Small Rooftop Solar Companies in India Struggle to Find Viable Financing Options

Smaller and newer entrants struggle to find financing options without high interest rates


After winning the general elections in 2014, the Modi administration set a target of installing 100 GW of solar capacity by 2022, out of which rooftop solar capacity was slated to account for 40 GW. According to Mercom’s India Solar Project Tracker, so far, India has installed over 26 GW of solar capacity out of which rooftop solar installations make up only 11 percent.

An increasing number of states are reforming their net-metering regulations related to rooftop solar PV installations. In Uttar Pradesh and Himachal Pradesh, new net-metering regulations have been proposed. In April 2018, the Central Electricity Authority (CEA) issued a draft amendment on technical standard regulations that apply to generation resources like rooftop solar in an effort to maintain grid stability.

Despite these changes, rooftop solar PV has not taken off in residential and small commercial segments. According to Mercom’s market research, the insufficient financing options are proving to be sector’s Achilles’ heel.

Shedding light on the financing situation, Nikunj Ghodawat, the chief financial officer at CleanMax Solar, said, “When it comes to large corporates with healthy credit ratings, the availability of finance is not an issue.  However, MSMEs and the residential segment are a different story. Due to low or non-existent credit ratings, it is difficult for a developer to raise debt from banks for these customers as well as get into a power purchase agreement of 20 to 25 years, which is necessary to make the project cost effective.”

Financing residential rooftop for small businesses has been extremely challenging. Compared to the Unites States or Europe, where every business and individual has a credit risk profile, India lacks such a system making it extremely risky to lend. A new system or a program is needed to finance such consumers and expand the reach of rooftop solar.

According to Ghodawat, to address this challenge, a “first loss protection” program would be a strong enabler for growth in this segment. The government, along with financial institutions are in a position to play this role, giving developers the assurance they would need to get into long-term agreements with this segment of consumers. “The details would need to be worked out, but such a program could be a very effective use of money to widen the base for the rooftop solar industry in India rather than provide capital subsidies for rooftops programs to power government buildings. Since CleanMax Solar caters to large corporates, financing has never been an issue. Having said that, for the industry to expand beyond large corporates, stable policies are required to encourage adoption in other segments and for developers to venture into those segments.”

The rooftop segment is still relatively small and new, and banks have yet to get comfortable lending to these projects. With many smaller companies budgeting on a yearly basis, buying expensive equipment which could last 25 years seems daunting.

To delve into the issue deeper, Mercom spoke to Gagan Vermani, the founder and CEO of MYSUN. “Despite the huge potential for rooftop solar, adoption of rooftop solar in India has been slow and one of the primary reasons is the lack of financing. It is typically the relatively smaller project sizes and lack of confidence on performance monitoring of these systems that banks see as a challenge. Although public sector banks like PNB and SBI have tied up credit lines from ADB (Asian Development Bank) and World Bank, on-ground adoption has been quite slow. For a capex business model, there is hardly any tailor-made financing product for the industry and the banks mostly look at it as a capital equipment financing. And because most of the SMEs and MSMEs have a stretched and over-leveraged balance sheet, they find it tough to find capital to go solar,” he said.

Many Indian banks are disbursing concessional loans to the rooftop solar segment to assist the government achieve its rooftop solar target. Mercom has reported that the State Bank of India (SBI) and the World Bank have announced ₹23.2 billion ($357 million) in credit facilities for seven Indian solar companies that will be used to develop grid-connected solar rooftop projects with an aggregate capacity of 575 MW. In May 2016, the World Bank and SBI also signed agreements for a $625 million (~₹40.2 billion) facility to support India’s grid-connected rooftop solar program.

Lending institutions like the SBI, PNB, and IREDA have got rooftop specific credit lines from multilateral agencies and are providing loans at concessional rates. Both private sector and nationalized banks have been very forthcoming in providing debt for financing good quality rooftop solar project portfolios. Still, the money is available to only a few.

Regarding the borrowing activity from banks Vermani said, “It’s a long-drawn process with the banks to secure funding for rooftop projects. And the overall liquidity scenario, as well as rising NPAs in the power sector, is not helping their cause. Furthermore, the poor financials and lack of collateral by SMEs and MSMEs also pose a hindrance. And since banks incur a cost in evaluating ‘risks’ associated with projects, they find it quite expensive to evaluate much smaller rooftop projects and therefore these projects go down on their priority index. Depending on the project and customer profile, some PSUs are lending between 8.5 ~ 9.5% and they have credit lines specific for rooftop solar. And these also have been primarily made available so far to developers who can consolidate several smaller rooftop projects into a larger package. Otherwise interest rates are higher. Some NBFCs have also come into the fray and their rates vary between 11~14%, again depending on the client profile as well as on the overall ‘risk’ assessment.”

Higher interest rates is another challenge. Interest rates for solar projects have risen by a percentage point over the last year making loans expensive. There is hope that the new RBI governor may leave the interest rates untouched or even lower the interest rates.

When asked how the unchanged RBI repo rate would affect the sector, Ghodawat added, “The decision to keep the repo rate unchanged by the monetary policy committee of the RBI is in line with the market expectation considering a stable inflation outlook. Additionally, given the current liquidity situation across banks and financial institutions, even a marginal increase in interest rate would have been very difficult to absorb by businesses, decelerating the growth of the industry considerably. The solar energy segment has seen aggressive growth which has been aided by favorable investments and debt raised from banks. However, in the last few months, the cost of borrowing has increased up to 100 basis points due to tight liquidity and we are glad that the RBI has not increased the repo rate which would have made borrowing even more inexpedient.”

Talking about Indian states that are favorable for rooftop solar, Vermani added, “Most states where consumers pay more than ₹5 (~$0.07)/kWh are favorable for rooftop solar. Southern states like Telangana, Andhra, Karnataka and Tamil Nadu are leading the charge when it comes to rooftop solar but Delhi-NCR, Maharashtra, Rajasthan, Uttar Pradesh, and Haryana are expected to catch up very fast. Even though Gujarat does not allow an Opex model in the state, it is still pursuing an aggressive ramp-up plan for rooftop solar. There is a combination of factors working here – high consumer tariffs, sound policy and support (or lack of it) from the local DISCOMs.”

Financing and service have to become an integral part of the solar solution offerings. If solar companies can eliminate the performance risk by using quality products, sound engineering and great after-sales service, then the short to mid-term financing to end-users can make a huge impact in attaining India’s rooftop solar potential.

“Installers will need to partner with financial institutions and the government needs to put some policies in place to absorb some of the risk and prod banks to lend since a credit rating system is not well established in the country for individuals or small businesses,” said Raj Prabhu, CEO of Mercom Capital Group. “The market also needs to innovate when it comes to financial instruments that are customized for the Indian market conditions.”

Image credit: Ojaskara Solar