National Resource Efficiency Policy (NREP): Can it revive the circular economy?

Over the last decade, much has changed in the regulatory landscape of waste management sector as number of old rules (Plastic Waste Management Rules 2011, Solid Waste Management Rules 2000) have been upgraded and new rules (E-Waste Management Rules 2016, Construction and Demolition Waste Management rules 2016) have been implemented. However, the ground realities remain grim: on the one hand, our cities are crumbling under piles of uncollected waste, while on the other hand waste management companies are unable to get enough waste.

In this context, the draft National Resource Efficiency policy (NREP), aims to create an overarching policy framework to promote resource efficiency across all sectors. It recommends a life cycle driven approach for managing resources right from their extraction to disposal. It proposes penalties for extraction of virgin material, design standards for product longevity and reuse, encouragement of production of green products, strict rules for collecting waste from consumers/bulk generators and taxes on landfills. The policy has good intent, but may not be able to achieve the desired impact in absence of a robust circular industry that can collect and process waste.

Historically, waste management policies have been implemented through Pollution Control Boards (PCBs), who are responsible for licensing and regulating the industry. As such, the emphasis has been on regulation, which now needs to shift to industry enablement. Further, NREP must address issues such as lack of access to waste, small scale of operations and high taxes that render circular companies uncompetitive.

Access to waste

India’s circular industry is nascent, with only handful of public listed companies and no unicorns. It mostly exists in selected sectors such as electronic waste, plastic waste and to some extent in tyre, metal recycling and municipal solid waste processing.

Getting access to segregated waste in large quantity is a big constraint for the industry. For example, while annual e-waste generation in India is estimated to be 20 Lakh tonnes, most formal sector recyclers are not able to collect even 5000 tonnes per annum. Similarly tyre recyclers that reclaim rubber from tyres face challenges in collecting waste tyres. Many waste and biomass based power plants have been closed down due to unavailability of segregated waste. Metal recycling industry relies on imported scrap, and construction waste recycling is yet to take off as segregating waste and converting it to useful products is not profitable.

Unlike regular manufacturing industries, where raw material can be bought from other sources, circular economy companies need to collect waste (their raw material) from a wide variety of sources and incur considerable cost in transporting it to the recycling centres. Additionally, generators of waste are not ready to pay for its disposal; instead, they expect to be paid for their waste. Moreover, composition of waste changes on a daily basis, making it difficult for companies to deliver standardised products, thus affecting their financial viability.

Waste can be divided into two categories; post-consumer waste and pre consumer (industrial) waste. The cost of collection of post-consumer waste is high and volumes are low, as consumers do not have sufficient incentives to dispose the waste in a responsible manner. For example, most of the Multi-Layer Plastic (MLP) waste cannot be recycled as it is mixed with household waste and the cost of cleaning MLP waste makes the recycling unviable. Industrial waste is somewhat easier to collect, but the waste generators are nonetheless unwilling to pay for its disposal. To add to this, high end machinery for recycling is mostly imported, adding to the project cost of recycling ventures.

Some of the remedial measures that could be implemented for this could are:

  • Funding mass awareness programmes on waste segregation, waste disposal and capacity building of informal sector should be routed through waste management companies who have incentives for doing it effectively as they stand to gain from higher waste collection
  • Incentivise domestic machinery manufacturers to develop indigenous machinery for onsite waste segregation/processing

Financial incentives to achieve economies of scale

India’s recycling industry is dominated by a large number of micro enterprises with low processing capacities. For example, a majority of the 7500 (Report by FICCI, 2017) plus formal and informal plastic recyclers, have capacities lower than 10 tonnes per day, whereas globally new plants are being built with a capacity of more than 100 tonnes per day. Similarly, most of around 300 e-waste recycling companies dismantle e-waste manually and have not invested in modern facilities for recycling/refining the waste. The tyre recycling companies that have been dismantling cross ply tyres need to invest in technology to be able to process radial tyres.

NREP has proposed to set up a green fund to facilitate access to finance for technology and process improvement. A part of this fund could be exclusively reserved for financing value addition related to capex of circular economy companies. This fund could work on the lines of energy efficiency cluster financing program of the World Bank/SIDBI which provides financing for energy efficiency/pollution reduction measures to foundries.

Rationalising taxes in the entire value chain

NREP proposes rationalization of the tax regime to make secondary raw materials price-competitive. The taxes would need to be rationalised throughout the product value chain. For example, the GST rates on plastic scrap have already been reduced to 5%, but the products made out of the plastic waste such as plastic granules, roofing sheets, furniture, sacks etc. attract 18% GST, in line with the products made from virgin material. Further, since recyclers buy their raw material from scrap sellers, many of whom are not registered with GST, they are not able to claim input credit, and therefore their effective taxation is higher than that of manufacturers of products based on virgin products.

