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1.0 Background

The UNDP-GEF supported project on “Energy efficiency improvements in Indian brick

industry” is addressing different barriers that would lead to the production of “resource
efficient brick” (REB) products by the brick industry and enhanced market for such
products. UNDP is the Executing Agency for the project and the Ministry of
Environment and Forests (MoEF) is the Implementing Agency. TERI is playing the role
of a responsible partner for the field level implementation of the project.

The Project Management Unit (PMU) located in TERI has established five “Local
Resource Centres” (LRCs) in different regions of the country. It includes (1) Punjab State
Council for Science and Technology (PSCST), Chandigarh for Northern region, (2) Int
Nirmata Parishad, Varanasi for Eastern region, (3) CEPT University for Western region,
(4) TERI–Southern Regional Centre for Southern region and (5) Tripura State Council
for Science and Technology, Agartala for North-East region.

Indian brick industry is traditional and a limited number of entrepreneurs avail of the
credit from banks for their investment and working capital. TERI is interested in
investigating the reasons for the brick kiln units not availing of bank assistance for
modernization/upgradation and identifying measures to improve the situation. It entrusted
a study to Fourth Vision, Ahmedabad in August, 2010 in this behalf. The present report is
an outcome of the study.

The scope of work focused on the following.

Identification of barriers/ issues pertaining to financing of brick industry in general
and technology upgradation imitative within it in particular.
Delineation and assessment of ways to overcome the barriers through following
work:
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 A ground-level appreciation of the extent/ methods/ terms of financial

assistance which brick project owners receive now; along with an
understanding of supply position in terms of credit-schemes, financial
incentives and critical conditionalities.
 Scope for positioning technology upgradation projects distinctly from the
brick industry in general vis-à-vis the state government as well as regional
banking/FI institutions
 Critical appreciation of individual as well as group-based (credit guarantee
trust) credit schemes, assistance programmes by the central/ state
government for energy/ environment efficient and modern technologies,
risk-mitigation mechanisms and potential for special assistance/incentives
through leveraging on appropriate funds
Formulating a strategy and action plan for facilitating pro-active and favourable
financing of technology projects. The plan will highlight credit and assistance
products/ programmes and action which individual stakeholders need to mount.

2.0 Work Done

In addition to secondary research, we held discussion with brick entrepreneurs, bank

officials and officials of LRC’s at Ahmedabad, Nagpur, Nashik and Chandighar (list
under Annexure-I). The report is an outcome of the fusion of consultant understanding of
the sector, specific interactions under the study and drawing from the larger credit and
policy environment in India.

3.0 Credit For Brick Sector

Let us outline a basic perspective for credit in terms of the following parameters.

Access to bank credit

Adequacy of bank assistance
Terms of assistance
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3.1 Access To Bank Credit

The brick industry, given the range of production- scale and investment, belongs to
MSME sector. Unlike some small/tiny/micro units which function without any formal
registration, brick enterprises- because they entail clay-mining and environmental
emissions- are, barring rare exceptions, registered with local authorities. Non-registration,
thus, is not a reason to prevent brick units from accessing credit. They clearly belong to
MSME sector. In the context of banking/credit, MSME is a priority sector.. The priority
sector denotes, other things being equal, easy access to credit and reasonable terms. The
brickwork owners in Gujarat, Maharashtra and Punjab with whom we interacted in the
course of the study, broadly confirmed easy access to bank-finance for term-loan as well
as working capital purposes. (The terms of credit are a separate issue). However, there
are three ground-realities which make access to bank-credit difficult in some
geographical areas or vis-à-vis some banks.

