Category: Business

Talks about business models, interesting stories, history and tips on running businesses.

A Milestone in Rooftop Solar Financing: Ecofy’s Securitisation Deal

Ecofy has recently completed what appears to be a pioneering securitisation transaction in the residential rooftop solar space. Based on publicly available information, the deal involved the securitisation of 2,400 non-overdue residential rooftop solar loans. This is as per rating document on the ICRA webiste. Tata Capital is reported to have invested in the senior tranche of pass-through certificates (PTCs). This is as per an announcement by Wadia Ghandy who seem to have acted as the legal advisor for the transaction. While modest in size, this deal is significant -possibly the first of its kind in India’s distributed renewable energy landscape.

This is a promising development. If such transactions become more common, they could open the doors to lower-cost capital for financing small-scale rooftop solar projects – an essential step toward accelerating clean energy adoption at a deeper level. Hopefully, we’ll see similar financial innovation extend to other distributed renewable energy assets or energy efficiency assets in the future. So, congratulations to the Ecofy team on this milestone!

Key Features of the Transaction

The structure appears to follow a typical two-tranche securitisation model, supported by cash collateral. The senior Series A PTCs are backed by about 30% credit enhancement leading to an A+ [So] rating:

  • 10% from cash collateral
  • 10% from a subordinated tranche, which Ecofy seems to have retained
  • ~9% from excess interest spread

ICRA has estimated the loss rate for this asset class at around 5%, which adds some context to the credit enhancement cushion. It’s worth noting that residential rooftop solar is still a relatively new lending product in India, lacking a long-term performance track record. Moreover, Ecofy itself is a young institution but has scaled quickly-reaching INR 1,000 crore in assets, backed by strong equity support.

What Stood Out to Me

One particularly interesting aspect is the choice of asset: residential rooftop solar loans, rather than commercial ones. I had assumed the commercial segment, especially among MSMEs, would be larger available pool. This deal suggests one of three things:

  1. My assumption about market size may be off;
  2. Residential loans are performing better than commercial ones;
  3. Greater granularity in the residential segment may have made the asset pool more attractive to investors.

I don’t know what is behind the choice of the pool. It might be that they will soon do another transaction with a commercial rooftop only pool.

Given that residential power tariffs are typically subsidised and lower than commercial rates, I had assumed stronger solar adoption in the commercial space. Additionally, metering and other policy frameworks tend to favor commercial installations.

Focus on Borrower Quality

The borrowers in this transaction reportedly had credit bureau scores above 700, indicating that repayment behaviour was a key underwriting criterion. This makes sense, given the lack of asset-specific performance data for residential solar loans.

It would be valuable to know whether the asset pool is being monitored by factors such as:

  • Rating or size of the rooftop solar unit
  • Brand or make of components

If such monitoring is in place, it could provide early signals of risk, although practical constraints may limit feasibility.

Recovery Considerations

Another angle worth exploring is whether Ecofy has buyback or performance contracts with EPC (Engineering, Procurement, and Construction) partners. In case of default, especially due to equipment failure, such contracts could significantly improve recoveries. It’s unclear whether this factor was considered during the credit rating process, but it could be a meaningful lever for de-risking.

A Familiar Credit Enhancement Pattern

The 30% credit enhancement, for senior Series A PTCs, feels familiar. It is similar to the structure of early microfinance and small business loan securitisation transactions that I encountered during my time at IFMR Capital. Does this suggest that the market sees similar risk profiles across these asset classes? Or, is it simply a market norm for first-of-a-kind (FOAK) transactions? (Yes, I said FOAK – aligning with the climate finance lingo!)

The Investor

The Investor in the transaction is Tata Capital and not a bank. Tata Capital wouldnt have priority sector considerations like a bank to invest in such a transaction. Their yield expectations would be higher than a bank as well. So, the transaction may not be commercially very lucrative for Ecofy but they would have done it to establish a track record. In fact, back in time, when Microfinance and Small Business Loan PTC transactions were introduced, NBFCs were the first to invest followed by small private banks. In all possibility, we will see a similar trend here. Access to priority sector funding from banks, in future, will improve the pricing of such transactions significantly reducing costs.

Legal and Structural Considerations

The other question I had was: are residential rooftop solar units considered movable or immovable assets? This matters because securitisation involves transferring both the loan and its underlying security to the Special Purpose Vehicle (SPV). Fixed assets (like homes) incur high stamp duties during such transfers, often making deals unviable unless the originator retains the security interest – something we’ve seen in HDFC-to-HDFC Bank or LIC Housing-to-LIC transactions. This is an iffy transaction structure but works in practice. I am not a legal expert to comment on the validity.

