Quick Facts
Term Loan and Working Capital basics
Solar project finance involves two main debt instruments:
Term Loan: Long-term debt for capital expenditure (the project’s CAPEX). Used to fund construction of the solar plant. Tenure matches the project’s economic life. Repayment from project’s PPA revenue per fixed schedule.
Working Capital: Short-term debt for operational expenses. Bridges cash flow gaps. Revolving facility (used and repaid as needed). Tenure typically 1 year, renewed annually.
For utility-scale Indian solar projects, both are typically employed:
Term loan dominates: 70-75% of total project cost. Funds the plant CAPEX.
Working capital is smaller: covers ongoing operations.
The total debt for a 100 MW project: about Rs 350-400 crore term loan plus Rs 1-3 crore working capital facility.
Term Loan structure
Term loan for solar projects:
Purpose: Finance project CAPEX (modules, inverters, structures, EPC services, construction).
Tenure: 12 to 18 years for utility-scale. Matches project’s economic life.
Interest rate: 9% to 11% per annum. Often partially fixed, partially floating.
Drawdown: During construction phase per drawdown schedule.
Repayment: Quarterly or monthly equal installments after moratorium.
Moratorium: 6 months to 1 year initial period with no principal repayment (interest only).
Security: Project assets, share pledge, escrow accounts, personal guarantees (sometimes).
Conditions: Standard project finance covenants including DSCR maintenance.
For a 100 MW project with Rs 400 crore term loan at 10% over 15 years with 1-year moratorium:
Annual interest: Rs 40 crore (declining as principal repays).
Annual principal: about Rs 28 crore.
Total annual debt service: Rs 35-40 crore.
Total interest over loan: about Rs 250 crore.
The term loan structure provides predictable financing for the long-term solar asset.
Working Capital structure
Working capital for solar projects:
Purpose: Finance operating expenses, bridge cash flow gaps.
Tenure: 1 year typically, revolving (continuous renewal).
Interest rate: 8% to 10% per annum. Often floating, linked to MIBOR or REPO rate.
Drawdown: As needed for operational payments.
Repayment: As cash flow allows, before next drawdown.
Security: Charge on current assets (receivables, inventory).
Conditions: Standard working capital covenants.
For a 100 MW project:
Working capital facility: Rs 2-3 crore typical.
Usage: O&M payments, insurance premiums, statutory dues.
Cycle: PPA revenue typically received monthly; working capital bridges gaps.
Outstanding balance: varies through the year as cash flow cycles.
The working capital facility provides operational flexibility while term loan handles the long-term financing.
Term loan amortisation example
For a Rs 400 crore term loan at 10% interest over 15 years (15-year tenor):
Year 1 (moratorium):
Interest paid: Rs 40 crore.
Principal repayment: Rs 0.
Outstanding balance: Rs 400 crore.
Year 2:
Interest: Rs 40 crore.
Principal: about Rs 17 crore.
Outstanding: Rs 383 crore.
Year 5:
Interest: about Rs 32 crore.
Principal: about Rs 23 crore.
Outstanding: Rs 290 crore.
Year 10:
Interest: about Rs 18 crore.
Principal: about Rs 37 crore.
Outstanding: Rs 130 crore.
Year 15:
Interest: about Rs 2 crore.
Principal: about Rs 30 crore (final).
Outstanding: 0.
Total interest paid over 15 years: about Rs 240-260 crore.
The amortisation structure shifts from interest-heavy in early years to principal-heavy in later years.
Working capital usage pattern
For a 100 MW solar project:
Monthly PPA revenue: about Rs 1 crore (at typical Rs 2.50 per kWh and 4 lakh kWh per day).
Monthly O&M expense: about Rs 30-50 lakh.
Monthly insurance, statutory dues: about Rs 10-15 lakh.
Monthly total operating expenses: about Rs 50-70 lakh.
The PPA revenue exceeds operating expenses month-over-month, providing surplus for debt service.
Working capital usage:
Bridge timing differences between revenue and expense.
Cover temporary cash shortfalls.
Support working capital cycles.
For most months, working capital usage is modest. Specific periods (insurance renewal, major maintenance) may require larger drawdowns.
