State Bank Eyes Tiger’s Share of India Rooftop PV Boom: Q&A

By Vandana Gombar, Bloomberg New Energy Finance editor. This article first appeared on the Bloomberg Terminal, and is available to clients on the web and on the Bloomberg Terminal.

State Bank of India, the country’s largest lender, seeks a dominant financing position in every sector, including renewable energy. It has now set its sights on the emerging rooftop solar segment, where the government has a target that would require many billions of dollars of investment.

“The 40-gigawatt rooftop target is a huge business opportunity for us,” Karnam Sekar, deputy managing director, chief credit officer and chief sustainability officer, said in an interview at his office in Mumbai. “We would play a pivotal role in maturing the industry.”

The government-owned lender will focus on commercial and industrial customers, many of which already have a relationship with the bank. In June, it announced funding for 100 megawatts of solar rooftop plants, making use of part of a $625 million credit line from the World Bank.

Two years ago, State Bank committed to extend as much as 750 billion rupees ($11.7 billion) to renewable energy by 2020. Its cumulative funding to renewables is about a third of this amount currently. The commitment has now been increased to $12.7 billion, as a result of the recent merger of associate banks that had their own individual targets for renewables lending.

In the longer term, State Bank of India aspires to be carbon-neutral in its operations – a challenge given that it has as many as 25,000 branches, in addition to various other customer touchpoints. In the nearer term, it is ready for a green bond issue. Why a green bond? “We wanted to make a statement: we are here in a big way in this sustainability field. We are funding many projects,” said Sekar.

He said India’s slowdown in power demand growth is a temporary phenomenon, with electric vehicles likely to add to power demand. State Bank also said that the government needs to provide incentives for energy storage applications.

Q: State Bank of India has announced funding for its first set of solar rooftop projects. These are very different from the utility-scale projects that SBI typically funds. Are there big changes required at the back end for this new business area?

A: We keep funding projects of various sizes. Even three to four decades back, we funded a small gobar gas [biomass] plant which cost maybe about 40,000 rupees. There is a wide spectrum of projects that SBI funds, and we have the wherewithal to handle that.

We also wanted to give rooftop a big push. The 40-gigawatt rooftop target is a huge business opportunity for us. SBI has always played a pioneering role in new sectors. In the solar rooftop sector also, I think we are playing a pioneering role. We would play a pivotal role in maturing this industry.

The background is that the government of India wanted to coordinate with the World Bank for rooftop funding. The $625 million line of credit is actually guaranteed by the Indian government, and it is a tripartite agreement we have entered to fund 800-1,000 megawatts over four to five years. We have already funded 110 megawatts. The interest rates are very competitive: 20-50 basis points above 1-year MCLR [marginal cost of funds based lending rate] depending upon the credit rating of the borrower.

Q: SBI also has a credit line from the European Investment Bank. I believe there are other key international financiers keen to partner with the bank, so that it can on-lend. What is the draw of SBI?

A: We don’t mind coordinating with any multilateral agency as long as it suits our commercial purpose. At the end of the day, SBI is a commercial banker, and as long as it makes commercial sense for us, we will go ahead. Right now, liquidity is not a constraint.

Q: SBI approves projects but disbursement tends to be an issue sometimes, especially for renewable energy projects. Is that a correct perception?

A: This perception is ill-placed. Any project we approve, there are some pre-conditions. Maybe it will take a while to fulfill those conditions sometimes. If everything comes in proper format, project approval can happen in 10-15 days, but initial discussions could take a while. If an existing borrower wants to do some small 1-1.5 megawatts of solar on his own rooftop, and we know him for 20 years, it does not take much time. In rooftop, we want to focus on the commercial and industrial users. Most of these would have been banking with us for quite some time, and we would know them.

Q: Do you have a target for solar rooftop funding or are you just testing the waters right now?

A: As the industry unfolds, our target also keeps on getting revised. In any industry, as a major player, we would like to have our due pie. In the overall market, if you take any product segment, our share would be in the range of 25 to 30 percent. The same share we should be able to capture in any new market also.

Q: SBI made its largest investment commitment, of 750 billion rupees ($11.7 billion) for 15 gigawatts of renewables, at the at RE-Invest conference in February 2015. What is the distance covered so far?

A: The cumulative funding to renewables is around 250 billion rupees, so another 500 billion rupees is needed in the next four-to-five years. If the market really grows, I don’t think that is a big deal. We are talking about 15 gigawatts out of a 175-gigawatt target. If the market really grows at that pace, as a leading banker, we would like to have our due share in the industry.

Q: How has the commitment to renewables increased to 816 billion rupees ($12.7 billion)?

A: After the merger of five associate banks earlier this year, their commitments were added, so the total commitment now stands at 816 billion rupees.

Q: Do you think that it is a bit of an ambitious target given the headwinds that renewables are facing?