However, given the nature of solar installations, they might be classified as movable. Even if not, the transfer of solar equipment may not trigger significant stamp duties, which helps the viability of such structures.

A Note on Asset Quality Trends

Not directly related to this transaction, but worth mentioning: Ecofy’s gross Stage 3 (non-performing) assets have shot up from 0.03% in FY24 to 1.3% in FY25, even as the portfolio doubled. This suggests that as growth stabilises, the Stage 3 aseets % could be significantly higher than 1.3%. Of course, Ecofy’s portfolio is a mix of electric vehicle loans and rooftop solar loans and I am not sure where the increase in defaults is.

If ICRA’s 5% loss assumption is accurate, and if loan yields are in the 16–18% range, a sustained increase in defaults could create problems for the balance sheet, especially in a steady-state growth environment.

Final Thoughts

This deal marks a small but important step in bringing structured finance to India’s green finance sector. It offers lessons in credit structuring, asset selection, and investor appetite for climate-aligned financial instruments. As the ecosystem evolves, better data, smarter structures, and more diversified funding sources will be key to scaling sustainable finance.

Re-post How can Agritechs and FPOs build a bridge between Agribusiness corp and small farmers?

Now that some of the Farmers’ Bills are passed, what can happen to make things better and what role can Agritech companies play? What role can FPOs play? Why are they needed?

No single article can fully explain the complexity of Indian agriculture especially now that the bills are a political hot potato. This article doesn’t claim to answer all questions but does make an effort to try and show where the jigsaw pieces could fit. I have tried not to be swayed by the politics of the bill or the magical claims agtech.

https://www.cnbctv18.com/agriculture/how-can-agritechs-and-fpos-build-a-bridge-between-agribusiness-corp-and-small-farmers-6972361.htm

Re-post: Why debt funding is sometimes the smarter option

I wrote something on why and how debt should be used smartly by growing businesses and startups even in a post Covid world.

I say in the article “In difficult times like now, it is not just the product, process and marketing strategies that matter for businesses. It is also an appropriate capital strategy that ensures their very survival and long term value creation.”

The link to the article is here: https://www.techcircle.in/2020/06/18/why-debt-funding-is-sometimes-the-smarter-option

Ensuring Debt Finance for All Professionally-run MSMEs.

For several years, a number of policy initiatives have been taken to address the financing gaps for MSMEs. Of course, we have improved over the years. However, a lot still needs to be done. Here is a set of views, that I have, on how to go about doing it. Some of it is about approach and some of it is about actual implementation. Of course, this is a complex problem and I am not denying that genuine efforts have been made in the past. My argument is that those efforts have fallen short and it may be a time for policy makers to do a few things differently (to the extent that some of the suggestions may seem impractical but I am taking the liberty to list them out here.)

Note: Unsecured, small ticket lending to MSMEs based on credit of the individual promoter is largely (on the How to aspect) a solved problem (in India) and has got/getting a lot of attention. (We are miles to go for universal access to finance for MSMEs even in the small ticket, individual credit led lending.) The focus of this write-up is on corporate SMEs with high growth aspirations, where the funding requirements is in crores (individual promoters credit is not a good alternative for company credit) and is generally not done by traditional lenders without mortgage collateral. For new age, asset light but professionally run businesses, it is a key gap, that remains unsolved at scale. Hence, the focus on that segment in this write-up.This write-up is addressed to those shaping policy and regulation. This write-up is specific to the Indian context.

Do NOT broad brush: The MSME segment includes not just the local tea shop, or the puffed rice making factory but also includes the SME corporate with turnover upto INR 250 Cr (as per the recommended Budget 2018 classification) with some of them having raised institutional venture capital. Hence, the funding requirement, credit evaluation process and lending model will not be the same. If we don’t separate out the sub-segments and find specific solutions for each segment based on loan size, security and nature of entity, we will not have a comprehensive solution.

It may make sense to break down MSMEs into categories based on legal structure i.e. individual, proprietorship, partnership and OPC or private limited and have priority sector or lending target setting done separately for them. Have caps on loan amounts for each type of legal structure. The reason why I say this is, I am not sure why a firm with several crores of rupees in turnover, borrowing from banks, etc in crores should have the legal structure of a partnership/proprietorship. It should be a private limited company. The regulators have to make it easier for people to set up companies and be compliant. This will enable access to additional sources of data which can be leverage to take lending decisions.

