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Financing Energy MSME Challenges and Way Forward . Santosh Singh GIZ India. MSMEs in India. Demand for Finance. All kinds of MSME are struggling for finance; Energy MSME are struggling comparatively more than others. . MSME sector’s finance demand is estimated at $650 billion
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Financing Energy MSME Challenges and Way Forward Santosh Singh GIZ India
Demand for Finance All kinds of MSME are struggling for finance; Energy MSME are struggling comparatively more than others. • MSME sector’s finance demand is estimated at $650 billion • 80% of the demand coming from informal sector • Formal sources of finance supply $140 billion • An estimated 67% of enterprises remain un-served by formal financial sector. Source: IFC-Intellecap Study
Financing MSME: Challenges for FIs • Information asymmetry • lack of financial information • High Risk • High failure rates • Little or no collateral • Low capitalization • Vulnerability to market risk • Inability to assess • Technology • Business Model • Team capabilities
Energy MSME: Understanding Risks Outcome Risk • Uncertainty of delivering public interest goals objective • Limited public resources • Budget constraints Source: Climate Policy Initiative Study Technology / Technical Risk • Immature or early stage technologies • Natural Resource Availability Assessment • Poor technology performance data
Energy MSME: Understanding Risks Market Risk • High cost of capital • Long investment period • High upfront cost of projects • Lack of historical data on green investments/lack of familiarity of investors Policy and Social Risks • Short Term Policies, long break-even period • Dependence on government support and public finance • Environmental Impact and social resistance
Success Stories from India • MSME Credit Guarantee Fund Trust • Provides guarantee covers up to 80% • More than 100 member lending institutions • Dedicated Renewable Energy Funds • DFID, ADB, UNDP and WB have set up/sourced dedicated funds and provided line of credit to existing financial institutions • CookstovePoA for Improved Cookstove Enterprises/Consumers • GIZ submitted national level PoA, expected to be registered soon.
Success Stories from India • SELCO Revolving Fund for energy entrepreneurs • S3IDF Social Merchant Banking Approach • Interest Rate Subsidies / Accelerated Depreciation • Wind Energy Sector • Power Purchase Agreements • Biomass or renewable based power plants • Renewable Energy Certificates / RPOs • States need to source a certain percentage of their power consumption through renewables
GIZ Interventions: Understanding Financial Barriers • There are various subcategories within renewable energy sectors, based on • Capacity, Technology, Business Model, Customers • Each of these categories have very distinct risk and return profile as well as resource requirements. • The requirements differ in terms of source of finance (Venture Funds, Banks, Guarantee Funds etc.) and in forms of finance (debt, equity, guarantee, interest subsidy etc.). • The resource requirement and availability also depend on the different stages of growth of the RE Enterprises. Each stage of growth has its unique needs. • Mapping of sources, needs and product availability, critical to identify the gaps.
