Priority sector lending to renewable energy can help India achieve sustainable energy access

The Ministry of New and Renewable Energy (MNRE) has planned to request the Reserve Bank of India (RBI) to remove the priority sector lending (PSL) limit for renewable energy (RE), according to recent reports. The decision was reportedly taken to encourage public sector banks to lend more for RE projects, and to promote easy access of finance for RE developers. The low solar tariffs and reduced operation and maintenance costs for solar projects are cited as the underlying rationale for the decision.

The proposal has been received positively by the industry, since it will help RE developers secure larger loans, however, it may have the unintended consequence of curtailing finance for households and smaller RE projects.

PSL norms form part of the qualitative measures contemplated under the RBI’s monetary policy. Through this mechanism, the RBI aims to “provide an access to credit for those vulnerable sections of the society, who are often deprived of it due to their perceived lack of credit worthiness”. Setting targets for the priority sector has been linked to a positive impact on the channelling of credit to previously neglected sections of society.

Loans of small value to low-income groups and weak sections of society are earmarked under the PSL norms, for example, low-value loans to farmers and micro, small and medium enterprises (MSMEs), housing loans for poor sections of society, education loans for students, etc. Loans for building social infrastructure for activities such as facilities and services like education, health, sanitation, and drinking water are also included under the PSL mechanism.

The RE sector was also included within the PSL norms, based on the recommendation of the RBI’s Internal Working Group in March 2015. Two categories of bank loans were included: Loans up to a limit of Rs 15 crore to borrowers for purposes like solar-based power generators, biomass-based power generators, wind mills, micro-hydel plants, and non-conventional energy-based public utilities such as street lighting systems and remote village electrification, and loans up to a limit of Rs 10 lakh per borrower for individual households.

What about smaller RE projects?

Indeed the removal of the cap on lending under the PSL norms, could translate into easier finance for developers and corporate consumers. However, has the MNRE considered the likely impact of the PSL limit dispensation on smaller RE projects, particularly in rural areas? How will these smaller projects be financed once the PSL limits are removed?

When it comes to RE in India, there is more than one narrative. On the one hand are the large-scale RE developers who will be key in achieving the 175 gigawatt (GW) RE target. On the other hand are households, public health centres, primary schools, and farmers in rural India, who are still not in a position to access reliable, sustainable, and affordable energy.

The Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) scheme has led to the electrification to thousands of villages in India. At the time of writing this article, the Saubhagya Dashboard indicates that 99.93 per cent of India been electrified. However, problems of reliability and quality still persist. Further, due to a concurrence between economic poverty and energy poverty seen across India, places with less electricity are also those where a significant proportion of the population lives below the poverty line.

Economic upliftment

It is important to note that RE also offers a pathway for economic upliftment in the most poverty-stricken areas of the country. Apart from improving the quality of life through improved and sustainable electrification, potential jobs in the RE sector also offer the possibility of reducing poverty. In fact, R K Singh, the Minister of State (independent charge) for power and new and renewable energy, has emphasized that, while during the previous term the government focused on electricity connections, in its new term it will focus on making the electricity available 24×7 and sustainable (by bringing about a change in the energy mix).

The question of who will pay for this universal supply of reliable and sustainable power remains unanswered, since poverty and limited resources inhibit the ability to pay for these services. Could retaining the PSL limits help address this issue, by increasing the chances of securing small loans?

Similarly, will the removal of PSL norms support or negatively impact the government schemes targeted at boosting RE in rural areas? For example, the KUSUM scheme, focusing on the agriculture sector, envisages grid-connected solar plants and off-grid solar pumps. Some experts believe that the decentralised renewable energy sector has been given short shrift in India’s policymaking and planning. If small loans become more difficult to secure, this sector will be rendered a further blow. The problem is further compounded by the structural challenges inherent in the financial sector. Smaller enterprises and retail consumers are more likely to face bigger challenges in securing finance due to the banks’ higher transaction costs of lending to them vis-à-vis larger enterprises, barriers like not having ownership over property that can form collateral, as well as other barriers of education, gender, and geography.

Balance between big and small project is key

It is important to acknowledge that the RE sector does not service a homogenous class of consumers and suppliers. While removing the PSL limit may benefit large RE developers and consumers who seek bigger loans, it should not make sparsely available financing even more out of reach for smaller households and consumers in rural areas, who could benefit from the RE technologies to meet their domestic and agricultural needs. The sector should be viewed in a more nuanced manner, as far as its classification under the RBI’s PSL mechanism is concerned. A balance must be struck between allowing the RE industry to grow, while providing much needed finance for small and rural consumers. This can be achieved through having multiple categories of loans for the RE sector under the PSL norms, to service the big RE developers and also the smaller RE projects.

The removal of RE loan limits under the PSL mechanism should not be based on a unidimensional analysis of the renewable sector’s needs. Instead, a more inclusive view of the sector can address the energy access needs of the traditionally marginalised (and subsidised) class of electricity consumers. Support for small loans under the PSL mechanism can catalyse the market for RE in the marginalised and newly-electrified parts of India. This can lead to the financial inclusion of households and small enterprises, and lead to important consequent benefits such as the empowerment of self-help groups, creation of jobs, skill development, and better healthcare and education through access to reliable and sustainable energy. Improving the chances of procuring small loans for RE under the PSL norms can form the foundation for the success story of sustainable energy access under the next phase of Saubhagya.

Source : economictimes