Page 5 - Supply-side Financing of Improved Biomass Cookstoves in India
P. 5
Discussion Paper
by and large willing to share technology with manufacturers, investment of capital due to the peculiar nature of domestic
without expecting any payment or royalty. The strong and ICS market. The focus of subsequent sections of this discussion
favourable linkages of research institutions with manufacturers paper will be on the availability of capital and finance for ICS
is a welcome sign for the ICS market, as it assures that tested suppliers in India.
technology of standard quality will reach end users with minimal
additional cost to suppliers. While selecting raw material Sources of Finance for Cookstove Suppliers
suppliers, firms have to take into account the distance of the
supplier from the firm and the taxation regime of the state As is visible in the preceding section, manufacturing factory-
where the raw material supplier is located. Hence, establishing made ICS involves initial production and marketing costs. The
backward linkages with raw material suppliers involves a trade- risk of capital investment is high, as returns from sales are
off between shipment costs and the cost incurred for payment not assured in a poorly organized market. To minimize this
of taxes during transportation. Like any other industry, a large risk, manufacturers rely on borrowed capital from a variety
portion of the initial capital investment is consumed by cost of of sources. The source of capital for the cookstove suppliers
raw material and cost of equipments/machinery required to interviewed by TERI and the challenges involved in obtaining
set up a production line. Figure 4 also makes it clear that in finance for setting up an ICS business has been presented in
cases where the cost of equipment is high, manpower costs Table 3.
tend to be low. While mechanization of production requires a
high initial investment, recurring labour costs in production can Even though the interviewed cookstove suppliers had
be avoided in future. However, some suppliers observed that obtained finance from diverse sources, they were unanimous
in situations where returns on investment are uncertain due in reporting that challenges in obtaining finance for ICS business
to under-explored markets, it is apposite to make minimum was a significant deterrent in setting up their business. The
investments in machinery at the initial stages of the business, most popular source of finance that was initially approached
and rely more on skilled labour. The cost incurred in marketing by all suppliers was commercial banks. However, convincing
of cookstoves substantially involves making dealer/retailer the bank about the commercial viability of their business model
networks, unless the supplier intends to engage in direct selling. posed a difficult challenge. One of the suppliers, unsure of
Dealers and retailers normally expect suppliers to provide them obtaining finance from any institutional source, had to depend
with a stock of cookstoves on credit, payable after sale of the on a non-institutional source for obtaining finance, resulting in
stoves. Therefore, suppliers normally have to incur high initial very high cost of capital. While micro-finance and donor grants
costs for establishing a market network. are also increasingly common in the clean cookstoves sector,
micro finance institutions (MFIs), and donor agencies tend to
While it is beyond doubt that the domestic ICS scenario set strict preconditions on the business model, on the basis of
presents a picture of a frontier market with high latent demand their own priorities. Also, suppliers who are unduly dependent
and under-explored opportunities, it must be appreciated that on grants may find it difficult to continue business operations
suppliers face huge uncertainties and production bottlenecks once the tenure of the grant is over. One of the interviewed
for setting up a business. Many of these bottlenecks are suppliers refused a market-support grant from a donor-
either related to insufficient capital, or high risks involved in agency to avoid excessive dependence on the latter, which he
thought would impede market expansion of his ICS business.
Table 3: Sources of finance and challenges faced by six interviewed ICS suppliers
Supplier Amount of initial capital Percentage of Source of finance Challenges
invested (in Rs.) borrowed capital Difficult to convince bank about commercial viability of the business
model
Supplier A 1,15,000 60% Commercial loan Had to depend on external help for preparing a detailed project report
Supplier B 2,50,000 100% Subsidized loan for women Has to model his business operations according to priorities of the
entrepreneurs from Khadi Village donor agency
Supplier C 12,00,000 Industries Commission Undesirable involvement of MFI in fixing the price of the cookstove for
Supplier D 4,50,000 its target consumers
45% Grant Difficult to convince bank about commercial viability of the business
model
30% Micro-finance High interest rate
Supplier E 14,00,000 40% Commercial loan
Supplier F 5,25,000 50% Loan from non-institutional lender
MAY 2015 5
by and large willing to share technology with manufacturers, investment of capital due to the peculiar nature of domestic
without expecting any payment or royalty. The strong and ICS market. The focus of subsequent sections of this discussion
favourable linkages of research institutions with manufacturers paper will be on the availability of capital and finance for ICS
is a welcome sign for the ICS market, as it assures that tested suppliers in India.