(A note for SMEs seeking larger loans: If you don’t have mortgage or collateral security AND you haven’t put in much of your money as equity because you don’t have much AND you don’t have reasonable size of operations AND you don’t want to be compliant with additional regulations or provide verifiable data on various aspects of your business AND you still expect funding in crores – time to get some coffee. The purpose of adding compliance and improving access to different sources of data from the SME is to deal with the lack of security. Please note that unlike equity investors, lenders do not get a share on your upside but they do get a share of your downside for sure and hence they need to ensure that downside is limited. )

Accept that only Banks will NOT be able to help us in ensuring complete access to finance for MSMEs: Banks hold public/retail deposits and it is natural that they will have less risk appetite than NBFCs or specialised funds who are typically funded by entities that have the ability to manage risk unlike the retail depositor of a bank. By design, NBFCs or specialised funds will take more risk through sectoral specialisations. Historically, banks have been treated as the favoured child by regulators. If there is genuine interest in enabling access to finance for all segments of MSMEs, it has to be recognised that banks, NBFCs, specialised funds will together be able to address the funding needs of MSMEs.

How about allowing specialised MSME lenders partial access to the payments and settlements system? This will allow them to set up basic escrow accounts and current accounts with zero or close to zero EOD balance and ability to receive funds ONLY from corporates. NO cheques, NO savings or other deposits. This will enable specialised MSME lenders/NBFCs to offer payments, set up escrows to do a cash flow traping arrangements to deduct repayments without having to depend upon banks who create severe roadblocks in letting specialised lenders access to these simple operations. Sounds, kind of, like payment banks but I am talking about larger value transactions. Say, those who offer loans in INR crores to corporate SMEs and need to transact in several lakhs and crores and not in thousands.

Use Govt backed DFIs as market developers: India needs to find a way to use Govt backed DFIs in a market development role and not in competitor role. Their role should be to find ways to encourage other commercial lenders/investors (Banks, NBFCs, specialised funds) to do the job of lending to MSMEs instead of competing with them by trying to reach the MSMEs directly. I understand that there was a time when DFIs had to “show the way” because the commercial lenders/investors were not interested. However, over the past 8-10 years, it has been shown that private entities have been trying to find different ways of reaching out to the lucrative MSME finance gap. Frankly, if all the banks and NBFCs together are not able to directly reach all MSMEs, it is good reason to introspect and accept that one or two DFIs with limited geographic presence can reach out to all MSMEs.

Policy makers should encourage the use DFI funds to act as market developers through guarantees/credit enhancements for institutional investors to invest into NBFCs/specialised funds that are trying to fund MSMEs in India. This opens up a much larger tap of borrowings for the NBFCs and specialised funds (beyond banks) and also enables them to raise funding at a cheaper cost (assuming credit enhancement by DFI will lead to better rating of the transaction.). Oddly enough, I have seen multiple instances where Indian DFIs offer funding to NBFCs/specialised funds at a cost that is signifcantly higher than what the commercial banks or offshore commercial and DFI lenders are ready to offer at.

Consider Bank, NBFCs and specialised funds as partners and not adversaries: Banks in India (DFIs included) do not like sharing of pari-passu or second charge with NBFCs or specialised funds, as a practice, when lending to SMEs. Even though nothing in the regulation or law disallows it. This is a version of caste system propagated within our financial services industry under the excuse of lack of sufficient assets. Interestingly, I have seen multiple cases of companies that are profitable for more than 3 years with INR 50 Cr+ revenues (and fixed and current assets worth atleast INR 15-20 Cr) having INR 2 Cr worth short term facilities from banks backed by 75% cash deposits and security over entire current and future assets of the company (and possibly even the kidney’s of the promoters) NOT willing to share pari-passu charge over receivables (not on cash, not on fixed assets, just receivables) for NBFCs willing to lend higher amount than the bank and under more flexible terms. Since, forced regulation and orders will not solve this “social” problem, a better way is to encourage banks i.e. say that for the MSME loan accounts that the bank has, if the banks are able to demonstrate another non-bank lender on-board, they will be awarded 1.5x the value of their loans as priority sector.

Over-leverage of SMEs has to be addressed differently: Initiatives like the central credit registry is necessary to give a clear idea about over-leverage.(This is already being done.) It should be made compulsory to have all types of financial lenders (not just banks) add the details of the loans on the platform.

