SBI Caps Report Sees Avenues For Banks In Indian Solar Manufacturing Sector

SBI Caps Report Sees Avenues For Banks In Indian Solar Manufacturing Sector

A recent report by SBI Caps has indicated new avenues for the formal banks in the country for financing solar module manufacturing projects. Bolstered with the expected rise in the production of solar cells, solar modules and other backward integration by domestic players, the report talked about a likely chance of increased participation of banks in financing the solar manufacturing industry.

The report admitted that Financial Institutions like IREDA, REC, PFC and others have dented the growth of banks in such the solar ecosystem in India in granting credits. “Banks have gradually lost share in power credit to key financial institutions in the past few years. The tend is set to reverse, with banks once again gaining exposure,” it said. 

The report, exclusively talking about the Indian solar manufacturing sector, said that the associated risk in the sector have also decreased, thanks to the pro-domestic policies of the government and the increased interest of the Indian solar industry sector.

“Increasing vertical integration of players reduces risks for procurement of panels, dipping cost and time overruns. Also mitigates geopolitical and currency risk. Proposed higher provisioning norms & larger risk weights for project finance could push banks to go beyond renewable project funding into the supply chain,” it said.

The SBI CAPS Report talked about the incremental outstanding bank credit given by banks and financial institutions (FI). Source: SBI Caps Report

The report said that the addition of solar projects alone is projected to a demand of around Rs 2 trillion over the next two years.

“The addition of solar projects alone is projected to necessitate an investment of ~Rs. 2 trn over the next two years. Beyond this, considering the announced capacity expansions, an additional ~Rs. 1.2 trn in capital investment will be essential to establish the complete value chain. Financing this intricate value chain demands a nuanced understanding of the capital requirements at each stage. While generation projects typically require long-term capital expenditure debt, upstream entities are predominantly dependent on working capital and nonfund-based facilities due to their extensive engagement in foreign trade,” the report said. 

It also recognized the improved asset quality and ample capitalization in most banks as one of the drivers for this shift. “Banks are now well positioned to lend to the manufacturing segment,” it said. The report said that increased safeguards in the infrastructure projects and reasonable tariffs are driving improved project economics. It also said that IBC now allows for better recoveries.  The SBI Caps report also said that the regulatory and investor mandate to green portfolio also reduces climate risks. 

Citing data, the report said that compared to the overall energy sector, renewable sector witnessed the highest jump of 9 percent in Merger and Acquisition (M&A) deals. The report said that the total M&A deal value in the segment increased from USD 9 billion in CY22 to USD 15 billion in CY23.  

The report also talked about the potential for INVIT. Source: SBI CAPS Report

The report also said that recycling operational assets could free up capital for integrated players. The report said that creating Infrastructure Investment Trust (InVIT) would be an important source of capital.

“6 out of the top 10 players by solar capacity in India (accounting for 75% of their capacity) are integrated players. Much of this consists of upcoming upstream capacities which need capex. Given their significant operational solar project portfolio, creating InvITs could be an important source of capital. Around 30 GW of capacity is upcoming for these players beyond currently operational, this will ensure a steady flow of assets to be added to the InvITs, offering investors long-term visibility,” the report said.