technology of standard quality will reach end users with minimal
additional cost to suppliers. While selecting raw material Sources of Finance for Cookstove Suppliers
suppliers, firms have to take into account the distance of the
supplier from the firm and the taxation regime of the state As is visible in the preceding section, manufacturing factory-
where the raw material supplier is located. Hence, establishing made ICS involves initial production and marketing costs. The
backward linkages with raw material suppliers involves a trade- risk of capital investment is high, as returns from sales are
off between shipment costs and the cost incurred for payment not assured in a poorly organized market. To minimize this
of taxes during transportation. Like any other industry, a large risk, manufacturers rely on borrowed capital from a variety
portion of the initial capital investment is consumed by cost of of sources. The source of capital for the cookstove suppliers
raw material and cost of equipments/machinery required to interviewed by TERI and the challenges involved in obtaining
set up a production line. Figure 4 also makes it clear that in finance for setting up an ICS business has been presented in
cases where the cost of equipment is high, manpower costs Table 3.
tend to be low. While mechanization of production requires a
high initial investment, recurring labour costs in production can Even though the interviewed cookstove suppliers had
be avoided in future. However, some suppliers observed that obtained finance from diverse sources, they were unanimous
in situations where returns on investment are uncertain due in reporting that challenges in obtaining finance for ICS business
to under-explored markets, it is apposite to make minimum was a significant deterrent in setting up their business. The
investments in machinery at the initial stages of the business, most popular source of finance that was initially approached
and rely more on skilled labour. The cost incurred in marketing by all suppliers was commercial banks. However, convincing
of cookstoves substantially involves making dealer/retailer the bank about the commercial viability of their business model
networks, unless the supplier intends to engage in direct selling. posed a difficult challenge. One of the suppliers, unsure of
Dealers and retailers normally expect suppliers to provide them obtaining finance from any institutional source, had to depend
with a stock of cookstoves on credit, payable after sale of the on a non-institutional source for obtaining finance, resulting in
stoves. Therefore, suppliers normally have to incur high initial very high cost of capital. While micro-finance and donor grants
costs for establishing a market network. are also increasingly common in the clean cookstoves sector,
micro finance institutions (MFIs), and donor agencies tend to
While it is beyond doubt that the domestic ICS scenario set strict preconditions on the business model, on the basis of
presents a picture of a frontier market with high latent demand their own priorities. Also, suppliers who are unduly dependent
and under-explored opportunities, it must be appreciated that on grants may find it difficult to continue business operations
suppliers face huge uncertainties and production bottlenecks once the tenure of the grant is over. One of the interviewed
for setting up a business. Many of these bottlenecks are suppliers refused a market-support grant from a donor-
either related to insufficient capital, or high risks involved in agency to avoid excessive dependence on the latter, which he
thought would impede market expansion of his ICS business.
Table 3: Sources of finance and challenges faced by six interviewed ICS suppliers
Supplier Amount of initial capital Percentage of Source of finance Challenges
invested (in Rs.) borrowed capital Difficult to convince bank about commercial viability of the business
model
Supplier A 1,15,000 60% Commercial loan Had to depend on external help for preparing a detailed project report
Supplier B 2,50,000 100% Subsidized loan for women Has to model his business operations according to priorities of the
entrepreneurs from Khadi Village donor agency
Supplier C 12,00,000 Industries Commission Undesirable involvement of MFI in fixing the price of the cookstove for
Supplier D 4,50,000 its target consumers
45% Grant Difficult to convince bank about commercial viability of the business
model
30% Micro-finance High interest rate
Supplier E 14,00,000 40% Commercial loan
Supplier F 5,25,000 50% Loan from non-institutional lender
MAY 2015 5
