Building financing relationships
When SELCO was founded in 1995, the biggest challenge was convincing rural banks to finance sustainable energy systems for poor households, as they had not yet been in the business of financing solar lighting technology. Its first breakthrough came in 1996, when it convinced Mlabhraba Grameena Bank, a subsidiary of state-owned Syndicate Bank, to offer India's first solar consumer-loan program. When financing by individual bank branches of PV systems for rural households commenced, loan terms were set at 15 percent down payment, with repayment over 60 months at a 13.5 percent interest rate.
Before the loans were disbursed, however, SELCO arranged for training of bank employees regarding its solar products. For SELCO, training was a way to help local branch managers understand that the solar technology was reliable. When clients came in for a loan, bank managers would know the basics of the product and be more confident in providing the loan. In this model, payment would be sent by the bank directly to SELCO once installation and inspection of the PV system were complete. Bank managers would take on the responsibility of monitoring debt repayment. This collaboration with banks allowed SELCO to focus more on its core strengths of product design, installation and servicing.
Of course, efforts to find credit institutions came at a high cost. In its early years, SELCO spent time and money convincing banks that solar electricity would empower borrowers economically and help them repay their loans. Ultimately, SELCO's effort and working capital influenced the entire solar industry in India, as it paved the way for other solar energy companies to find banking partners who were familiar with the product and its financing. SELCO's model also served as a foundation for the United Nations Environment Program's (UNEP) Indian Solar Loan Program, expanding the involvement of banks in solar financing. UNEP's subsidies allowed lenders to reduce end-user interest rates from a new standard of 12.5 percent to a special 5 percent rate.
Besides working with banks, SELCO's efforts to help its clients gain financing involved finding NGOs and governmental agencies to provide grants and subsidies. SELCO had helped its clients find subsidies for interest rates and for down payments on solar equipment. SELCO had also found grant money for the purchase of ancilliary equipment in solar energy chains (for example, grants to buy low powered sewing machines). Finally in some cases, SELCO was able to line-up third party guarantors who would help underwrite loans where SELCO clients did not have sufficient collateral to satisfy banks.
Growing the financing network
One of the primary reasons for SELCO’s success was its ties at the ground level with various financial institutions in its areas of operations. As of 2010, SELCO had working relations with the following types of financial institutions:
- Commercial Banks: Four commercial banks worked with SELCO to finance its energy products, including Canara and Syndicate Banks in Karnataka.
- Regional Rural Banks (also known as Grameen Banks): SELCO was partnering with nine rural banks in Karnataka and Kerala, including Malaprabha, Vardha and Karnataka Vikas Grameen Banks.
- Rural Farmers Cooperatives: SELCO was working with numerous farmer cooperatives representing customers working in industries ranging from rubber to vanilla.
- Microfinance Institutions: SELCO was working with SEWA Bank in Gujarat to cater to its 300,000 women client base.
Operationally, SELCO also worked through many of its partnering financial institutions to contact new customers. For example, SELCO products were displayed prominently in SEWA Bank lobbies in Gujarat.
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Sample memorandum of understanding (MoU) between customer and Syndicate Bank, including a loan repayment schedule.
Marketing brochure for solar lighting systems for rural customers distributed by Karnataka Vikas Grameena (KVG) Bank.