First, there are brickwork clusters where the brick industry track-record of repaying bank-
loans is unsatisfactory. In such areas, banks are reluctant to extend assistance to the
industry. There are, likewise, some bank-branches which bore the brunt of loan-default
by brick industry. Such bank-branches shy away from assistance to brick industry. With
the passage of time and improvement in industry debt-servicing record, the outlook for
access- even in above cited cases- is improving. However, it is difficult, at this stage, to
persuade such bank branches to consider REB project as distinct from a brick project. If
we accomplish a breakthrough in the form of explicit guidelines from the top
management of such banks for credit/support to REB projects, the branch-resistance in
such cases will diminish. Until then, a set of bank branches will remain non-responsive to
for REB project.
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There are some banks, largely private, which take a dim view of the brick industry. The
view stems from bank-perception of brick industry owner profile in terms of fair business
practices, compliance with law and such other parameters. Such banks continue to stay
away from the brick sector; though they have not had any unpleasant experience. Such
banks may change the sector-view, in the short run, if they receive credit proposals from
right-profile entrepreneurs. On the whole, such banks will continue to follow a niggardly
policy vis-à-vis the brick sector.

In Gujarat, we came across reports of green bricks (hand moulded bricks not yet fired)
being the cause of hesitancy on the part of some banks to lend to the brick industry.
Unseasonal rains cause damage to green bricks (and hence loss to the brickwork owner).
There have been instances of brickwork owners defaulting on bank-payment because of
real (or not so real) loss on account of damage to green bricks. This has brought about a
perception on the part of some bank-managers that brick is a risky industry; vulnerable to
loss on account of unseasonal rains and consequently, kept them away from the industry.
Despite some industry effort, insurance companies have not come forward to provide risk
cover on account of damage to green bricks, caused by unseasonal rains. Some banks,
thus, will remain lukewarm until the industry develops a risk-mitigation mechanism.

The cumulative impact in terms of non-access to bank credit on account of above

reasons, however, is limited. On the whole, access to bank finance is not a barrier, which
prevents brick industry from launching new/expansion/technology upgradation projects.
This is because bank-credit has become, in recent years, entrepreneur-centric rather than
project-centric. If there is a competent and resourceful entrepreneur, access to bank credit
is easy.

Among the entrepreneurs whom we met, we did not come across a single entrepreneur
who expressed unhappiness about availability of bank credit.
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3.2 Adequacy of Bank-Assistance

There is the question of adequacy of assistance. Out of 15 entrepreneurs whom we

interacted with, eight have availed of term-loan assistance, though some did so as long as
1985. They expressed satisfaction with the quantum of term-loan assistance. No
entrepreneur indicated failure to secure term-loan. All fifteen entrepreneurs possess
working capital limits sanctioned by the banks. Again, the limits, in their view, are
adequate. We did not come across any instance of an entrepreneur wanting an
enhancement of working capital limit and failing to secure it.

3.3 Term of Assistance

For term-loan, the banks generally follow a debt-equity ratio of 1.5 to 2. The banks,
typically, stipulate 25% margin in case of working capital requirement.

These norms hold good for the brick sector. In case of several MSME’s, the branch
managers, at the ground-level, follow such thumb rules as estimating working capital at a
percentage of annual turnover rather than go into detailed calculations. They raise the
percentage marginally, if the industry is seasonal. Thus, brick industry should qualify for
higher level of working capital assistance.

The lending rates in India are meant to be governed by two parameters, viz., policy rate
and borrower rating.

On the policy rate front, there has been a switchover from the concept of prime lending
rate to base rate. The banks are expected to transmit shifts in policy rate to the borrower.
For various reasons, such transmission is not occurring adequately and the brick sector
also must live with sub-optimum transmission.
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The banks follow a system of rating the borrowers and fixing lending rate accordingly.
There is a widespread grievance that rating is not transparent, it is not shared and that
interest rates charged do not follow the rating. The borrowers who possess negotiating
clout or are in a position to offer substantial collateral manage to secure lower interest
rates than others; notwithstanding the rating. This is a nation-wide reality, and inevitably,
applies to the brick industry.

Next, there is security. It is fair for the banks to acquire security over fixed and other
assets which they fund and provide for a margin so that the loan amounts remain
significantly below the security value. However, the banks are not satisfied with this and
ask for collateral or additional security, particularly against working capital advance.
There is in vogue Credit Guarantee Scheme under which the banks charge slightly higher
interest, receive cover for the loan risk and dispense with the collateral security
requirement. An entrepreneur should get a choice of the credit guarantee scheme or
collateral security but some branches deny the choice and insist on collateral. This is a
common practice rather than a practice specific to brick industry.

