Energy Efficiency Cluster Lending For SMEs By Indian Banks • Cluster lending represents an innovative approach that can be utilized by domestic financial institutions to increase lending for energy efficiency projects in the SME sector. • These enterprises, especially those in energy-intensive industries in developing or emerging market economies, typically have unexploited opportunities for substantial energy efficiency gains but usually do not have the in-house capacity to prepare and implement the projects needed to achieve
Barriers Faced by SMEs • SMEs also commonly face additional barriers in accessing commercial financing in these economic environments even after cost- effective energy efficiency projects have been identified. • Beyond the problems faced by the SMEs themselves in identifying and preparing energy-saving projects, additional barriers are faced by Indian banks in lending to SMEs, including high (per loan dollar)
Background for SME Lending • Lending to SMEs is a government-set priority for Indian banks because of SMEs’ importance in generation of economic growth, employment, and exports. • The cluster lending strategy for reaching SMEs predates the three Country Energy Efficiency Project and was initially begun for reasons other than energy efficiency alone. • To service the energy efficiency financing needs of this hard-to-reach class of customers, SBI adapted its cluster lending strategy (Project Uptech), and several banks
Definition and Objective of Cluster Lending • Cluster lending refers to lending operations targeted at certain clusters of industries that are co-located for some economic (or policy) reason. • The objectives of cluster lending programs include lending for investments to increase SME competitiveness through technology up- gradation, cost reduction (through reduced wastage and increased operational efficiencies), increased productivity, and (in some cases) improved product mix.
The Importance and the Problems of the SME Sector in India • Though the SME sector makes a significant contribution to India’s industrial GDP and exports and is a significant source of employment in urban, peri- urban, semi-urban, and rural areas, SMEs have fallen behind the benchmarks set by larger industrial firms in terms of productivity, performance, efficiency, and technology. • The gap has continued to increase even after the comprehensive economic reform
Early Cluster Lending Approaches • As the realization grew in the late 1980s that lending programs that worked for larger firms were not succeeding in reaching SMEs, the concept of cluster lending began to gain ground. • The objective of this newly emerging approach was to increase lending to SMEs while Early Cluster Lending Approaches. As the realization grew in the late 1980s that lending programs that worked for larger firms were not succeeding in reaching SMEs, the concept of cluster lending began to gain
Types of Cluster Lending • Essentially two types of cluster lending programs have been attempted so far: • Those aimed at upgrading technology and improving overall performance in a holistic fashion (with energy efficiency improvements as an integral component of this improvement without being the sole objective) • Those where energy efficiency improvement is the core lending objective
Initiatives by Indian Financial Sector • SBI, India’s largest public sector bank, set up a technology up-gradation (Project Uptech) program for SMEs across all industrial categories in 1988. This was very different from the previous industry specific programs that were targeted at somewhat larger enterprises. • With the passage of the Small Industries Development Bank of India (SIDBI) Act, SIDBI was set up in April 1990. In keeping with its charter, SIDBI has emerged as the
• As and when target clusters were identified in any state/region in the country, selected personnel from the Project Uptech central team were relocated to a branch in the vicinity of the target cluster while continuing to report directly to the Central Office in Mumbai. This approach was distinct from the standard SBI practice, wherein the regional offices and branches implemented policies made by the Central
Measures Taken • SMI and SIDBI took various measures to support some of their technology development work: • SBI contracted external industry experts and (where necessary) research- demonstration-development organizations. • SIDBI created a specialized agency, the Technology Bureau for Small Enterprises
Project Example: Technical Experts for the Auto Cluster at Pune. • In its simplest form, the lender selects technical experts in the target industry, and helps them to work closely with the SMEs. The case of the auto component industry cluster in Pune (as well as the neighbouring areas of Aurangabad, Nasik, and Ahmednagar) is a typical one. The process followed by SBI may be described as follows: • The Project Uptech team catalogued the opinions of SME entrepreneurs in the cluster as well as their requirements, and identified
Technical Assistance in Identifying Additional Technology Options. • In cases where the baseline survey (by bank personnel and industry experts) indicated that a few specific technology interventions were required but were not readily available off the shelf, specialized R&D institutions could also be called into service. • One such instance was the Firozabad Glass cluster, where the SMEs experienced high wastage (through glass breakage and rejections) as well as poor quality. SBI’s Project Uptech coordinated with various
Technical Assistance in Identifying Additional Technology Options • Likewise, SIDBI appointed the National Productivity Council to work on reducing heat losses from locally fabricated furnaces in more than 1,000 aluminum, brass, and steel utensil manufacturing units in Jagadhari (Haryana). The cluster utilized wood and fuel in poorly designed and inefficient furnaces that had been fabricated by local masons, with the entire cluster having virtually the same furnace designs.
Recent Energy Efficiency Cluster Lending Initiatives • The combined experience from SBI’s Project Uptech and SIDBI helped provide a good base for the Indian banking community to launch energy efficiency–focused cluster lending programs. • The trend was reinforced with the joint policy directive of the Government and the Reserve Bank of India in August 2005, which urged banks to increase credit to SMEs. • Prompted and encouraged by the Three Country Energy Efficiency Project, five banks
Lessons Learned and the Way Forward • For the most part, each specific cluster project has been considered a success by SBI and SIDBI and perhaps the entire banking and development community. However, the entire concept has not taken off in the manner that was initially envisaged. In the case of SBI, Project Uptech has remained a head-office-centered activity that has not become part of the mainstream lending business. • In view of the recent emphasis on SMEs
Conclusion • Key activities which can be undertaken for future scaling up of energy efficiency lending to SME clusters include: • Devising additional energy efficiency lending schemes • Making efforts to market the new and existing schemes • Empanelling certified, reputable energy auditors • Developing standardized energy audit
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