Data, data, data: Enable electronic access to data for all types of statutory, regulatory and transaction compliance done by companies. Eg: Specialised lenders or even banks should have access to data on taxes, electricity payments, EPFO, ESI, salary, bank transactions, etc. Security and privacy concerns are paramount but given that they are solvable issues, we need to find ways in which access to all that data is made extremely convenient, if we were to expand access to finance for MSMEs.

Access to Finance for Financiers

dKXGkaWhile enough literature is available pointing out to the lucrative business (and impact) that local financial institutions could target by reaching out to the micro and small businesses in any economy, there is very little written about how these “local financial institutions” can access funding to re-lend to this segment underserved segment. By nature, small businesses are risky and lack of formally verifiable income makes it difficult for banks to lend to small business. To some extent, it is right that banks avoid getting into financing risky business at a large scale given that they risk putting retail deposits at risk in case they build a very risky loan book. This means that there is clearly a need to address the credit needs of smaller enterprises through a network of more nimble financial institutions. In fact, in India some specialised lenders have come up over the years catering to different types of small businesses. Such financial institutions are recognised by the Reserve Bank of India as well.

They reach out to the “lucrative” MSME segment through customised appraisal mechanisms and lending processes and often due to their close ground presence manage to have a fairly good quality of loan book. Higher risk is adequately compensated by higher yield AND additional measures like closer monitoring prevents high default rates. This makes it look like an attractive proposition for people who want to invest (as debt or equity) in such businesses. In fact, a lot of these business have got significant equity interest. And that is where it starts to get interesting.

They have an interesting problem of being able to raise equity while not being able to raise enough domestic debt. A clearer inspection would reveal that the equity raises have largely been from foreign sources and often result in companies facing hurdles around the guidelines that guide loss of shareholding vs FDI amounts invested.

While the debt could have also come in from offshore sources, bringing debt into India from foreign jurisdictions faces lot of obstacles in terms of process (which has become significantly smoother over the years but it still continues to be a pain). These small financial institutions depend largely upon banks for debt funding and banks in India don’t fund anything unless the borrower is large enough or unless they the borrower is classified as priority sector. If a corporate entity doesn’t fall into any of those categories, their growth expectations are doomed because banks just wouldn’t fund.

Of course, banks have their own reasons. Most of these small financial institutions would be less than investment  grade (as per rating agencies) or just about investment grade. “Risking” money in something that the rating agencies don’t call investment grade is criminal in a bank setup.What banks miss though is that there is a way to assess such companies by moving out of the branches and observing the operations of those companies, their people and their practices. A small group of debt funding companies (companies that I have worked for most of my career) understand that and provide funding to such small financial institutions based on strong/relevant evaluation practices. In my experience of working with such companies and debt funding of more than INR 9000 Crores, there has not been a single case of non performing assets, be it in the form of on balance sheet loans or in the form of off balance sheet transactions.

Beyond banks, we also have other sophisticated financial institutional investors who can measure and establish appropriate risk mitigation strategies but even they don’t because the size of funding that each individual small financial institution seeks is not economically interesting. Honest and successful efforts have been made by the organisations that I have worked with to bring larger investors to fund these smaller financial institutions but it still takes a lot of push to make such transactions happen. It is not the norm.

As a result, the growth of new small financial institutions which have the ability to cater to smaller enterprises and customers, enabling financial access for all have been very slow, painfully slow. Entrepreneur interest in setting up new financial institutions to reach out to smaller enterprises and households have waned in spite of all data/reports and literature suggesting that there is a large market to be addressed. The number of new NBFCs coming up in the Indian market have slowed down in the last 2-3 years. The only ones who continue to move ahead are the ones with significantly large equity backing. Crossing the Chasm before success is dependent entirely on equity.

A portfolio size of INR 100 Crores in portfolio outstanding seemed to be like something that could garner interest of banks. Such a portfolio size could also give rating agencies enough track record to consider a rating upgrade. It seems that the number is of INR 100 Crore in portfolio size is becoming less important now. It is more important to know how much of that INR 100 Crore is funding with equity because more often than not, debt wouldn’t be easy to get for such companies anyways.

In other words, bootstrapping as a strategy to enable access to finance for SMEs in India is a very challenging job! So, banks won’t fund small enterprises because they are small and risky and no body would fund those who can fund small enterprises because they are not large and not priority sector. How do we then make it easier for small enterprise to access debt in India?

