Worth Their Salt: How Clean Energy is Powering a Breakthrough Opportunity for Saltpan Farmers in Gujarat's Desert - Part 3

Innovative financial solutions

1. International grant supplemented with government funding: This strategy requires the creation of a common pool of capital from several sources: combining one or more international grants, philanthropic as well as climate finance institutions, with funds from the Indian government's solar pumps subsidy scheme. The government fund, administered by the Ministry of New and Renewable Energy (MNRE) is largely underutilized as the subsidies face implementation challenges described in our pervious blog. On the other hand, a grant on its own is limited by the number of farmers it can cover. However, structured as a revolving loan fund it can significantly expand the scale of farmers serviced through this common pool. Two overlapping pathways are possible.

a. Revolving loan fund (RLF): A revolving loan fund is essentially a recyclable source of low-cost loans for clean energy projects. As the first batch of loans are repaid, the capital is then loaned again for another batch, and as long as the default remains low, the fund keeps replenishing over time, thus providing an 'evergreen' source of funding. To illustrate the leveraging power of this mechanism, let us assume we capitalize the common pool with $5 million of funds from various sources including philanthropic grants and MNRE funds. Now, given as a grant, or simply as a direct to farmer loan, this amount will buy about 1,800 pumps. However, structured as a RLF, with interest rates low enough to cover the cost of servicing the loan, and assuming a five year repayment period, with roughly 2% default every year, our analysis reveals that this corpus can pay for over 18,000 pumps even after assuming that inflation in India moderately outpaces price decrease for solar pumps. Moreover, if administered by a local non-banking financial institution with simplified enrollment and collection process, such a fund can be more effective in reaching the target consumers.

b. Loan loss reserve (LLR): A loan loss reserve is a type of credit enhancement that supports other clean energy financing mechanisms such as domestic bank lending, international loans, and revolving loan fund. The reserve covers a pre-agreed amount of lender's losses. For instance, an LLR of $500,000 is created to cover 10% defaults on the original principal to the extent of 100% of each default. So in this case lender's, such as the revolving fund, or even banks, can give loans of $5 million, secure in the knowledge that they bear no default risk as long as the total number of defaults are within 10% of the portfolio. Hypothetically, let us assume an extreme scenario in which 12% of the farmers default on their payments, even in this case, the net loss of the lender is only 2%, which makes the portfolio much more creditworthy than in the absence of LLR. An LLR can be carved out of the RLF, or be created independently, to encourage lending in underserved markets such as the one in our case study.

2. Vendor financing - Vendor financing is an attractive solution for both the buyers and the equipment suppliers. For the buyers, it simplifies the procurement process as they have a single interface for the equipment and the finance. It also encourages the vendor to provide after-sales service, periodic equipment upgrades and replacements if required. For the vendor, it creates an increased sales opportunity often giving them a competitive edge in the market. A few vendors can take the financing risk on their balance sheets, but most will have an agreement with a financial institution in which they either borrow from the financial institution or sell their payment streams in what is called forfeiting. For the salt farmers, vendor financing could be especially effective since it takes care of the loan origination hurdles typically associated with the banks. For the banks tying up with a vendor is advantageous as it aggregates demand, reduces transaction costs, and enhances creditworthiness.

3. Simplified subsidies: Government subsidies simplified and adapted to the needs of the salt farmers, can help in scaling up each of the other financial mechanisms. In addition to the MNRE and NABARD subsidies, SIDBI and several other nodal agencies, administer a Credit Linked Capital Subsidy Scheme (CLCSS), for technology upgradation by small enterprises. In this scheme 15% or the project cost is credited as a term deposit in the borrower's account and the lender uses this to bring down the interest of the loan. In the revolving loan example above, coupled with an appropriate government subsidy of 30%, the RLF can run for perpetuity, creating access to every farmer - a big increment from the no-subsidy model.

4. Demand aggregation and payment collection services: A majority of the salt farmers are a part of the SEWA member network. SEWA can provide the crucial last mile link between the farmers, the suppliers, and the lenders. SEWA can also tap its existing relationships to create a repayment structure in which equipment payments are auto-debited from the salt revenue by entering into an agreement with salt buyers and farmers associations. SEWA has an impressive record of working with low-income communities and has been very successful in implementing large scale social change projects. Another huge benefit that SEWA brings to the project is the ability to match the repayment with the earning capacity of the farmers. For instance, almost all salt farmers have a regular income for only 7-8 months in the year. It is exceedingly difficult for them to repay their loan through the traditional 12 month installments followed by all banks. SEWA can help in tailoring the repayments with the income cycle of the farmers to ensure low default rates, provided banks are willing to look beyond the conventional 12 monthly installment system, and willing to align the loan to borrower cash flows, which will substantially improve collection efficiencies.

5. Several other ideas that came out of our roundtable are worth exploring further.

a. International soft loans - investors provide soft loans, not grants. Even adding forex hedging risk and the cost of aggregation, such loans can still turn out to be cheaper for the farmers given the high domestic interest rates in India. A third-party service provider can work with SEWA to aggregate demand to a reasonable deal size (minimum 500 farmers for every tranche); or the provider may work with a domestic financial institution to structure the debt as asset-backed securities for an international market. The key benefit of securitization would be to reduce borrowing cost since the farmers do not have an established credit history but, as SEWA members, have a good debt repayment record.

b. CSR funds: As per the Companies Act 2013, all companies in India are expected to contribute a certain percentage of their profits to CSR activities. The Gujarat CSR Authority has been established by the Gujarat government to pool these contributions and implement CSR activities in the state. For the current year their funds are committed to other projects, but energy access can be included in the list of activities in the future. However, large salt marketing companies that procure salt from the agarias can use their CSR budgets for lending to the farmers, either through low cost loans, or as a part of a revolving fund as discussed above. This way, they not only strengthen their supply chain, but also make a positive impact on the livelihood of the salt farmers.

Leveraging the collective expertise of the roundtable participants helped identify potential sustainable, scalable and replicable solutions to increase the agarias' access to affordable financing. Looking ahead, NRDC and SEWA will be further collaborating with the roundtable participants to help put these clean energy financing models into practice and support the agarias' transition from diesel to solar pumps to improve livelihoods through clean energy.