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Renewable energy loans: good idea, recovery worry

According to reports, in July this year, the Reserve Bank of India finally decided to act on the recommendation of a committee set up under the chairmanship of MV Nair (former chairman and managing director of Union Bank of India). The RBI allowed loans given to individuals to set up off-grid solar and other renewable energy solutions for households as priority sector loans.

The move allows individuals to get low-cost loans for setting up solar and other renewable energy generations capacities. This could give a major fillip to small solar power generation in villages which, according to some estimates, is already catching popular attention.

As of this year, among other fund providers, Aryavrat Grameen Bank, a Regional Rural Bank sponsored by Bank of India, provided finance for 52,000 Solar Home Systems in Uttar Pradesh; Selco has provided 135,000 solar home systems in Bangalore and other areas.

Priority sector lending has not been managed very well, if data about recoveries is anything to go by. As against recovery of over 96% for most housing finance companies, recoveries in respect of direct agricultural advances stood at only 76% in 2008, and they continue to fall. By 2011, recoveries had fallen to 73.7%. Experts say that these recoveries have fallen because of several reasons. First, they are given to some of the most marginal borrowers, whose repayment capabilities are poor. But if one looks at recoveries by NGOs, it shows that recoveries can be well over 90% if implemented and monitored carefully.

A more plausible explanation could be found in the government’s own policies, which often teach honest rural borrowers to become dishonest and not to repay the amounts borrowed. Turn to Page 14
Schemes like loan melas and loan waivers actually contribute significantly to the growing profligacy among agricultural borrowers – many of whom are not marginal income borrowers either.

There is another problem with the manner in which loans for solar and other renewable energy are being processed. And it has to do with policy formation. Solar power is a great idea for a sun-soaked country like India. But it works only when the sun is up and shining. When the sun hides behind clouds, solar power generation becomes poor. At night time solar power generation is not possible, and the only way households can harness solar power is by storing it in batteries.

Unfortunately, batteries are expensive, and are made from materials that are environmentally toxic. The government’s decision to levy a 30% import duty on batteries only protects domestic producers and encourages the manufacture of environmentally toxic batteries in the country. It also pushes up solar power storage costs. It is not the best way of offering cheaper loans on inflated project costs.

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