India’s micro, small, and medium enterprises (MSMEs) are increasingly turning to clean energy solutions such as rooftop solar, but access to finance remains a decisive factor shaping adoption.

Bankers highlighted that while lending frameworks for such projects are evolving, borrowers must navigate interest-rate volatility, documentation requirements, and realistic project expectations to secure funding.

Lenders also emphasize that access to capital is improving, though loan approvals still depend on creditworthiness, cash flow stability, and careful project planning rather than on technology alone.

Lending Structure and Credit Assessment

Banks currently do not offer a standardized “green loan” category for MSMEs; instead, they route renewable energy projects through existing SME lending frameworks. Interest rates vary based on internal assessments, borrower profiles, and financial history.

Amit Kanhai, Assistant General Manager (AGM) at Bank of India, explained that rates are linked to internal and external credit ratings and typically range from 8.6% to 8.9% for most borrowers, with slight variations based on risk.

External credit ratings are not mandatory for most MSMEs unless exposure exceeds ₹500 million (~$5.28 million), allowing smaller enterprises to rely on internal evaluations based on experience, financials, and repayment capacity.

Similarly, IDBI Bank follows a risk-based approach. Deputy General Manager Abhishek Mishra noted that interest rates are not fixed and depend on “credibility, banking behavior, and credit scores,” generally starting at around 8.9% and rising with risk.

Collateral-free lending is widely available at both institutions, reducing barriers to entry for MSMEs exploring rooftop solar or other clean energy options.

Timelines, Documentation, and Role of EPCs

Loan processing timelines are relatively short when proposals are well-structured. Lenders indicate that approvals can be completed within 10 to 20 days, provided the documentation is complete and the project details are credible.

A key factor influencing approval is the engineering, procurement, and construction (EPC) partner. Banks rely heavily on the quality of project reports and cost estimates submitted by these vendors. Mishra emphasized that borrowers should prioritize efficiency over low pricing, as unrealistic or aggressive quotations often lead to delays or closer scrutiny.

Cash flow analysis remains central to decision-making. Banks primarily assess whether existing business revenues can support loan repayment over time, making conservative projections essential for faster approvals.

Borrower Risks

Both lenders flagged over-optimism as the most common mistake among MSMEs intending to adopt clean energy. Borrowers often overestimate savings or system performance without factoring in long-term variability.

Mishra felt that while lenders may appear conservative, this caution protects borrowers from financial stress, particularly over the project’s lifecycle. Kanhai added that overestimating capacity or returns can weaken repayment ability, making realistic planning critical.

Another frequent issue is poor partner selection. Enterprises often prioritize lower-cost vendors without assessing long-term reliability, even though system performance directly affects financial outcomes.

Financial Gains and Future Outlook

Despite these challenges, lenders pointed to clear financial benefits for adopters. Many MSMEs have significantly reduced electricity expenses, improving operating margins and competitiveness in tight markets.

Government-backed programs are further strengthening the financing ecosystem. Under the agriculture infrastructure fund, eligible enterprises can access loans of up to ₹20 million (~$211,185) at capped interest rates, with effective rates dropping to nearly 6% after subsidies. These loans are also largely collateral-free, supported by government guarantees.

Demand for renewable energy financing has risen steadily over the past few years, with lenders observing a clear shift in business behavior. As Mishra noted, the transition is established, with adoption now driven by both cost savings and competitive pressure.

The discussions at Mercom India’s Bhopal C&I Clean Energy Meet focused on financing challenges for MSMEs, where lenders outlined the evolving landscape of clean energy funding and the growing readiness of businesses to invest in it.

The next Mercom India C&I Clean Energy Meet event will be held in Mumbai on April 16, 2025.

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