Financing the SME sector to meet India’s renewable energy targets – pv India magazine

June 14, 2024 Sangram Singh, Head – Products, U GRO Capital

India’s renewable energy targets present both a challenge and an opportunity. The target of achieving 500 GW of renewable energy capacity by 2030, while daunting, has the potential to make India a world leader in renewable energy. Achieving the goal requires not only large-scale projects but also the active involvement of micro, small and medium-sized enterprises (MSMEs).

Small-scale entrepreneurs in India can drive India’s economic growth and help spread the benefits of renewable energy to communities. Effective financing mechanisms are key to unlocking their potential and enabling them to contribute to the renewable energy sector.

SMEs are generally flexible and have the potential to innovate, which can prove important for the renewable energy landscape. Indian small and medium enterprises consume almost 25% of the total energy consumption in the industrial sector, most of which is thermal energy. Replacing much of it with green energy could help India achieve its goals. In addition, they can play a significant role in the production of key components for the renewable energy sector, including turbines, panels, etc. However, despite their potential, SMEs often face significant challenges in raising funds to support the renewable energy movement.

Challenges facing small and medium-sized enterprises

Access to capital: SMEs often struggle to secure financing due to the perceived risk associated with their scale and lack of collateral. According to a World Bank study, approximately 40% of small and medium-sized enterprises in developing countries have poor or limited access to formal credit. Traditional financial institutions often view them as risky, which leads to stringent lending criteria.

High cost of financing: A survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) revealed that access to affordable finance is one of the biggest barriers faced by SMEs in adopting renewable energy technologies. High interest rates and short repayment periods, combined with the long maturation period of renewable energy projects, make participation in such projects financially unviable for small and medium-sized enterprises.

Renewable energy financing

Addressing these challenges requires a multi-faceted approach that includes policy interventions, innovative financing mechanisms and capacity-building initiatives.

Political interventions: Government policies play a key role in creating an enabling environment for small and medium-sized enterprises. Implementing favorable policies such as tax incentives, subsidies and subsidies can reduce the financial burden on small and medium-sized enterprises.

Green bonds: The Indian green bond market has witnessed significant growth in recent years. In 2019, India became the second largest green bond market in the world with a total issuance of USD 10.3 billion. Issuing green bonds can attract investment from both domestic and international investors involved in sustainable projects. These bonds provide a stable and long-term financing option for small and medium-sized enterprises.

Data-Tech Loans: Traditionally, lenders in India assess creditworthiness based on tax returns and other financial parameters. Many small and medium-sized businesses may not have a long credit or financial history. Data-tech lending analyzes a variety of data such as GST returns, order book, cash flow, etc. to get a more complete picture of the business. Using such data analyzes can better assess the creditworthiness of a company and expand the circle of potential borrowers.

Mixed finance: Combining public and private funds can reduce risk and lower the cost of capital for small and medium-sized enterprises. Public funds can be used to cover initial losses, making projects more attractive to private investors. The India Climate Finance Partnership, a joint initiative of the Government of India and various international organizations, aims to mobilize private investment in climate-friendly projects, including renewable energy ventures led by small and medium-sized enterprises.

Capacity building: It is crucial to increase the financial knowledge and technical skills of small and medium-sized enterprises. Training programs and workshops can equip small and medium-sized enterprises with the knowledge they need to access and manage finance effectively. Furthermore, supporting partnerships between small and medium-sized enterprises and large corporations can facilitate knowledge transfer and technical support.

First-hand success

India has already had several success stories where innovative financing has empowered small and medium-sized enterprises in the renewable energy sector. For example, the Indian Renewable Energy Development Agency (IREDA) has launched programs specifically designed for small and medium enterprises. These programs offer preferential loans and financial assistance, making it easier for small and medium-sized enterprises to implement renewable energy projects.

Similarly, a partnership between subsidiary Tata Power and the Small Industries Development Bank of India (SIDBI) aims to increase solar energy adoption among small and medium enterprises by offering loans for rooftop solar power installations. Suzlon Energy, India’s leading wind turbine manufacturer, has collaborated with many small and medium-sized enterprises in component manufacturing and installation services, driving innovation and creating jobs in the renewable energy value chain. With access to convenient loans, these small and medium-sized enterprises can participate in the renewable energy movement.

The road to a renewable energy future is paved with the innovation and resilience of small and medium-sized enterprises. Strengthening their position will enable India to shine as a leader in renewable energy. By responding to the challenges facing small and medium-sized enterprises and using innovative financing mechanisms, we can help unlock their full potential.