SELCO: An energy loan's ripple effects

Sarah Alexander, Guest Contributor

Urban India encapsulates this nation's paradoxes, mixing a highly developed world (the planet's second-fastest-growing economy) with a painfully underdeveloped one; in Mumbai, for instance, more than 60 percent of the population lives in slums. Despite India's recent economic growth, improvement in the quality of life has not kept pace for a majority of the country's inhabitants, and the mushrooming of slums without basic infrastructure is a fact of life.

One of the main consequences of India's split-screen urban economy is its radically inequitable distribution of public services — from energy, drainage and sanitation, and waste management to potable water and paved roads. The poorest 75 percent of the population receive less than 10 percent of public services, while the richest 25 percent are getting 90 percent.

Despite the willingness of the poor to pay, inefficient delivery of basic civic services is still the norm in most slums. The poor are forced to fend for themselves — even though their makeshift, homegrown solutions are often inefficient, socially unsustainable, and financially burdensome.

Linking to mainstream financing

SELCO, a social enterprise primarily focused on solar lighting for the poor, has experienced firsthand the willingness of the poor to pay for reliable energy services. SELCO has found, however, that a necessary first step in achieving the associated long-term environmental and financial benefits is to facilitate financial linkages through mainstream financing. Without access to loans, there's little the poor can do to improve their situation.

For the urban poor, the lack of land titles and collateral precludes lending by mainstream financial institutions. Recognizing this barrier, SELCO launched a pilot initiative, initially approaching several financial institutions; however, these approaches met with little success. To overcome this, SELCO decided to offer the collateral itself: a "100 percent loan guarantee" to cover the loan costs of the first adopters of the lighting system. This backing would demonstrate to the financial institutions the validity of lending to customers of this type and, in turn, encourage further loan disbursements.

In the first instance, managers from the local financial institution (a cooperative society) visited households in a slum in Manipal, Karnataka and agreed to lend to ten customers under the loan guarantee mechanism. Soon, seeing the success of loan repayments, the bank agreed to finance other households. Today, the bank has financed over 100 customers and is interested in financing solar home lighting systems for households in neighboring slums as well.

The energy loan's ripple effects

This project has proven to be particularly successful because, besides gaining access to a clean, reliable source of lighting, the urban poor have been included in the formal financing system as a result of an energy loan. Having successfully repaid their initial loans, these customers are able to access other livelihood-related loans as well.

Many of us don't make the connection between diffusion of sustainable energy and poverty reduction. The commonly accepted notion is that sustainable energy is expensive, and that coal and nuclear power are thus the only realistic ways to give the poor immediate access to energy. In reality, however, this premise is false and the supposedly inevitable conclusions are financially and socially unsustainable. To arrive at a solution that is truly sustainable requires that technology, finance, and market linkages all be taken into account. Meanwhile, small interventions (for instance, providing solar lighting solutions to replace kerosene lamps for slum dwellers) can lead the poor away from more costly but currently conventional approaches — generating savings, increasing the number of healthy working hours, and lighting the path toward incremental improvements in the lives of slum residents.

A few key learnings from SELCO's experience bringing sustainable energy solutions to the urban poor:

• Solutions (financial and technical) must be customized and cost-effective to be affordable to the poor. Matching cash flows to existing frequencies of payment toward their energy needs, such as kerosense/diesel, ensures that financing will be tailored to their affordability and earning capacity.

• Rather than reducing the cost of the system, with targeted interventions to address financial barriers, local financial institutions can participate in energy loans of this kind.

• Sustainability must be considered from both a financial and an environmental standpoint.

• Solutions should help to achieve development linkages, including creating and mobilizing local savings.

• The poor must always be held as the primary stakeholders.

• A bottom-to-top approach is essential to ensure a pro-poor way forward.

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Sarah Alexander is a consultant assisting SELCO in launching new program initiatives such as the Urban Poverty Labs.

SELCO is a Bangalore-based social enterprise whose mission is to enhance the quality of life of underserved households and livelihoods through sustainable energy solutions and services.

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