Page 9 - Supply-side Financing of Improved Biomass Cookstoves in India
P. 9
Discussion Paper
Incentivize market development: Donors attempt to Advantages
develop a robust market for clean cookstoves and provide
incentives for development of a local cookstoves market. Provide start-up support to manufacturers: Unlike
Grants are mostly targeted to remove the failings of the subsidies that are linked to the sale of cookstoves, loans
current ICS market, and seek to provide support to may provide finance at the start-up phase of an ICS
market development through specific incentives which business. A lot of the costs in setting up an ICS business
suit the local context. are incurred by suppliers before initiation of actual market
operations. Loans may help suppliers meet these costs at
Disadvantages the initial stages of their business, before they start earning
revenue from the sale of cookstoves.
Business governed by donor priorities: Donors have
their own priorities, which are manifested in various Promotes formulation of business plan: Since financial
conditions set for the grant. For instance, certain donors institutions insist on borrowers convincing them about
may insist on supporting cookstove business models the commercial viability of their business model, suppliers
which disseminate ICS to below poverty line households. formulate a business plan before applying for a loan. This
Such conditions may hamper free market development helps suppliers to practically plan their business operations
and may bind market development to the regulations and before venturing in the ICS market.
restrictions imposed by donor agencies.
Encourages suppliers to expand business: A regular
Overhead costs high: Grant-driven projects are mostly stream of revenues is essential to enable borrowers
implemented by local organizations, having their own repay their loan on time – linking repayment to business
institutional costs. While donor agencies make efforts performance. Hence, suppliers may be compelled to
to minimize the proportion of overhead costs in the expand their cookstoves business and earn higher revenues
project implementation process, they cannot completely so as to repay their loan without much difficulty.
eliminate a part of the grant being used for such purposes.
Promote socially beneficial technology: Many financial
May promote dependence on grants: Market actors institutions offer support to technology that has clear social
receiving the grant may become exceedingly dependent and environmental benefits. For instance, certain micro-
on the grant. Once the tenure of the grant expires, these finance institutions provide ‘energy’ loans to renewable
market actors may not find it viable to carry on their ICS energy technology products.
business any further.
Promote women entrepreneurship: There are
Actual market costs and value cannot be determined: various schemes of the government and some financial
Grants which subsidize the product by providing buy- institutions which offer attractive loans to encourage
down subsidies, or absorbing implicit market-related costs women entrepreneurs. For instance, one of the suppliers
(taxes, transportation costs, etc.), may convey a wrong interviewed by TERI has availed of a special subsidy on
message about the actual cost of selling ICS in the absence loan provided by the Khadi Village Industries Commission,
of any external support. provided to women entrepreneurs in rural areas to set up
cottage industries.
Credit
Strict monitoring and evaluation: The use of credit
Loans are the most popular source of raising capital for is strictly monitored by financial institutions to ensure
setting up an ICS business. Loans may be borrowed from that revenues from business activities will permit timely
commercial banks or micro-finance institutions. However, repayment of the loan. This infuses a sense of rigour and
financial institutions have strict criteria for selection of discipline in entrepreneurs in carrying out their business.
borrowers, which may deter small entrepreneurs from
approaching these institutions. As a result, suppliers may Disadvantages
sometimes rely on non-institutional finance from local
money-lenders and unregistered financial institutions. Micro- Pressure of repayment: Suppliers who avail of loans
finance institutions have to a great extent eased the access are continually under the pressure of repaying the loan,
to a loan by small entrepreneurs, by offering collateral-free irrespective of the revenue generated by them from ICS
micro-credit to them. An obvious feature of loans is that they sales.
need to be repaid, which compels suppliers to perform in
terms of sales so that adequate revenues are generated for Poor awareness among financial institutions: Many
repayment of the borrowed credit. financial institutions are unaware of cookstoves as a clean
energy product. While some may be willing to offer
‘energy’ loans, reduction in collection of biomass may not
be eligible for such loans.