Further, NREP may also want to advocate the case of rationalisation of taxes/subsidies on the products that compete with the recycled products. For example, organic fertilsier (made from food waste) competes with chemical fertilsier such as Urea/DAP, which are heavily subsidised. Rationalisation of subsidies on chemical fertilsier will provide a boost to the organic fertiliser sector and make the operations of agri waste recycling companies profitable.

Monitoring the health of circular industry

The new policy lists resource productivity, domestic material consumption, extraction and output as indicators for measuring resource efficiency. It may be prudent to add circular industry health to the list of indicators, which could be measured in terms of growth in sales of formal sector enterprises, their employee strength and capital expenditure.

In summary, NREP with its proposed measures of life cycle management of resources, is a good step toward building the circular economy. However, the implementation approach needs to be different though, one that gives priority to the entrepreneurs /enterprises in the sector.

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Loans to MSME in 59 minutes — A radical reform or just an eyewash?

One of the biggest announcements for MSME sector in 2018, was the 59 minute loan scheme, which promises loans of up to INR 1 crore to MSMEs from public sector banks (PSBs) through a seamless online lending market place called PSBLOANIN59MINUTES. This web portal approves a loan in 59 minutes and connects the borrower to the bank branch for sanction and disbursal.

The process is as follows: on submission of the information online, the portal does an analysis of the data and approves or rejects a loan. For loans that are approved in-principle, the portal provides information on banks that offer required product, loan amount, rate of Interest etc. The applicant has to choose the branch of the bank through which the loan shall be processed and disbursed and make payment of a convenience fee of INR 1000. The “in-principle” approval is valid for a period of 15 days from the date of approval. The Bank receives a preliminary report from the portal, where a set of 22 parameters are checked along with profile of the promoters, business activity, analysis of past financial statements, risk scoring, assessment of limits, fraud analysis and verification from GSTIN and MCA. Then, the applicant has to approach the bank branch along with the system generated approval letter and list of indicative documents. The bank would do required due diligence and sanction/disburse the loan.

As per MSME PULSE , the size of loans to MSME (under INR 25 crore) is estimated to be around INR 25 lakh crore, of which the share of public sector banks is large (around 48%). While the share of PSBs in MSME lending has been declining, they still retain a dominant share of over 75% for loans under Rs. 10 lakh, highlighting their critical role in financial inclusion. The biggest advantage of a PSB loan is its low cost, which could be 5-7 % lower than that of NBFCs and fintech portals. For a small borrower looking to borrow a collateral free loan under INR 1 crore, PSB loans are the most accessible loans, as both private banks and NBFCs mostly lend against a security. PSB loans are also an important source of funding for the manufacturing sectors such as food processing, textile, chemicals, and auto components.

As such, this policy measure may be a sincere attempt to reduce the time and effort required to secure credit from PSBs, thus easing the life of an entrepreneur. The demand for such a portal is validated by both the large number of applications (around 1.31 lakh) received within 2 months of its launch, and their total loan value. To substantiate, assuming an average loan size of INR 30 lakhs, these applications translate into loan requirement of INR 40,000 crore, which is almost 5% of the total MSME credit for loans below INR 1 crore . However, unless these applications translate into loan disbursals, the portal would remain just another channel for the PSBs to generate qualified leads

Advantages of the portal

The difficulties in getting a loan from PSBs stems from unwillingness of the ground level staff to even acknowledge/accept the loan application. Even after a loan is approved, the high turnaround around time for the disbursal of the loan remains a challenge. Therefore, the portal is a good first step to ateast reduce the number of branches to be visited. In addition, the MIS behind the portal would make it easier for the banks to closely monitor reasons for rejection of a loan.

Performance

While the intent of the scheme is good, its success depends on the ability of PSBs to quickly disburse the loans that have been approved by the portal. According to official data, the portal received 1.31 lakh applications during the first 50 days of its launch, of which around 1.12 lakh applications were approved, with a strike rate of 85%. However of these 1.12 lakh applications, sanctions were accorded for just 40,669 cases, which translates into a loan sanction ratio of around 36%. This loan sanction ratio could actually be overstated as the applications through the portal may include those for loan renewals from existing clients of banks, which are likely to have higher approval to disbursal ratio vis-a-vis that of a new client. Even if we assume that these applications are all new, the conversion ratio does seem low, as just over a third of the approved loans seem to have been sanctioned. The above performance indicates the following gaps:
1) High approval ratio of the portal suggests one of two things: either most of SMEs that are applying through the portal have good credit quality or the portal’s credit sanction norms are relaxed. Low loan sanction ratio suggests that there are differences in the credit assessment methods of banks vis-a-vis that of the portal;
2) Takeover of loans among banks is not easy, and banks are finding it difficult to extend loans under multiple banking arrangements
3) Lack of resources at bank branches to follow up with the SME and carry out due diligence
4) Unwillingness at branch level staff to lend under CGTMSE

Suggestions

To address the above issues, some of the following steps may be needed to improve the credit evaluation process of the portal along with related policy measures to facilitate loans by banks and improve their loan disbursals:

Process improvements that may be needed to improve loan disbursal

systems to increase the likelihood of the sanction of approved loans. Specific areas that require attention are:

  • The portal should be able to capture the existing liabilities of the borrower correctly so that rejection from the banker does not take place on account of inaccurate information on the existing debt levels. Moreover, the risk rating parameters of the portal have to be similar to that of the banks so that there are no disputes in the quantum of credit sanction.
  • For borrowers seeking term loans for a new asset, the portal needs to assess viability of new projects and the availability of other resources such as required land/technology with the entrepreneur.
Policy measures to support easy lending
  • Relaxation of takeover norms would be required to facilitate easy takeover of loans among lenders. For example, for borrowers who already have a secured loan, a new lender may not be willing to provide a collateral free loan and may want to take over the existing loans as well. Similarly obtaining any enhancement on working capital loan from a different lender would be difficult, as banks would not be inclined to share security on pari passu basis for such small exposures.
  • Since MSME sector credit seekers also require assistance in filing the application, consultants enrolled with SIDBI could be incentivised to take up the work related to filling application forms
  • Many small enterprises do not have GST registration and may not want to obtain the same as the threshold turnover for GST registration has been revised. The portal may want to waive GST registration as a mandatory requirement for companies with turnover of INR 40 lakhs. The credit assessment parameter for such companies could be based on bank account statements and alternate data points such as profile of their customers, industry profitability, and track record of the utility bill payments.

In the absence of the above measures, this web portal would just be a superfluous channel for generating qualified leads for the PSBs alongside their websites and tie ups with online e-commerce platforms; what would be really enterprising is converting these leads into qualified loans for disbursal.

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source: livemint.com

Business opportunity: Waste Management

Indian cities are crumbling under waste, India generates almost 130 million tonnes of waste per day of which only 12 % is being processed and treated[1].

Hence, lies the opportunity for entrants in waste management services, where the service provider can tie up with the waste generators to manage their waste by treating/processing it on site. This opportunity exists in number of sectors including food waste, poultry waste, agri waste, and dairy farm waste. This blog focuses on managing food waste.

What is the opportunity? 

The business opportunity is to offer waste management services to the large food waste generators, such as hotels, big institutions with canteen facility, hospitals, and engineering colleges by setting up a biogas plant in their premises. The kitchen waste can be converted to either biogas or electricity, which can be consumed by the user.

This service would also be useful to large apartment complexes (with 1000 flats or more) and schools that offer meal to their students.

As can be seen below, biogas plant is an attractive investment for its buyer, he can recover his investment in four years.
Further, the use is entitled to a subsidy[2] of Rs. 40,000 per KWH of power generated or 40% of the project cost. After accounting for subsidy, the payback period would only be three years.

Captureb

How does one start biogas plant manufacturing unit

In order to offer Biogas plant fabrication service, one needs to have detailed understanding of the processes involved in manufacturing, selling, installing and operating of the Bio-gas plant. There are Biogas Development & Training Centres set up by respective state governments, which impart training in operations of biogas plant.

Typically, most of the companies who are in the business have at least one member who is a micro-biologist/ bio-technologist with a bachelor’s or master’s degree.

The capital requirements are not large, as it is a skill intensive business. One does not need to set up a manufacturing unit, the plant is typically fabricated at the client site and client pays up to 50 per cent of the price in advance.  The cost of fabrication of a (up to 2 tonne per day) plant usually is less than15 lakhs. Assuming that one starts with one order, the capital required for setting up this business would be within 20 lakhs.

Challenges

  • Waste management is a new concept in India, and people are not used to paying to manage their waste. It can take several meetings/follow ups to convince a customer about utility of investing in waste management. However this issue will be eased with stricter environment laws going forward.

 

  • The waste for the plant needs to be homogeneous, requiring the waste to be segregated into organic and inorganic waste at source. The segregation of waste can be challenging for a housing apartment complex, where residents are not used to segregating their waste.

 

  • The biogas produced in the plant has to be used the very same day as transporting and bottling it is not viable. Hence, biogas as a cooking option is feasible only for institutions that have one large kitchen (hotel/ hospitals) and not apartment complexes.

 

 How can we help?

FineTrain enables entrepreneurs to assess and understand new business opportunities. Our services include market research, business feasibility studies and business diagnostics – we can help you in understand the market, competitive landscape, subsidies and government schemes available for waste management opportunities. We also offer support in executing your ideas by connecting you with sector experts and professionals.

 

Call us @ 800 888 4932,

Write to us- bchhatre@finetrain.com

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[1] Source: Status report (2001-13)Pollution control board.

[2] The subsidy is available only for plants which convert the gas into electricity and the calculation is based on the KWH of the electricity generated. The subsidy is calculated as Rs 40,000 / KWH (kilo watt hour) or the 40% of the total cost of plant construction whichever is less.

[3]Picture Source: Livemint.com

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