NB Financial Health
The Financial Power of the Group: How demand aggregation can enable consumer financing for renewable energy products
In Northern India close to the Arabian Sea, salt farmers known as agariyas harvest salt in large pans from sub-surface brine. Every day during the seven-month-long production season, they labor for eight to 10 hours pumping, channeling, scraping and piling salt in salt pans. As they work, their diesel pumps, which help them harvest, run for over 16 hours a day. When the season ends, farmers typically amass about 150,000 Indian rupees in income (about $2,356 U.S. dollars). But after subtracting the cost of inputs, they’re left with only about 5,000 rupees (about $80 U.S. dollars) as savings.
Solar-powered pumps could help these farmers save much more. By swapping expensive diesel for solar power, farmers’ savings could go up substantially, as up to 60 percent of their income is spent on diesel and associated fuel costs. But without access to local financing to purchase solar pumps individually, the cost of the pump itself – ranging from 100,000 to 150,000 Indian rupees (about $1,575 to $2,360 U.S. dollars) – is prohibitively expensive.
However, Dalberg estimates that if farmers made a 20 percent down payment on a solar pump, and were charged market rates of interest (10-25 percent), they would be able to repay a loan for a solar pump in three years from the savings generated by the pump. To help farmers realize the benefits of renewable energy in salt farming, we explored financing options for solar water pumps in the Little Rann of Kutch, a salt marsh located in Gujarat, North India.
Financing Options for Solar Water Pumps
On the one hand, there has been increasing activity in consumer financing for renewable energy in India. A few examples include Yes Bank, the Central Bank of India and Union Bank, which offer a variety of loan products, and Sustainable Agro-commercial Finance Ltd., Bajaj Finserv and Srei Infrastructure Finance Limited, which offer loans for solar lighting, heating and pump products.
However, we found that salt farmers in the Little Rann of Kutch can’t take advantage of these offerings. Most low-income farmers lack credit and transaction history, and cash and/or assets to offer as collateral – and they don’t have access to a banking branch. Further, the seasonally-linked cash flows of farmers are rarely compatible with fixed payment schedules. In short, institutions are offering financing solutions, but they’re not reaching the farmers most in need.
Demand Aggregation for Consumer Financing
Fortunately, our research pointed toward one solution: Rather than purchasing solar water pumps individually, demand aggregation could allow farmers to access financing for the pumps through their local marketing cooperative. (These cooperatives provide training and financial assistance to salt workers, and enter into purchase agreements to ensure remunerative prices for their produce.) Under demand aggregation, each farmer owns an individual pump eventually. But for the purpose of financing, their pumps are purchased on loan by the cooperative, which leases them to individual farmers. Once the farmers have paid down the loan to the cooperative (which in turn pays it to the bank, as an aggregator), they take ownership of their pumps. We worked with a local cooperative that agreed to act as an aggregator of services for bank loans: The cooperative would collect payments from individual members, ensure timeliness of payments, apply informal pressure on those who defaulted, and offer financial planning and advice.
When we suggested this model to financial institutions, they showed great interest in piloting such demand-based models. Demand aggregation helps mitigate the core risks associated with lending to rural customers, because the cooperative as a whole has a strong reputation among banks and a reliable credit history. In addition, the services provided by the cooperative help reduce transaction costs for banks, which would otherwise have to provide oversight and advice themselves.
Above all, the cooperative model opens up a significant financing opportunity for financial institutions. Within the salt farming industry in the Little Rann of Kutch alone, there are 26,000 salt farmers using an equal number of diesel pumps, creating a potential market opportunity for solar pumps worth 4 billion Indian rupees (roughly 60 million U.S. dollars). And India’s broader agricultural market employs 7 million to 8 million diesel pumps, making the nationwide opportunity many times this number.
Unsurprisingly, financial institution representatives we interviewed expressed a strong desire to explore the cooperative lending model and hoped to see the model scale across unbanked, rural India.
Making Demand Aggregation an On-the-Ground Reality
That said, for this cooperative model of demand aggregation to be successful, the on-the-ground capabilities of stakeholders must be improved. In particular:
- Manufacturers must provide strong maintenance services and after-sales support for pumps in rural areas to ensure technical failures do not impede loan repayment.
- Cooperatives, self-help groups or any other aggregating institutions must strengthen their capabilities to manage individual transactions, serve as correspondents for banks and obtain financial holding power to offer as collateral.
- Financial institutions should consider keeping timelines of repayment flexible, to suit the seasonally-linked cash flows of rural workers.
- Bilateral and multilateral aid agencies should promote demand aggregation models as a means of self-financing among rural communities, and offer technical assistance to local aggregators on community outreach, financial planning and engagement with banking stakeholders.
If these stakeholders can provide tailored support and service offerings, financial institutions will be able to tap into a significant, waiting market. And more importantly, salt farmers in the Little Rann of Kutch – and, ultimately, many more farmers across India – will have access to financing options that could greatly boost their livelihoods.