While a 1 MW solar plant is not a small project, few promoters would be inclined to fund it out of their own pocket. A bank loan allows to spread the costs over several years and keep liquidity on the promoter's side. However, keep in mind that banks will always be focused on numbers.

Before sanctioning a loan, the bank will want to know about the cost of the project, offtake from the plant, cash flows and promoter's credentials. This guide will walk through the costs of a 1 MW plant, bank loan for 1 MW solar power plant in India, eligibility and documentation, interest rates and tenure, ways in which a bank will evaluate a solar project, and the application process.

What is the cost of a 1 MW solar power plant in India?

The cost of a 1 MW solar power plant is 3.5-4.5 crore rupees for a ground-mounted turn-key project.

Use this as a starting point and ask vendors for a detailed breakdown of costs for modules, inverters, mounting structures, balance of systems (cables, transformers, switches, earthings, monitoring and civil works), EPC costs, land (4.5 acres on lease or purchase), evacuation infrastructure (transformer, lines to the grid, which increases with distance from the substation), approvals and other expenses. Always request itemized costs rather than a lump sum per 1 MW of capacity.

Can I get a Bank Loan for 1 MW Solar Power Plant in India?

In most cases, yes. Bank loans for 1 MW solar power plant in India are available by many banks, NBFCs and specialized agencies like IREDA. The loan can be either project-based (repayment from cash flows of the plant) and/or ad-hoc term loan based (repayment from the promoter's pocket). Eligibility depends on the viability of the project, promoter's credentials, assured revenues from the plant and security offered.

Among these, revenue streams are the most important, which is why a bank will want to see a PPA (power purchase agreement) signed with a DISCOM or a reliable corporate buyer. Alternatively, a long-term captive arrangement can also be viable. In some cases, government schemes can also be used as a source of offtake or revenue.

For example, PM-KUSUM Component A intends to encourage solar power among farmers and includes solar plants with capacities ranging from 0.5-2 MW. Note that the initial cut-off date for this scheme is March 2026.

In terms of security, a bank will typically take a charge on the plant and its cash flows, and may also ask for additional collateral or guarantees.

What is the Bank Loan for 1 MW Solar Power Plant in India?

The Bank Loan for 1 MW Solar Power Plant in India figure depends on multiple factors, however, note that most lenders will only sanction up to 70-75% of the project cost, leaving the promoter to fund the remaining 25-30%. IREDA, for example, has a standard of 70-75% of the project cost as a loan amount, subject to the promoter's contribution and other factors. For example, for a ₹4 crore project, a loan amount sanctioned by the lender may be around ₹2.8 crore. This leaves ₹1.2 crore to be contributed by the promoter, which may be in the form of cash or promoter's contribution to the project cost.

Bear in mind that the lenders, too, are going to check if the project makes sense and is likely to pay all borrowed money back. Often, lenders refer to the level of the Debt Service Coverage Ratio (DSCR), which shows how much cash is available to pay back loans each year compared to the debt-service obligation (that is, interest and principal payments). In other words, a solar project's cash flows should greatly exceed its annual debt payments to be eligible for a loan. Most banks will be looking at anything above 1.2x-1.3x DSCR, with some room for error in the base case. The lower the DSCR, the lower will be the sanctioned amount.

Eligibility Criteria For A Bank Loan For 1 MW Solar Power Plant In India

Bank loan for 1 MW solar power plant in India tend to vary with every lender as they will have different requirements, however, here are the common factors that determine solar plant loan eligibility:

Applicant:	A company (LLP, partnership, private limited, etc.), proprietor or individual, though many lenders now require a separate SPV (special purpose vehicle).
Credit profile:	Minimum credit score, good repayment history, minimum net worth, etc.
Project Viability:	Realistic generation estimates, reliable EPC, quality equipment, and so on.
Land:	Ownership and lease documents, land-use permissions, etc.
Approvals and offtake:	DISCOM or nodal-agency approvals, grid connectivity, PPA/LOI/offtake agreement, etc.
Promoter contribution:	Minimum 25-30% promoter's contribution with proof of funds.

Documents required for a Bank Loan for 1 MW Solar Power Plant in India

The list of documents varies slightly from the bank loan for 1 MW solar power plant in India, but here is the general list of documents that are required for a 1 MW solar project loan.

