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Solar Financing in India - Part 4
The nuts and bolts of operations
In this part, I would like to share some of the critical elements of NBFC operations before and after processing the loan file. Many aspects require detailed attention, however, I have picked my top three elements which are critical to the smooth operations of a retail-focused solar financing company.
Customer Acquisition Cost
Retail solar in India is still not need-based - I am increasingly willing to change my opinion given the rising temperatures and the soaring electricity bills - hence the marketing is still largely 'push' rather than 'pull'. Awareness levels are rising and customers are a lot more educated than before - but as a lender - the first step would be to appreciate that customer acquisition in this segment is driven through an installer partner approach.
First, a customer must want solar and the site should be technically appropriate for solar, then, they will think of financing options, hence as a lender - understanding choosing an installer partner is of paramount importance. Not only is an installer partner critical for all this technical (equipment selection, service levels) and regulatory (net metering, etc) but also for being the first point of contact with the customer. It is during this meeting that a potential loan can be discussed.
They can share which markets have consistent demand - a scattered geographic area typically does not work, unless one has a very large dealer network. Very few companies in India have that kind of network and even then, maintaining service levels across all your dealers can be a challenge. This business is best run hyper-local. Identify a state or two. Pick up 3 - 4 cities in that state, perfect those geographies, learn more about your sales process, issues in installation, observe repayment behaviour, and then proceed to other geographies.
We are all motivated by the millions of SME industries in the ~ 450 clusters and 300 million homes across India - however, it’s best to win in a small area and then grow. Some of the best lending companies I have seen have been laser-focused on a geography. The focus allows them to run very strong operations with a clear view of credit culture, collections. They further leverage the strong regional brand recall.
You can work with your credit and risk teams to reject geographies and industries that you feel are risky. For example:
Maharashtra has arguably the highest industrial tariffs but a textile cluster may not be interested in solar as they have tariff subsidies
Mumbai has the highest residential tariffs and the best economics but these are mostly apartment complexes that have a painfully long sales process
Pune (auto cluster) and Bangalore (residential market) have tremendous competition - If your installer partner is out of business in 3 years and your loan is 5 years long - How will you monitor the functioning of the solar project?
Much rather get your 100 loans in 4 cities (25 loans in 4 cities) rather than 10 cities (10 loans in 10 cities) … This math sounds logical but when you speak with installers, ask them about concentrated demand. You need a minimum amount of sourcing per month per location for your opex to be viable.
The use of technology - where Fintech helps and where it doesn't
Fintech helps in sourcing the initial information - At a click of a button - through APIs, you can source KYC, Credit Bureau, Financials, etc. This is very helpful in the initial screening. However, for underwriting its better to follow the traditional FI / PD approach (Field Investigation / Personal Discussion).
Tech can help with residential projects but for SMEs loan sizes are far larger. One must meet the promoter, see the factory and then decide whether to lend. A cluster-based approach can help with the latter - The credit officer would perhaps already know the prevailing industry issues of the customer and the more companies they meet, the more patterns will emerge.
Investing in technology stack is critical - a solid Loan Origination System, Loan Management System, and Credit and Collections piece are critical to a tech platform. Numerous companies are providing such services - It’s about bringing together a tech stack that can help solar customers and installer partners - process initial screening in a hassle-free manner.
One must appreciate that NBFCs will not be competitive on price, hence ease of service and faster TAT are perhaps the only differentiation. Fintech helps in that in a very meaningful way.
Once the system is operational, regular O&M of the plant is critical - Clean plants generate more savings for the customers and it is through those savings, the customer pays back the loan, hence as a lender - at least at this stage of the evolution, where the industry is still maturing - best to keep a close eye on the regular monitoring of the plant. Ask your installer to provide monitoring services.
Unfortunately, removing solar panels and selling them in a secondary market sounds simpler than it is. Unlike vehicles, for solar there is a limited history of repossession, and there is no vibrant resale market. The labour cost of entering the customer’s factory to remove panels itself will be prohibitively high. This equipment, if functioning well, can be used at other premises but the transaction cost of transportation, new installation can make the re-installation unviable.
While there is a limited history of credit losses in solar lending at a retail level, the possible issues can be:
Equipment malfunction - if the project equipment fails, hold the installer / OEMs accountable. Warranties are a black box - most of the replacement works in good faith.
The borrower’s business can go through cycles and the factory may not be running at full capacity hence little need for solar - This can easily be managed by studying their electricity bills over the last 12 months and seeing their business performance. If the factory is running, solar is reducing electricity bills, there is a good chance you will get your repayments in time.
The assets can be pledged to the lender's name - so you do have a physical asset with some value.
You can use remote monitoring to shut down the device in case of non-payment of a loan - at best, it acts as a deterrent.
In conclusion, 1) find a strong installer partner base, 2) use tech judiciously and 3) mitigate bad loans by managing certain risks.