UNDERSTANDING THE SOURCES OF INTERNATIONAL FINANCE IN THE INDIAN SOLAR MARKET
Prevailing high interest rates in India and the absence of sufficient domestic financing support has led project developers to reach out to many international financing sources to fill in the gap.
- International financing for solar projects in India is mostly done through development finance institutions (DFIs) and international banks (insured by Export Credit Agencies or ECAs)
- The most active international financing sources for Indian solar projects till now have been the International Finance Corporation (IFC) and the EXIM Bank (US)
- With hedging, the cost benefit of international financing comes out to 100-200 basis points in terms of cost of money. This benefit can be as high as 700 basis points for un-hedged finance
DFIs are multilateral and bilateral funding agencies which provide credit in the form of higher risk loans and loan guarantees in developing countries. DFIs’ levels of liquidity are higher than in commercial banks, because of large levels of paid-in stock, additional ‘callable’ capital, exemptions on dividends and corporation tax. As an example, IFC, EBRD, CDC Group, DEG, Proparco and EIB are all exempt from paying tax on profits. They can provide a cost of borrowing at sub LIBOR rates due to their institutional AAA credit rating, an implicit state guarantee and income from trading in borrowings. Some of the DFIs active in the Indian solar market are IFC and Asian Development Bank (ADB).