Financing the MSME sector to power India’s renewable energy goals

Share

India’s renewable energy targets represent both a challenge and an opportunity. The target of achieving 500 GW of renewable energy capacity by 2030, though a daunting one, can potentially make India a global leader in renewable energy. Achieving the goal necessitates not only large-scale projects but also the active involvement of Micro, Small, and Medium Enterprises (MSMEs).

India’s small entrepreneurs can fuel its economic growth and help percolate the benefits of renewable energy across communities. Effective financing mechanisms are key to unlocking their potential and helping them contribute to the renewable energy sector.

MSMEs are generally nimble and possess the capacity to innovate, which can prove significant for the renewable energy landscape. India’s MSMEs consume nearly 25% of the total power utilisation in the industrial sector, most of which is thermal-powered electricity. A substantial part of the same replaced by green energy can help India meet its targets. Besides, they can play a significant role in manufacturing key components for the renewable sector, including turbines, panels, etc. However, despite their potential, MSMEs often face substantial challenges in obtaining funds to contribute to the renewable energy movement.

Challenges faced by MSMEs

Access to Capital: MSMEs frequently struggle to secure financing due to perceived risks associated with their scale and lack of collateral. According to a World Bank study, approximately 40% of MSMEs in developing countries have poor or limited access to formal credit. Traditional financial institutions often view them as high-risk, leading 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 was one of the biggest barriers faced by MSMEs in adopting renewable energy technologies. High-interest rates and short repayment periods combined with the long maturation period of renewable energy projects makes participation in such projects financially unviable for MSMEs.

Financing renewable energy

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

Policy Interventions: Government policies play a pivotal role in creating a conducive environment for MSMEs. Implementing favourable policies such as tax incentives, subsidies, and grants can reduce the financial burden on MSMEs.

Green Bonds: India’s green bond market has witnessed significant growth in recent years. In 2019, with a total issuance of $10.3 billion, India became the second-largest market, worldwide, for green bonds. Issuing green bonds can attract investment from both domestic and international investors dedicated to sustainable projects. These bonds provide a stable and long-term financing option for MSMEs.

Data-Tech Lending: Traditionally, lenders in India have evaluated creditworthiness basis the tax returns and other financial parameters. Many MSMEs may not have a long credit or financial history. Data-tech lending analyses diverse data such as GST returns, order book, cash flows, etc., to derive a more comprehensive picture of an enterprise. Using such data analyses can better evaluate the enterprise’s creditworthiness and enhance the potential borrower universe.

Blended Finance: Combining public and private funds can mitigate risks and lower the cost of capital for MSMEs. Public funds can be used to absorb initial losses, making projects more attractive to private investors. The India Climate Finance Partnership, a joint initiative between the Government of India and various international organisations, aims to mobilise private investment in climate-smart projects, including renewable energy ventures led by MSMEs.

Capacity Building: Enhancing the financial literacy and technical skills of MSMEs is crucial. Training programmes and workshops can equip MSMEs with the knowledge needed to access and manage financing effectively. Additionally, fostering partnerships between MSMEs and large corporations can facilitate knowledge transfer and technical support.

Success first-hand

India has already seen several success stories where innovative financing has empowered MSMEs in the renewable energy sector. For instance, the Indian Renewable Energy Development Agency (IREDA) has launched schemes specifically designed for MSMEs. These schemes offer concessional loans and financial assistance, making it easier for MSMEs to undertake renewable energy projects.

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

The path to a renewable energy future is paved with the innovation and resilience of MSMEs. Empowering them will enable India to shine as a leader in renewable energy. By addressing the challenges faced by MSMEs and leveraging innovative financing mechanisms, we can help unlock their full potential.

 

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.

This content is protected by copyright and may not be reused. If you want to cooperate with us and would like to reuse some of our content, please contact: editors@pv-magazine.com.

Popular content

Alpex Solar appoints global head of EPC business
11 July 2024 Alpex Solar Ltd has appointed Gaurav Bector as the global head of its EPC (engineering, procurement and construction) business as the company looks to...