MAY 2015 9
Incentivize market development: Donors attempt to Advantages
develop a robust market for clean cookstoves and provide
incentives for development of a local cookstoves market. Provide start-up support to manufacturers: Unlike
Grants are mostly targeted to remove the failings of the subsidies that are linked to the sale of cookstoves, loans
current ICS market, and seek to provide support to may provide finance at the start-up phase of an ICS
market development through specific incentives which business. A lot of the costs in setting up an ICS business
suit the local context. are incurred by suppliers before initiation of actual market
operations. Loans may help suppliers meet these costs at
Disadvantages the initial stages of their business, before they start earning
revenue from the sale of cookstoves.
Business governed by donor priorities: Donors have
their own priorities, which are manifested in various Promotes formulation of business plan: Since financial
conditions set for the grant. For instance, certain donors institutions insist on borrowers convincing them about
may insist on supporting cookstove business models the commercial viability of their business model, suppliers
which disseminate ICS to below poverty line households. formulate a business plan before applying for a loan. This
Such conditions may hamper free market development helps suppliers to practically plan their business operations
and may bind market development to the regulations and before venturing in the ICS market.
restrictions imposed by donor agencies.
Encourages suppliers to expand business: A regular
Overhead costs high: Grant-driven projects are mostly stream of revenues is essential to enable borrowers
implemented by local organizations, having their own repay their loan on time – linking repayment to business
institutional costs. While donor agencies make efforts performance. Hence, suppliers may be compelled to
to minimize the proportion of overhead costs in the expand their cookstoves business and earn higher revenues
project implementation process, they cannot completely so as to repay their loan without much difficulty.
eliminate a part of the grant being used for such purposes.
Promote socially beneficial technology: Many financial
May promote dependence on grants: Market actors institutions offer support to technology that has clear social
receiving the grant may become exceedingly dependent and environmental benefits. For instance, certain micro-
on the grant. Once the tenure of the grant expires, these finance institutions provide ‘energy’ loans to renewable
market actors may not find it viable to carry on their ICS energy technology products.
business any further.
Promote women entrepreneurship: There are
Actual market costs and value cannot be determined: various schemes of the government and some financial
Grants which subsidize the product by providing buy- institutions which offer attractive loans to encourage
down subsidies, or absorbing implicit market-related costs women entrepreneurs. For instance, one of the suppliers
(taxes, transportation costs, etc.), may convey a wrong interviewed by TERI has availed of a special subsidy on
message about the actual cost of selling ICS in the absence loan provided by the Khadi Village Industries Commission,
of any external support. provided to women entrepreneurs in rural areas to set up
cottage industries.
Credit
Strict monitoring and evaluation: The use of credit
Loans are the most popular source of raising capital for is strictly monitored by financial institutions to ensure
setting up an ICS business. Loans may be borrowed from that revenues from business activities will permit timely
commercial banks or micro-finance institutions. However, repayment of the loan. This infuses a sense of rigour and
financial institutions have strict criteria for selection of discipline in entrepreneurs in carrying out their business.
borrowers, which may deter small entrepreneurs from
approaching these institutions. As a result, suppliers may Disadvantages
sometimes rely on non-institutional finance from local
money-lenders and unregistered financial institutions. Micro- Pressure of repayment: Suppliers who avail of loans
finance institutions have to a great extent eased the access are continually under the pressure of repaying the loan,
to a loan by small entrepreneurs, by offering collateral-free irrespective of the revenue generated by them from ICS
micro-credit to them. An obvious feature of loans is that they sales.
need to be repaid, which compels suppliers to perform in
terms of sales so that adequate revenues are generated for Poor awareness among financial institutions: Many
repayment of the borrowed credit. financial institutions are unaware of cookstoves as a clean
energy product. While some may be willing to offer
‘energy’ loans, reduction in collection of biomass may not
be eligible for such loans.
MAY 2015 9