On the whole, the terms of credit suffer from distortions across small industries and brick
sector is not an exception.

4.0 Bank Reaction To REB Project

PSCST has prepared a model project report on REB project. We discussed the REB
project briefly with a set of PSU and private banks. The bank officials, given the current
stage of development of REB concept and the report-content, could not react
meaningfully/knowledgably to REB project.

The Corporation Bank at Chandhighar, for instance, has expressed general support for
REB based on the report. It has issued a letter to PSCST accordingly. However, the
support appears based on PSCST brand-equity rather than on a critical appreciation of
REB project. Besides, it appears to rely on the track-record/collateral offering capacity of
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entrepreneurs (as yet not named) who will set up the project. The Bank does not propose
to do any gesture in terms of extent or terms of assistance because it is REB (Box-A). It
is an encouraging response but not rooted in specific knowledge or priority for REB. The
extent and terms of assistance are unattractive.

The ICICI Bank and HDFC banks have been rather unenthusiastic about REB project
mainly because they view the brick sector in negative light. To some extent, this is also
true of State Bank of Patiala.

The State Bank of Hyderabad at Chandighar has reacted favourably presumably because
of entrepreneur track-record.

SIDBI at Chandighar was not forthcoming. It cited its complete absence of exposure to
the brick industry as the reason for its inability to react even in principle. It emphasized
that it would review the sector in its own way and take a view. It is unlikely to respond
favourably. Environment and energy do not appear to be matters of particular interest at
the lending level.

Naroda Co-Operative Bank at Ahmedabad demonstrated positive interest in REB mainly

because it possesses some happy exposure to brick sector. It seems to be pinning its
confidence in successful brick entrepreneurs and their capacity to offer collateral security
(rather than the intrinsic merit of REB). It will clarify extent and terms of assistance only
after reviewing entrepreneur track-record.

The overall credit environment now is entrepreneur-centric and industry/sector has

become- barring select negatives chosen by the banks or stipulated by the Reserve Bank
of India- of little relevance. It is the performance record and security-value offered by the
entrepreneur which are the basis for assistance. Consequently, it has become difficult to
secure a particularly favourable deal for a sector/sub-sector, unless the policy regime
projects it as a priority, e.g., Textile Industry Upgradation.

The Bank response to brick sector or REB projects, in absence of specific policy or
promotional guidelines, will thus continue to be shaped by entrepreneur profile.
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Box-A
Support For REB Project In Principle But Inadequate Offer

The Deputy General Manager Corporation Bank, Chandighar outlined the following contours of
assistance
The Bank will recognize the fixed asset part of project cost and stipulate 25% margin.
This means a bank loan of Rs. 163 lac and equity of Rs. 100 lacs; given the project report
submitted to the bank
The civil works against which the Bank is to extend term-loan (indicated amount of Rs.
163 lacs) are to be located on leased land; which means the land will not be owned by the
entrepreneur. Dpy GM, in view of this, apprehends ineligibility of civil works for bank-
loan; thus reducing the indicated loan amount from Rs. 163 lac to Rs. 101 lacs against a
project cost of Rs. 263 lacs; denoting a debt equity ratio of 0.62 as against the normal
prevailing ratio of 1.5 to 2.
It will meet 50% to 60% of working capital requirement of the project through bank-
limits. The entrepreneur will meet the rest. This is a stiff margin
It will levy interest @ 12% pa on term loan and 11% pa on working capital loan
It will expect, in respect of working capital loan, besides hypothecation of finished goods,
works in progress and raw material, collateral security @ 70% to 80% of working capital
limits. The collateral expectation is unfair and excessive

On the whole, the indications from Corporation Bank denote an unattractive proposal in
terms of adequacy of assistance and terms of assistance.