KYC and company documents:	PAN, Aadhaar, company incorporation certificate, MOA, AOA, board resolution, GST, etc.
Financials:	Last 2-3 years' audited financials, ITR, bank statements, etc.
Project details:	Detailed project report (DPR) with estimated cost and financing, generation estimates, cash flow statements, etc.
Land:	Land records, lease deeds (if on lease), land-use conversion documents, etc.
Equipment and EPC:	Quotations from EPC and equipment suppliers with technical specifications.
PPA/Offtake agreement:	Power purchase agreement, LOI, or offtake agreement.
Approvals:	DISCOM or nodal agency approvals and grid-connection approvals.
Other documents:	Net-worth statement of promoter and existing loans, if any.

Interest rate and tenure for Bank Loan for 1 MW Solar Power Plant in India

Bank Loan for 1 MW Solar Power Plant in India typically have floating rates of interest that depend on the applicant's profile, the security offered, the offtake and its reliability, loan tenure, and so on. When reviewing term sheets from various lenders, keep in mind that processing fees, pre-payment penalties and reset clauses also affect the overall cost.

The tenure of such loans is typically long, with IREDA offering up to 15 years on a solar power plant loan with government PPA, depending on the cash flows, PPA tenure, and DSCR. There is also a one-year moratorium after commissioning. A longer tenure benefits the borrower, since it reduces annual repayments.

However, the longer the tenure, the higher the overall interest paid on the loan, and it should also be within the PPA tenure of the project. A bank will also want to see a good revenue stream from the solar power plant. A higher DSCR means that a larger portion of the project costs can be financed.

How Do Bank Loans for 1 MW Solar Power Plant in India Evaluate?

When evaluating a bank loan for 1 MW solar power plant in India for a solar project for financing, a bank will primarily be focused on the project's ability to service the debt, even under the worst-case scenarios. This is why a bank will typically do the following:

• Assess the project cost and the promoter's contribution based on estimated generation, solar irradiation at the project site, utilization hours, degradation rate for the modules and other factors. A 1 MW plant can be expected to generate around 1.4-1.7 million units of electricity on an annual basis, with most banks taking a conservative view on generation potential.
• Analyze the revenue from the solar power project, including the PPA tariff, escalations in the PPA, and security of payment. The credit profile of the offtaker also plays an important role, which is why a DISCOM PPA or a corporate PPA from an established company is viewed more favorably than a private party PPA.
• Understand operating expenses, including O&M costs, insurance, and land lease (if any).
• Review IRR (internal rate of return) and DSCR (debt service coverage ratio) of the project, which are the primary metrics used to assess a solar power project. Ideally, the IRR should considerably exceed the interest rate that the lender will charge, while DSCR should be significantly above 1x.
• Evaluate the promoter's profile, including the promoter's experience in the field, existing liabilities and other factors that can affect the promoter's ability to fund their share in the project.

The steps to apply for a Bank Loan for 1 MW Solar Power Plant in India

The entire process for submitting a bank loan for 1 MW solar power plant in India application typically looks like this:

1. Prepare a detailed project report (DPR) that includes the estimated DPR and project cost, generation estimates, tariff, and associated cash flows.
2. Compare and contrast the loan offers from different lenders in terms of interest rates, margin, tenure, fees, security requirements, solar power project experience and so on.
3. Submit the application along with KYC, financial and project details.
4. The bank will perform due diligence on the technical aspects of the project, land ownership, credit appraisal, and a site inspection.
5. The bank will approve the application and issue a sanction letter with additional terms and conditions.
6. The loan documentation will be prepared, requiring signatures from the borrower and the lender. Escrow and other charges will also be processed at this stage.
7. Funds will be transferred as per the terms of the loan agreement, usually in installments, after the promoter's contribution to the project has been made.

Bank Loan for 1 MW Solar Power Plant in India - is it a good choice?

A bank loan for 1 MW solar power plant in India is a good option that has reliable offtake and realistic costs, sufficient cash flows for repayment, and promoter's contribution that can yield better returns elsewhere. It is less viable when the tariff is uncertain, the offtake is unreliable (especially with credit risk), and when the profit margins are low.

It is essential to model the costs, generation, revenues, O&M, interest, and repayments on a worst-case and best-case basis and consult with a chartered accountant or project finance expert before finalizing any loan. Get your project started today with Sunkind India Limited

Frequently asked questions