NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, May 5, 2015

The Reserve Bank of India (RBI) recently revised its priority sector lending (PSL) guidelines. Now medium enterprises, social infrastructure and renewable energy (RE) will form part of priority sector, in addition to the existing categories. This has brought excitement to the stake-holders.

The central bank’s move basically means that banks are now mandated to provide a percentage of their annual adjusted net bank credit (ANBC) or the credit equivalent amount of off-balance sheet exposure, whichever is higher, to RE project developers seeking finance.

Bank loans with a limit of Rs.15 crore (approx $2.5 million) will be made available for RE power generation (solar, wind, biomass, and micro-hydro) and for non-conventional energy-based public utilities such as street lighting systems and remote village electrification. For individual households, the loan limit will be Rs.10 lakh per borrower. Various policy think tanks, research institutes and industry representatives have been lobbying for this move and finally the government has acceded.

How will the solar power sector be impacted with its inclusion in the PSL framework?

To begin with, analysis of the Rs.15-crore limit needs to be highlighted. Today, grid-connected solar PV plants cost around Rs.7 crore/MW. Considering a standard debt-equity ratio range of 3:1-4:1, developers with plans to install around 2.5 MW now have easy access to finance. This means that smaller and emerging players can now enter the market in the 100 kW-3 MW segment and stave off competition from the larger players.

Research has shown that the 60 GW ground-mounted portion of the 100 GW solar target (by 2022) needs a mix of large solar parks (>200 MW), 10-50 MW plants, 5-10 MW plants and plants <5 MW when it comes to grid-connected systems; along with off-grid plants <1 MW for remote rural electrification. Large solar plants (>10 MW) come with baggage (intermittency and associated grid management and synchronisation headaches, land contention and displacement issues, additional investment for government for green corridors, and the possibility of cartelisation) whereas smaller centralised distributed generating units (<5 MW) are easy to incorporate into the existing grid infrastructure without any of the aforementioned issues.