Term loan vs Working capital comparison
| Aspect | Term Loan | Working Capital |
|---|---|---|
| Purpose | Finance CAPEX | Bridge operating cash flow |
| Tenure | 12 to 18 years | 1 year revolving |
| Repayment | Per fixed schedule | As cash flow allows |
| Interest rate | 9% to 11% | 8% to 10% |
| Drawdown | During construction | Ongoing as needed |
| Outstanding balance | Declines per schedule | Cycles up and down |
| Security | Project assets | Current assets |
| Lender’s risk | Higher (longer tenor) | Lower (short, revolving) |
| Use in solar | Plant CAPEX | Operating expenses |
| Typical size (100 MW) | Rs 400 crore | Rs 2-3 crore |
Both are essential for project operations. Term loan is the primary financing; working capital provides operational flexibility.
Term loan with moratorium
Solar project term loans typically include a moratorium period:
Construction phase: 12 to 18 months for utility-scale.
Moratorium covers construction plus initial ramp-up.
Typical moratorium: 6 months to 1 year after commercial operation.
During moratorium: only interest is paid; principal is deferred.
The moratorium acknowledges that solar plants need time to start generating revenue. Without moratorium, the project would face debt service before adequate cash flow.
After moratorium ends, principal repayment begins per schedule.
Step-up amortisation
Some solar term loans use step-up amortisation rather than equal installments:
Early years (low ramp-up): Lower principal repayment.
Later years (mature operations): Higher principal repayment.
Total repayment over loan life: same as equal installments.
Step-up amortisation acknowledges that solar plant cash flow may improve over time as performance stabilises and degradation effects are managed.
For lender’s diligence, the amortisation schedule is part of the loan structure agreement.
Sources of term loan
Major Indian sources of solar term loans:
PSU banks (State Bank of India, Canara Bank, Bank of Baroda, Punjab National Bank).
IREDA (Indian Renewable Energy Development Agency).
REC (Rural Electrification Corporation).
Power Finance Corporation (PFC).
NBFCs (LIC Housing Finance, Tata Capital).
ECB (External Commercial Borrowing) for some projects.
Multilateral lenders (IFC, ADB, AIIB) for specific structures.
Foreign banks for ECB-eligible deals.
For larger projects, syndicate of multiple lenders is common.
Sources of working capital
Working capital sources:
PSU banks (Cash Credit, Overdraft facilities).
NBFCs.
Inter-corporate deposits within sponsor groups.
Trade credit from suppliers.
Working capital may be from the same lender as term loan or separate. Some projects have separate working capital lenders to spread risk.
Common term loan and working capital mistakes
For sponsors:
Mismatching loan tenor with project life. Tenor should match PPA term.
Inadequate moratorium period. Construction delays can stress debt service.
Over-relying on working capital. WC is for cycles, not for permanent capital.
Mismatch between cash flow and amortisation. Lender’s schedule should accommodate project’s cash profile.
For lenders:
Generous tenor without strong PPA. Long tenor needs reliable revenue.
Inadequate covenant package. Covenants protect lender’s interests.
Underestimating refinancing risk. Some projects may refinance during loan tenor.
Best practices
For project sponsors:
Engage with multiple lenders to negotiate competitive terms.
Match loan tenor with project economic life.
Negotiate adequate moratorium and grace periods.
Structure working capital around actual operational cycles.
Maintain good relationships with both term loan and working capital lenders.
For lenders:
Apply appropriate due diligence on project structure.
Set realistic DSCR and covenant requirements.
Provide structural flexibility for genuine project needs.
Maintain monitoring throughout debt term.
For tax planning:
Interest on both term loan and working capital is tax-deductible.
For 80-IA eligible projects, the deduction interacts with the tax holiday.
Consult chartered accountants for company-specific tax treatment.
Standards and references
Term loan and working capital structures follow banking industry standards in India. RBI guidelines apply to all bank lending. CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) requirements affect bank lending costs. CRISIL, ICRA, India Ratings, and other credit rating agencies assess solar projects for lender’s diligence.
Related glossary terms
- IRR
- DSCR for Solar Projects
- Solar Financial Closure
- Escrow Account in Solar PPA
- Payment Security Mechanism
- Power Purchase Agreement
Key takeaways
Term Loan and Working Capital are two distinct debt instruments in solar project finance. Term Loan finances the project CAPEX with long tenure (12-18 years), structured repayment, and security against project assets. Working Capital finances operating expenses with short revolving tenure (1 year) and security against current assets. For utility-scale Indian solar projects, term loan is the primary financing (70-75% of total cost); working capital is smaller (Rs 2-3 crore per 100 MW). Term loans typically include 6-month to 1-year moratorium and follow amortisation schedules matching project cash flow. Major Indian sources include PSU banks, IREDA, REC, PFC, and NBFCs.