C&I Projects Yield Better Returns Than Utility-scale PPA Portfolios: SBI Interview

Non-recourse financing is the best approach when funding renewable projects


Lenders are more receptive to funding renewable transactions encouraging corporates striving towards a carbon-neutral environment and adding value to their brands, Hitesh Paliwal, Senior VP & Zonal Head, North Zone Corporate Banking Group at SBI said, on the sidelines of the Mercom India Renewables Summit 2023.

Paliwal added that even though we are in the early stages of the journey toward renewable targets, we are progressing in the right direction, and the sectors will mature down the line.

Below are some excerpts from the interview.

Why would you say the renewables sector is appealing, and what is SBI’s role in the industry?

In the past couple of years, the power sector has seen most of the value addition on the generation side, particularly in renewables.

When we delve deeper into renewables, we see that solar accounts for most of the growth. Capacity addition in solar has increased from 12 GW in 2018 to over 65 GW at present. As a leading financier, we have successfully financed many solar projects.

How do you assess the commercial and industrial (C&I) landscape?

We are now seeing more results in the commercial and industrial (C&I) and hybrid sectors. Other renewable energy avenues, such as electric vehicles and ethanol, are also showing promise.

The C&I sector is more granular, with numerous counterparties, but we have found that the selection criteria of independent power producers installing C&I projects is very good.

They tend to select better-rated companies with an impeccable track record of payment and contract fulfillment. So far, every C&I operator we have interacted with is thrilled about the exposure to this sector and the track record.

Payment can sometimes be a struggle when dealing with authorities and other intermediaries. However, having a strong counterparty with a proven payment and contract fulfillment track record significantly reduces risk. No borrower has mentioned losing a single penny in a renewable contract.

Regarding return on assets, equity, or capital, C&I projects yield better returns than utility-scale portfolios of PPAs (power purchase agreements). Major customers we have onboarded or interacted with have confirmed this.

We have learned that non-recourse lending (where a lender is entitled to repayment only from the profits of the project being financed) is ultimately the best approach.

What are the key factors you consider before lending to MSMEs?

When approached by an MSME (Micro, Small & Medium Enterprises) sector company, we focus solely on the project as the value-adding potential of the project is immense.

For instance, an MSME may be paying ₹8 (~$0.097)/kWh – ₹9 (~$0.11)/kWh, but after implementing a C&I project, they may only pay ₹3 (~$0.037)/kWh – ₹3.5 (~$0.043)/kWh.

This results in increased cash flows and a shorter break-even period, leading to a higher return on investment. Although we haven’t yet seen a 25-year track record in renewables, we’ve observed that with insurance, reinsurance, and purchase requisition considerations, solar projects have exceeded our initial assessments and are performing exceptionally well.

As the Indian economy grows and focuses on value-adding manufacturing activities, programs such as PLI (performance-linked incentive) create value for MSMEs, mid-corporates, and large corporations.

This sector is yielding benefits for all stakeholders, including lenders. Renewable energy projects typically have a 25-30 years lifespan but can be loaned for 12-15 years, providing a sense of safety for lenders.

Compared to thermal and hydropower projects, where state and central participation is over 60%, the renewable energy sector, specifically C&I, is nearly 100% private participation, making it a lucrative opportunity for investors.

How vital is creditworthiness when an MSME approaches you for a CAPEX project?

When it comes to MSMEs looking for captive purposes or C&I projects, the project size is often tailored to their needs, and we, as lenders, analyze these criteria to determine creditworthiness.

We actively lend to MSMEs and retail consumers for rooftop and ground-mounted projects. At SBI, we pride ourselves on our commitment to stable and sustainable financing, focusing on long-term arrangements rather than short-sighted ones.

While we may take slightly longer than some other lenders, our customers can trust us to honor our commitments and provide high satisfaction over the long term.

We have a strong cultural ethos and reputation, and our track record of successful projects speaks for itself. Ultimately, we believe in honoring our commitments for the project’s entire duration, whether 15, 20, or even 25 years.

Are there any sectors besides solar that you believe hold great potential for the next few years and that SBI plans to finance?

It’s worth noting that electric vehicles are growing rapidly, and we have already begun funding them. We also support projects that convert stubble and biomass to compressed natural gas.

Furthermore, we’re considering and analyzing green hydrogen and will soon release our policy formulation.

In addition, we’ve become very active in city gas distribution over the last 2-3 years, and we’ve already processed many proposals in that space.

It’s interesting to see how quickly the renewable energy sector is expanding, and with the hydrogen mission in place, we know this sector will boom in the coming years.

(Note: Sections of the interview have been paraphrased for better reading. Check out the video for a full chat)