A: If you see total wind and solar installations as compared to five years back, acceleration is taking place. Once a critical mass is achieved, scaling up also becomes easier. With the tariff rates we are seeing now, there are more and more installations. If this pace continues, I don’t think the target would look as ambitious as it is looking today.

Q: Is 80-100 percent equity drawdown a condition of disbursement?

A: In order to ensure proper debt-equity levels for any project and to ensure equal interest of promoters, we require them to bring in reasonable upfront equity. The levels of upfront equity are determined on a case-by-case basis depending upon the nature of project and credit worthiness of the borrower.

Q: Could the decline in renewable energy tariffs be cannibalizing the growth of the industry? Power purchase agreements are being renegotiated or canceled, and projects are not moving ahead.

A: I would think this is the process of churning in any major industry. This would stabilize. Similar things have happened in any maturing industry, such as telecom.

Q: Do you see the growth in renewables vitiating somewhat the exposure you have to the conventional power sector?

A: I don’t think so. The Indian economy is ready to grow at 8-10 percent on a sustainable basis for the next 15-20 years. I think the entire economy will guzzle energy in a big way. We would need lot of energy, so the capacity utilization in the traditional sector would also go up. There would be demand for newer plants from all sources, including renewables.

Therefore, I think in the medium term, there is a place for both. Both may coexist. One may not cannibalize the other because of the huge power requirements.

Q: The growth of the economy and the growth in power demand seems to have been decoupled. Is it possible that there might not be increased demand for power?

A: If majority of your growth is coming from the service sector, maybe it gets decoupled temporarily. When the economy fires on all four cylinders, so to speak, it would need power. In the medium and long term, I don’t think that can really be decoupled.

People are also talking about the transport sector. Maybe 100 percent of the vehicles are not converted to electric vehicles, but even if a few of them are converted, the requirement for electricity would be huge.

Q: You have a very confident outlook on the future. The alternative view out there is much more pessimistic. The lack of power demand does not worry you?

A: In the medium and long term, no, power demand does not worry me. Low plant load factors may be a temporary, short-term phenomenon. Once the economy really picks up, and there is rising demand from all sides, the entire power sector outlook would change.

Q: You are also the chief sustainability officer for State Bank. What is the main brief you have?

A: My main task is to ensure that, as an organization, we are environmentally responsible. Our carbon footprint should gradually come down. Maybe in a period of 15-20 years, we should become carbon-neutral – that is a longer term roadmap we have laid for ourselves. The position of the chief sustainability officer is at the deputy managing director level, indicating the serious commitment of the bank to this activity. We have been able to bring out two sustainability reports, and are on our third one now.

We have our own wind mills – 15 megawatts – which are captive power consumption. Over a period of time, we want to reduce our reliance on thermal or fossil-based power and go for renewables. We own buildings across the country, and we are trying to put up rooftop solar wherever we can. We are using solar for remote ATMs. Even on this building [State Bank Bhavan, Mumbai], we have a solar rooftop. We are installing efficient LED lights. We feel that it is our responsibility to lead by example. As a leader in the banking industry, if we can set an example, others will follow.

Q: There are some companies and financial institutions committed to 100 percent renewable energy usage. Is that something on your radar too?

A: Not right now. Carbon neutrality is a long term goal. SBI is a huge organization. We have more than 25,000 branches. Apart from that, we have ATMs, business centers and service points. The long term plan is to make all of them carbon-neutral. We are in the process of preparing the blueprint, which will likely be ready next year.

Q: You also have a plan to raise funds through green bonds. A report in the Economic Times pegs it at a $3 billion issue. Is that likely to be the size?

A: I think that is their own imagination. Right now, liquidity is not an issue. Whenever we need to issue bonds, we will. We are ready. We will not be able to talk about timelines at this time.

Q: SBI is committed to carbon neutrality in the long term. The country as a whole wants to be cleaner and greener. As a financier, what would be your main policy recommendation to enable that to happen?

A: I think, in the entire value chain of renewables, storage needs to get some more importance. That is a very critical piece. If you need to even out generation and usage, I think we need to invest more and more in storage. Maybe policy interventions are required initially by the government to give a push to the storage industry. Unless we have a perfect combination of generation, storage and consumption of power, the industry will not be able to scale up. That is especially true for solar because generation peaks during mid-day while consumption peaks later. To balance that, storage would be an important intervention. Storage technologies are evolving but are still prohibitively expensive. The industry needs incentives, and that is one area where government needs to look.

Q: SBI’s annual report says that the annual expenditure on power was 9.24 billion rupees in 2016-17. Is there a targeted reduction in the bill via the use of renewables, as is being done by airports, railways and other sectors?

A: The bank has undertaken various steps to reduce its electricity consumption as well as migrate to cleaner fuel sources to reduce its carbon footprint. Some of these include energy-efficient buildings, latest energy-saving equipment (such as chillers, lifts, air conditioners, etc.), LED lights, movement-activated lights and solar-powered water heating. We have plans to set up 20 megawatts of rooftop solar systems on the roofs of the bank’s own buildings.

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