Energy Efficiency Cluster Lending

For SMEs by Indian Banks

Energy Efficiency Cluster Lending For SMEs by Indian Banks

• Concept of Energy Efficiency (EE), particularly for

SMEs in India, was promoted by World Bank, as part
of efforts to save environment and reduce global
warming due to the effect of Green House Gases.
• Project for Development of Financial Intermediation
for EE investments in developing countries. Three
Country Energy Efficiency programme (Brazil, China
& India) launched by World Bank, UNFUNEP in Goa
in January 2002
Energy Efficiency Cluster Lending For SMEs by Indian Banks

• The objective of the India-MSME Energy Efficiency

Project is to improve efficiency and reduce GHG
emissions through commercial investments in
energy efficiency goods and services in target
Small and Medium Enterprise clusters.
• In addition, as a matter of policy, SBI develop the
concept of promoting adoption of Energy
Efficiency measures to all new enterprises and
those looking for expansions / diversifications.
Energy Efficiency Cluster Lending For SMEs by Indian Banks

• SBI launched “Project Uptech – Energy Efficiency”

(PUEE) in January 2003 – the first Bank to promote
EE among their SME clients through a specially
designed scheme offering grants and concessional
finance for EE Term loans to its existing SMEs.
• In first 3 years or so, under PU-EE, SBI assisted 66
SME units with investment of Rs 12 Crores having
an energy savings potential Rs 12.4 Crs per annum.
 Cluster based lending Approach

• Cluster based approach to lending is intended

to provide a full-service approach to cater to
the diverse needs of the MSE sector which
may be achieved through extending banking
services to recognized MSE clusters. A cluster
based approach may be more beneficial (a)in
dealing with well-defined and recognized
groups (b) availability of appropriate
information for risk assessment (c) monitoring
by the lending institutions and (d) reduction in
costs.
 Cluster based lending Approach
• The banks have, therefore, been advised to treat it as a thrust
area and increasingly adopt the same for SME financing.
United Nations Industrial Development Organisation (UNIDO)
has identified 388 clusters spread over 21 states in various
parts of the country. The Ministry of Micro, Small and Medium
Enterprises has also approved a list of clusters under the
Scheme of Fund for Regeneration of Traditional Industries
(SFURTI) and Micro and Small Enterprises Cluster Development
Programme (MSE-CDP) located in 121 Minority Concentration
Districts. Accordingly, banks have been advised to take
appropriate measures to improve the credit flow to the
identified clusters.
 Initiatives of banks to promote Energy Efficiency
in SMEs
• Under the project, SIDBI focused largely on
five energy intensive clusters viz. foundry
cluster at Kolhapur, Forging at Pune, Limekilns
at Tirunelveli, Chemical at Ankleshwar and
mixed at Faridabad in India to support for
mobilization of financing from the Indian local
banks to ensure that the identified Energy
Efficiency measures are implemented.
 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.
• As implemented thus far, SME cluster lending in India has focused
either upon (i) a specific sector or technology group, or (ii) upon a
geographically grouped cluster that includes several industrial
categories but concentrates on a few technical interventions as a
way of minimizing assessment and appraisal costs.
 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 those
savings.
 Barriers Faced by SME’s
• SME’s face additional barriers in accessing commercial financing in 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 SME’s, high (per loan dollar) transaction costs and the increased
risk associated with lending to smaller clients.
• The cluster approach can bring specialized technical support and outreach to
smaller enterprises along with follow-up loan provision based on a
standardized, replicable model that can result in substantial reductions in
transaction costs per loan.
• With support from the Three Country Energy Efficiency Project, the State Bank
of India (SBI) adapted its Project Uptech, a cluster lending approach for
technology up gradation in India’s SME sector, to incorporate energy efficiency
improvement projects.
 Background for SME Lending
• Lending to SME’s is a government-set priority for
Indian banks because of
• SMEs’ importance in generation of economic
growth, employment, and exports.
• 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 followed with their own versions of
the approach.
 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,
SME’s 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 program initiated in the early
1990s. Wide-ranging fiscal incentive programs offered to small-
scale industry (SSI) units by government have not succeeded in
bridging this growing performance gap between SME’s and
larger industrial firms.
 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 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 ground.
• The objective of this newly emerging approach was to increase
lending to SMEs while reducing transaction costs per borrowing
enterprise to within reason-able and acceptable limits.
• Many variations have subsequently been tried, with the overall
objective of finding a readily acceptable and workable solution that
would make it possible for commercial banks to bring cluster
lending into the mainstream of their operations.
 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 principal financial institution to promote, finance, and
develop the small-scale sector. In recent years, SIDBI has also begun
supporting medium-scale enterprises. In terms of banking infrastructure
and arrangements that SBI and SIDBI mobilized to reach out to SMEs, the
approaches developed by these two lenders are very different:
• In spite of its extensive network of (now nearly 10,000) branches spread
across the entire country, SBI relied exclusively on its Central Office
(headquarters, located in Mumbai) for designing, managing, and staffing
Project Uptech.
 Initiatives by Indian Financial Sector
• 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 Office.
• SIDBI, with less than 40 establishments across the country,
relied to a large extent on about 900 other primary lending
institutions (such as state-level financial entities, branches of
other public sector banks, and cooperative banks) to increase
its outreach to SSI units and SMEs.
 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 possible organizations and experts to form
an expert panel.
• With its expert panel in place, Project Uptech launched the implementation in the auto
component industry cluster in January 1996.
• In close consultation with the entrepreneurs and SME workers, the technical experts
identified a set of activities and investments required to enhance the competitiveness
of the SME units. In so doing, the technical experts also helped the SME units to move
from making simple components to subassemblies (a change that was being
increasingly required by the newly emerging auto industry in India in the mid- to late
1990s).
• A total of Rs 96 million of loans were made by SBI to the 42 SME units over a four-year
period (an average of over US$5,000 per SME unit).
 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
government agencies including the Centre for Development of Glass
Industry and the Central Glass and Ceramic Research Institute. Several
training programs and seminars were conducted as well as SME-level
studies that covered more than 20 percent of the registered SMEs in the
cluster. The focus was on appropriate technologies for process
improvement, energy efficiency, pollution abatement, low-cost
automation, introduction of management information systems, and
above all, creation of an improved working environment.
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.
• Replacement furnaces designed by the National Productivity
Council helped the companies to realize energy savings of
upwards of 20 percent. The organization was thus similar to
SBI’s, except for the use of an R&D institute in addition to
technical engineering consultants
 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.
Five banks have now formulated energy efficiency schemes targeted at
SMEs.
• In chronological order of the date of scheme sanction, the banks include:
• State Bank of India
• Canara Bank
• Union Bank of India
• Bank of India
• Bank of Baroda
 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 accorded by the
Government, SBI is in the process of realigning its short-term
priori-ties (of increasing business with SMEs and reducing
bad debts from SMEs) with its longer-term objectives of
encouraging SMEs to become modern, competitive, and
financially sound.
 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 templates
• Developing in-house skills, and/or identifying a pool of
external experts to assist on technical matters in the
appraisal process