Small and medium enterprises (SMEs) will require USD 44 billion in debt financing, to 2022, to harness the opportunities presented by renewable energy and energy efficiency in India. Currently, bank lending is the most common source of external finance for many SMEs and entrepreneurs. However, the banking system has traditionally relied on collateral and past track records as key factors in lending decisions. Newer, smaller entities, including renewable energy and energy efficiency SMEs, often fail to meet banks’ stringent lending requirement of at least three years of profitability and often do not have real estate to offer as collateral. As a result, there is a shortage of capital for these groups.
Peer-to-peer lending offers an alternative to traditional lending that can: (i) expand the source of domestic debt capital for renewable energy and energy efficiency beyond banks; (ii) focus on cash flows and repayment capabilities of the projects and create trust in the minds of investors; and, (iii) offer timely financing.
There are currently no other peer-to-peer lending facilities in India that cater specifically to SMEs in renewable energy and energy efficiency, so Loans4SMEs would be the first.
Loans4SME will launch a curated marketplace that will connect businesses with debt providers directly via peer-to-peer lending, thereby expanding the source of domestic debt capital for SMEs beyond banks, to include high net worth individuals, family investment offices and corporate treasuries.
By utilizing a resilient credit risk assessment module that incorporates a wide range of data elements as compared to traditional credit scoring mechanisms, Loans4SME will focus on cash flows and the repayment capabilities of the projects in order to increase investor confidence and offer timelier financing when compared to traditional lending.
We estimate that 40% of the Government of India’s 40 GW rooftop solar energy target could be driven by the SME sector, which is about 16 GW by 2022. With a 5% market share, Loans4SMEs has the potential to finance the addition of 800 MW of solar rooftop capacity. The total potential for debt financing through Loans4SME is USD 2.2 billion including solar rooftop (USD 590 million), energy, procurement, and construction (EPC) financing (USD 141 billion) and energy efficiency financing (USD 200 million).
To commission the facility, USD 460,000 in public finance would be required. The leverage of private finance through Loans4SME is 1:234 times, which is very high. Loans4SME is also highly actionable. It can start operation in under ten months, does not face any regulatory barriers, and already has an implementer in place.
Loans4SME will have four main components that interface with each other: a user interface, the borrowers’ module, the lenders’ module, and the operating module.
Borrowers and lenders would interact with each other on the Loans4SME platform accessed with validated login details. The platform administrator performs a Know-Your-Customer (KYC) check of a potential account holder before they begin transactions through the platform, in which his or her business and financial position are scrutinized, followed by a fraud check.
Loans4SME would also be supported by a robust credit risk assessment model to build lender confidence. Using an innovative credit score algorithm, Loans4SME will provide lenders with a tool to measure the relative risk of all the loans listed on the portal and organize them according to their risk profile. The model is used in conjunction with cash flow projections to form a view on relative riskiness of the transaction.
To date, Loans4SME has so far partnered with 50 lenders, including banks, NBFCs, venture debt funds, and high net worth individuals. The platform has in total closed around 20 transactions worth a deal size of approximately INR 40 crores (~USD 6.2 million) by mid-2017.
40% of the Government of India’s 40 GW rooftop solar energy target could be driven by the SME sector, which is about 16 GW by 2022. With a 5% market share, Loans4SMEs has the potential to finance the addition of 800 MW of solar rooftop capacity. The total potential for debt financing through Loans4SME is USD 2.2 billion
Loans4SME is currently seeking USD 2 million in impact equity to expand its operations by including innovative lending products.
In the existing marketplace model, the lenders offer standard products like term loans and invoice discounting. More product innovation is required to meet the capital needs of the energy companies, particularly short term working capital required for companies with large order books and pay-as-you-go models beyond solar for sectors like energy efficiency, waste to energy, alternative heating and cooling solutions. Such new products can be piloted only through Loans4SME’s own lending book and hence Loans4SME is looking to get an NBFC license and move to a hybrid marketplace/lending model.
With a USD 2 million equity raise and 6x leverage, Loans4SME can build a USD 14 million book. Assuming 50% of that goes into solar, it would help setup 14-15 MW of additional rooftop solar capacity. Overall, Loans4SME has the potential to mobilize around USD 2.2 billion in debt financing for SMEs in renewable energy and energy efficiency by 2022, and thereby help in providing access to finance almost 800 MW of rooftop solar projects. It could lower CO2, SOx, and NOx emissions by an estimated 1.2 million tons, 4.1 million tons, and 5.8 million tons respectively per year by 2022.
News & Events
Loans4SME is a 2015-2016 India Lab instrument that launched in April 2016 as a marketplace to catalyze cash-flow based loans for small businesses. Since July 2016, it has closed transactions with a total deal size of INR 38 crore, or USD $5.7 million. 80% of these transactions have been in support of SMEs in renewable […]
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