A brick sector entrepreneur is likely to accept these in view of the industry dynamics outlined
under 5.0. However, entrepreneurs in most other sectors will find such a proposal
unacceptable.
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5.0 Brick Industry Dynamics And Approach To Credit

The large brick-producers are the group with whom we have interacted. On the whole, we
sensed low-key interest in the group in availing of bank-assistance. The main reason for
this lies in the book-keeping practice within the industry. The industry does not record its
income (and hence expenditure) fully. The extent of annual turnover understatement
varies from region to region. The brick producers in northern India report, according to
informal feedback, as little as 10% of annual turnover. In western India, this is higher-
30% to 40% of turnover. Evidently, the expenditure is also under-reported. There is large
a cash payment for labour and fuel.

The industry, so far has grown, in terms of capital expenditure, in an incremental way. It
has not experienced the requirement for a quantum jump in capital expenditure for
new/expansion/upgradation purpose. It has met this substantially out of “cash” at its
disposal. It has also met increased working capital requirement from such “cash”.

It is aware that its formal financial record does not qualify, in most cases, for increased
working capital assistance from banks (and this is why it expresses general satisfaction
with bank assistance).

The REB project warrants capital expenditure (minimum Rs. 2 crores according to
PSCST report) on a scale which brick entrepreneurs have, by and large, never incurred in
the life-cycle of the industry. Presuming the financial viability of REB project, the
entrepreneurs are likely to deal with the credit requirement in the following way.
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First, some entrepreneurs are likely to meet the capital expenditure-at least partly-
through cash route (BoxB). Since they possess “cash”, they find it worthwhile to utilize it
for capital expenditure rather than keep it idle or use it for non-productive purpose. The
cost of “cash” is clearly lower than cost of bank term-loan.

The other reason for recourse to “cash” is that many entrepreneurs do not possess
sufficient official equity; which makes it difficult to raise debt; given normal debt-equity
expectation of banks. The project proposed by PSCST implies that the entrepreneur,
presuming normal level of bank assistance, should bring in an official equity of Rs. 1
crores. For some entrepreneurs, it is not difficult to mobilize official equity but this
entails tax-planning operations and exposes the owners to some risk arising from non-
compliance so far.

The large brick work owners, in most cases, own land on the periphery of cities/towns. In
the wake of real estate boom in recent years, they have made tremendous real/potential
gain from land price appreciation (again, substantially in cash).

The brickwork owners, as we saw, ask for a fraction of working capital requirement from
banks mainly because the official turnover supports such a fraction only. However, most
banks ask for a collateral security- building, fixed deposit certificates, etc- in respect of
such working capital limits. In other words, the bank is not satisfied with hypothecation
of raw materials, work in progress, finished goods etc.. It expects additional security. We
must hasten to add that this particular bank-expectation is not limited to brick sector; it
covers the whole of MSME sector.

On the whole, brick is an industry whose genuinely felt need for credit has been modest;
given industry dynamics and so problem in respect of bank-credit is almost non-existent
on the industry-list of problems. The fact that it is a low capital expenditure industry has
enhanced it comfort vis-à-vis the banking system. It is the proposal of a capital-intensive
REB project which gives rise to the credit-issue (almost a non-issue otherwise).
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Box-B

Funding For Large Brick Project

Real Life Example

A successful brick entrepreneur is establishing a soft mud, highly mechanized brick

project, based on foreign machinery/technology. The cost of the project is Rs. 6 crores. It
is likely to be heavily understated and the composition of capital expenditure will be put
to good use in this behalf. This is illustrated below.

Component Practice
Land bought for Rs. 2 crores The official price will be a small fraction
30,000 pallets on which Rs. 1 crores will Substantially cash payment
be spent
600 racks on which Rs. 1 crores will be Substantially cash payment
spent
Civil works on which Rs. 50 lacs will be Partly cash payment
spent
Preliminary and pre-operative expense Substantially cash payment
Working capital margin Understatement of working capital
requirement

The official cost of the project is likely to be less than half of the real cost. Consequently,
the official profitability estimate will be much higher than the real one. The owner will
qualify for less than half of the term-loan which the project deserves. But he is not
complaining since he wishes to park cash rather than raise expensive bank-debt. The bank
is happy because the project assets have a far higher security than official statistics
indicate. On the whole, there is an eliquibrium of mutual interest.
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6.0 Entrepreneurial Motivation For REB’s And Technology Options

We met many entrepreneurs, including some REB- interested entrepreneurs.