Photo Courtesy: rgbfreestock

Also published on LinkedIn.

Enterprise and Quest towards reducing friction

Customer loyalty is a result of reduced friction.

All successful enterprises (for profit or non-profit) are in the business of reducing friction that a customer faces in the process of accessing  products or services required by the customer.

Friction, that arises during pre-product acquisition as well as post product acquisition phases, needs to be reduced to build customer loyalty. Successful enterprises strive to reduce friction during both phases.The expectation is that reduced friction in accessing a product or service will encourage the customer to be more willing to use only that specific enterprise as a source/channel, i.e. customer loyalty.

However, friction doesn’t get reduced in one go because it is not just the customer experience but also the customer mindset that is in play behind the decision of a customer to be loyal to an enterprise.

From a customer perspective, the willingness to use a particular channel/source follows a four step process as shown in the diagram below and in some ways, each specific sector/industry has evolved over the years following these steps. As an industry matured, successful enterprises within the industry had to take a step upwards to remain in the fray. Those that could not, fizzled out.

snowflake

Steps towards low friction.

The first step is continuity i.e. being available “forever”. A customer will not invest time and effort to understand how the channel enables him to access the product or service unless the customer is certain that the channel will continue to be available for a significant period in future. Eg: Continuity is a feature of public sector undertakings and is often a default choice for many people.

Predictability is the next level. Predictability is the certainty the enterprise will be able to provide you with the service/product at an expected point of time or as per an expected schedule. Predictability is also the certainty that the product or service will have a set of basic characteristics that the customer expects. Eg: If you require to pick up a coffee at a local store everyday on the way to office and you realise that it is not certain whether it will stay open, would you depend upon it or look for an alternative before that?

Continuity and Predictability together build a sense of Reliability in the customers’ mind.

The next step  is convenience i.e. being available at a point of time, in a form and at a place that meets the customers’ requirement to the best possible extent. An enterprise can meet all three requirements or aim to achieve at least one of the above to be considered a convenient channel. Eg: Bigbasket.com gets you groceries at your place, at an expected time slot and the products are generally fresh! Many who have started using it, often don’t give up.

Beyond convenience is the flexibility offered by an enterprise. Flexibility in terms of product/ service options that meet specific needs of each individual customer and/or the ability to modify the choice during the process. Eg: Flipkart lets you return without any questions asked!

Convenience and flexibility are bring about a sense of Ease of Access in the mind of the customer which builds stickiness or customer loyalty.

Reliability and Ease of Access need different approaches.

Interesting thing about the aspects of Reliability and the Aspect of Ease of Access is that the ability to rely varies widely with the mindset of the customer (within the same customer profile) but the ability to perceive ease of access is quite democratic within a similar customer profile.

All new enterprises need to identify a set of early adopters who have the mindset to rely upon the enterprise more easily than the majority population. If the early adopters are satisfied, the word of mouth will enable the late adopters to start believing in the enterprise ability and move over. While it is difficult for the late adopters to easily rely, once a late adopter joins, it is not very difficult for the late adopter to see the value of Ease of Access.

In fact, ease of access is something that is often the most visible aspect and often a part of the sales pitch of the enterprise. Reality is, the customer needs to cover the first two steps before they can get the benefit of ease of access and the first two steps is more about the customers’ mindset that what the product offers.

So, while it takes a lot of effort to build a perception of reliability, a perception around ease of access is built easily. Similarly, it is easier to change perception with regards to ease of access than with regards to reliability.

It must be noted that Reliability is fundamental to the success of the enterprise. An enterprise can fight it out if it is reliable but doesn’t offer ease of access. However, it is impossible for an enterprise to survive if it offers ease of access but doesn’t offer reliability.

How does an enterprise provide Reliable and Easy to Access products/services?

As an industry matures and more enterprises join the fray, management of the issues that help in building the first two steps get fairly commoditised i.e. earlier, services/products that met the basic first two steps used to have economic value and used to be distinguishable but with more competition, they end up losing differentiation and hence lose the ability to build customer loyalty. The result is that in addition to Reliability, Ease of access becomes critical to the ability of the enterprise to command margins and survive in a mature (competitive) market.

Co-ordination (between different supply chain actors) or innovation (technology or process)enables the enterprise to provide better ease of access. The ability of the enterprise to work on these two aspects while keeping the customer shielded from the brisk activity in the back-end by providing an interface that cancels out all the noise (of co-ordination/innovation) is what reduces friction and builds customer loyalty.