Finance plays a vital role in influencing the uptake of energy efficient technologies in the MSME sector. In general, MSME entrepreneurs lack sufficient capital resources to invest in energy efficient technology. Recognizing this, the Government of India has put in place a number of schemes to finance energy efficient technologies for MSMEs. MSME sector finance is given priority in the policies of banks and other lending institutions.
Yet, access to loans by MSME units remains low for adoption of energy efficient technology or for upgradation of the existing technology. Individual entrepreneurs, or even industry associations, are often unaware of the different schemes available for financing such technologies, or they simply lack the ability or wherewithal to prepare the financial statements and related documentation required by the lending institutions to support loan applications. On their part, financial institutions and commercial banks often consider MSMEs to be a 'high-risk' sector for lending, entailing high transaction costs. Bankers at the branch level may not have the knowledge or wherewithal to appraise energy efficient technologies for finance. Often, they regard such technologies as 'new and unproven' and, therefore, risky.
The financing of energy efficient technologies in the Indian MSME sector is, therefore, facilitated through schemes that act as incentives, both for lending institutions and for entrepreneurs. The schemes fall under the following broad categories.
An MSME entrepreneur applying for capital finance (a term loan to acquire new technology or to upgrade existing technology) is required to contribute a certain percentage of the loan amount as 'margin'. Under the typical capital subsidy schemes offered by various institutions like Small Industries Development Bank of India (SIDBI), Indian Renewable Energy Development Agency (IREDA), and North Eastern Development Finance Corporation Ltd. (NEDFi), a certain percentage of the margin is reimbursed to the MSME entrepreneur after the term loan is sanctioned. This reimbursed 'capital subsidy' amount is directly credited to the entreprenur's term loan account, thereby reducing the liability. The reduced outstanding in the loan account also represents the reduced 'risk' for the lending bank.
Under interest subsidy schemes, banks and other lending institutions (such as state financial corporations) are able to borrow funds from institutions such as SIDBI and IREDA at relatively lower rates of interest, for 'on-lending' to MSME entrepreneurs at relatively higher interest rates that are still lower than the rates charged from, say, corporate borrowers. In effect, interest subsidy schemes act as incentives to MSME entrepreneurs to avail of loans at reduced interest rates for both capital investments (new technology, upgradation of technology) and working capital.
Refinance and credit guarantee
Banks and other lending institutions, such as state industrial development corporations and state finance corporations, are encouraged to lend to the MSME sector through financial incentive schemes provided by government supported institutions like SIDBI, IREDA, and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The incentive schemes are structured so that they reduce the costs and risks related to MSME finance, and, thereby, catalyse increased lending to MSMEs. Broadly, these incentive schemes fall under two categories: refinance and credit guarantee.
- Refinance: Institutions like SIDBI and IREDA offer refinance (essentially, long-term loans at soft rates) to banks and other lending institutions that extend loans to MSMEs.
- Credit guarantee: CGTMSE enables subscribing banks to insure themselves against any losses suffered in case MSME loans go bad.
Here are some examples of the initiatives undertaken by the members of SAMEEEKSHA to facilitate financial support to MSMEs for adopting energy efficient technologies.