Across entrepreneurs, the major motivation for producing REB’s is labour rather than
energy/soil/environment resource. There is a growing scarcity of hand-moulding labour,
the wage-rates for hand-moulding labour are rising, NAREGA is exerting pressure on
availability as well as cost of migrant labour and enforcement of labour-laws- particularly
law on bonded labour-is improving. The brick owners apprehend labour problem to get
aggravated and there is consequently, escalated interest in mechanization of brick-
moulding process.

At the ground-level, therefore, it is the choice of mechanization technologies which is on

the front-burner. This means that the proposition to the entrepreneur needs to combine
resource-efficiency, project economics and mechanization.

Soft mud, extrusion, and dust press are the major technology options in terms of
mechanization of brick production. Among these, soft mud mechanized brick; given 30%
moisture content, is not resource efficient but in the eye of the entrepreneur, resource-
efficiency matters less.

7.0 Inadequate Ground Work For REB-Promotion: The Key Barrier

We reviewed earlier the general environment for credit, bank perspective on credit to
brick industry and brick entrepreneur approach to credit. Let us now turn to barriers to
REB production. The key barrier is that the groundwork, on the part of TERI/LRC’s,/
brick industry to facilitate bank-assistance for REB’s, is yet to done. This is explained
below.
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7.1 REB: Definition And Standard

There exist ISI specifications for perforated/ hollow bricks but such specifications for
REB are not yet in place. We met a producer of perforated bricks; which weighs 25%
more than conventional hand- dried brick- and is clearly resource-inefficient,
notwithstanding extrusion.

The statutory/desirable standards are not couched in terms of resource efficiency.

TERI/LRC’s need to capture baseline position and develop efficiency concept. There is a
need to formulate the definition and detailed standards for REB in terms of resource-use
as well as finished product specifications. This is also essential to communicate the
concept of REB to brick producers as well as brick-users. The definitions/standards are a
precondition for seeking policy support as well as preferential terms for credit. It is only
following REB definition/standards that the banking system will recognize REB’s as a
reasonably distinct sector from the general brick sector. So long as this is not done, the
credit providers will continue to view REB’s almost as bricks (rather than REB’s).

The model project report on REB prepared by PSCST puts the power requirement of
60000 bricks/ day REB project at 350 KW. Many brick work sites are connected to a
rural power feeder. The owner will have to spend a large amount to get the industrial
power feeder. The profile under question, therefore, assumes genset arrangement (a
provision of Rs. 20 lacs for 380 KVA genset). The recourse to genset evidently is at
variance with the concept of resource efficiency. This issue will have to be resolved.

7.2 Technology Package

The technology package for REB consists of equipment, infrastructure and operating
practices. There is in vogue a variety of extrusion equipment- south India, other Indian,
Chinese, Pakistani, European. The sizing of drying shed offers scope for varied thinking.
The entrepreneurs whom we met, in the context of REB, were focused on extrusion and
drying shed. They do not envisage any need for improvement on firing side. They appear
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to be working out REB solution according to their own, presumably, limited technical
competency. It is imperative that TERI and RRC’s step up work on the development of
technology package; taking into account practices/choices already in vogue. The
integration of REB technology package into the existing brick production set-up is
crucial. While TERI/LRC’s may not present fully prescriptive technology solutions, they
need to play a pro-active role and engage with the entrepreneurs on technology issues in a
manner which promotes growth of (if necessary alternative) technology packages. This is
the key to triggering interest of knowledgeable/resourceful entrepreneurs in REB. The
body of technology development work will also come in handy, at an appropriate stage,
in dialogue with banks/policy-making institutions.

7.3 Scale Options

It is imperative to offer a range of scale options to the entrepreneur. A straight jacket

proposal of Rs. 2.6 crores will daunt most brick makers; the capital expenditure size is
several times higher than what he has cumulatively invested in his life-time. The report
highlights an annual production capacity of 216 lac bricks. This is, say, three times larger
than the output produced by a large brick maker. REB, at this juncture, is a capital-
intensive project involving considerable market-risk. A proposal to produce REB’s yet-
not-fully- accepted-in-the- market at a project cost several times higher than conventional
project cost pushes most entrepreneurs out of the potential network of REB producers.
There is a view, though we have not examined it, that 40 lac REB production per year is a
viable proposal. It will also help to work out a techno-economically viable mix of REB’s
and non-REB’s in the total production of an existing brick enterprise rather than
presenting REB and non-REB as mutually exclusive proposals in relation to a given brick
unit. There is a dire need to analyze lesser capacity options and mixed output options and
present project proposals around these to the entrepreneurial fraternity. This is likely to
help us expand the pool of interested entrepreneurs.
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In the context of credit, lesser capacity options will have a two- fold advantage. First, the
banks will be encouraged to take the necessary risk. Secondly, the proposal will get
processed at the relatively lower echelon of decision-making in banks.

7.4 Establishing Market/Economic/Financial Viability of REB Production

Besides developing technology package, there is a need to establish/promote the

following

Market prospects for REB’s

Economic viability
Financial viability

In south India, extruded bricks and hence perforated/hollow bricks have been in vogue
for a considerable time. The brick extrusion equipment being manufactured in India
appears to be imperfect. However, brick producers in south India, over the years, have
learnt to work through such equipment and the extrusion practice is working out well in
south India, given the nature of soil, finished brick quality (lesser) expectation,
(significantly higher) wage-rates, enforcement of labour laws and such other parameters.
In other words, extrusion technology is compatible with natural and market conditions in
south India but will require drastic reshaping in case of rest of India in general and north
India in particular.

The market for REB’s in northern/western India, according to the feedback we received,
is largely limited to government/quasi-government sector. It derives its strength for
localized, somewhat ad-hoc administrative guidelines stipulating compulsory use of
hollow/ perforated bricks. The damage to edges of extruded bricks, it is reported, is fairly
common. The dented edge extruded bricks are far less acceptable to the market than
similar hand-moulded bricks.
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The claimed advantages of reduced masonary cost, reduced plaster requirement and
reduced cooling/heating requirement need to be translated into economic/financial values
and a price-premium for the REB needs to be established. The exercise will also lead to a
national estimate of saving(economic value, shadow pricing) from use of REB-
imperative for policy advocacy. It will enable the REB producer to determine the market
price premium (financial value) for REB.

The report claims saving of energy (firing) up to 20% and soil up to 30%. This also calls
for detailed back-up work. There is a need to validate and quantify(economic value,
shadow price) these advantages, relate the quantification to the size/composition of
national brick industry and put the resource inefficiency in a clear perspective. Besides
policy advocacy, this is also required to arouse interest of highest echelons of selected
banks into REB’s. The use of electricity/diesel on account of extrusion will have to be
factored in. There is proliferation of off-kiln sourcing of clay; warranting soil transport
from the source to kiln. The cost reduction in of transporting clay will be added to saving.
Likewise, the reduction in cost of transporting finished brick because of reduced weight
will increase the saving

There is a need for quick and reliable empirical data-collection, analysis of such data and
consultation with brick-produces, architects, energy analysts and others and to produce a
techno-economic-cum-development perspective(a paper separately for business
community and policy-makers) on REB’s. Such work will also clarify
immediate/medium-run financial viability (or gaps in viability) of REB production.

The model report presumes a greenfield REB project. It outlines viability of a Greenfield
project. In reality, REB projects will be brownfield; an existing brick-maker will launch
it. The report should clearly state existing facilities, estimate additional capex, additional
income/operating expenditure and additional profitability (or lack of it in initial years).
This is essential to enable a brick maker evaluate REB project and arrive at an informed
decision. There is a need to shift focus from new to upgradation/ modernization. Such
document will also be necessary to advocate policy support for REB’s.
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The above-cited groundwork is an immediate priority to facilitate both-credit and policy-

support for REB production.

8.0 Credit And Policy Support For REB Production

On the credit-front, we advocate the following.

8.1 Promotion of Immediate Demonstration Projects Based On Available Credit

TERI needs to follow a two-track approach in this behalf. Let us outline Track-1.

There are a few entrepreneurs in Punjab who have evinced interest in REB projects.
These need to be bank-assisted quickly through LRC’s.

However, it is necessary to make at least a preliminary assessment of these entrepreneurs.

We suggest the following criteria in this behalf.
A brick producer who is already producing a certain minimum annual volume of
bricks; say, 50 lac bricks
A brick producer who possesses at least a modicum of formal performance- a decent
profit and loss account and balance sheet
A brick producer who possesses a satisfactory relationship with a bank and evidence
thereof
A brick producer who has a game plan to market REB’s.

The LRC, the interested bank and the entrepreneur should work together for the purpose
of securing bank assistance and establishing REB project. At this stage, the bank-credit
will flow mainly on the strength of the performance record and collateral value of the
entrepreneur. It is likely that the extent of assistance will not be adequate; the terms of
assistance will not be wholly reasonable. However, given the brick industry dynamics,
entrepreneurs are unlikely to grudge this. Admittedly, this is not an optimum
arrangement.
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We are suggesting this because systematic work on credit and policy support is likely to
take time; it is essential to promote showcase projects in the meanwhile and such projects
will contribute significantly to easy and full flow of credit and policy support.

The UNDP project should commit full-fledged techno-managerial support to such demo
projects. There is also a case for some subsidy toward construction of drying shed. It is
the investment in drying shed, which entrepreneur is reluctant to make. Such subsidy is
proposed to trigger entrepreneurial interest and fast-track the process of establishment of
demo REB project.

8.2 Catalyzing of REB Specific Credit Initiative

Under Track-II, TERI needs to establish a contact with selected banks- may be 5 to 7- at
the highest level. The top management of these banks needs to be educated on the techno-
economic viability and environmental/energy significance of REB projects and the
potential of UNDP-TERI programme to promote REB production. TERI should conduct
a dialogue; which culminates into the top management issuing tangible guidelines in
terms of adequacy and terms of assistance for REB projects. The illustrative list is as
follows.

The entire project cost will qualify for term-loan assistance. Depending on various
parameters, the debt-equity ratio will be in 1.75 to 2 range
The moratorium period will be one year
The entrepreneur will have a choice of credit guarantee scheme cover and collateral
security. The collateral security obligation will not be imposed upon him
Given existing interest regime, interest on term-loan will not exceed 11%

Following this, TERI can aim at MOU’s or equivalent mechanism through which banks
will assist eligible REB projects in selected areas. It will help to select specific regions-
brick cluster locations- rather than make such MOU’s nation-wide. This will ensure
emphatic communication to a group of branches of a selected bank rather than diffused
message to nation-wide branch network. TERI and LRC’s will also make a concerted
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effort to promote REB projects in selected areas, and work in tandem with bank
branches/regional offices. It is imperative that RRC’s identify, motivate and equip
deserving brick producers to come forward to establish REB projects. The desirable
profile of such an entrepreneur is already discussed under 8.1

The LRC’s need to identify in the selected areas of Punjab, Haryana, Gujarat and
Maharashtra 25 to 50 such prospective entrepreneurs. On the other hand, there will be
say, 50 to 100 bank branches being encouraged by the top management to extend credit
to REB projects. It will not help to be sequential; the action will have to be simultaneous.
The establishment of an understanding with banks, without prospective entrepreneurs
being in place soon, will not be productive. Likewise, ready entrepreneurs submitting
loan proposals to banks which treat proposals in a completely undifferentiated way
(already proposed under 8.1) will not be helpful in the medium/long-run. If TERI/LRC’s
succeed in securing policy support for REB production, entrepreneurial interest as well as
bank-assistance will proliferate quickly. Such support is discussed below.

Given the cash character of industry, working capital assistance from banks in general is
a lower priority.

8.3 Policy Support

We tried to assess the form of support to which prospective REB entrepreneurs attach
maximum weightage. The following ideas were put forward in this behalf.
Policy action to promote market access
Capital investment subsidy
Interest subsidy on term-loan assistance from banks

8.3.1 Market Support: Most Required Support

The entrepreneurs have, on the whole, voted for support for market access. REB, at the
ground-level, is viewed by the entrepreneurial community, as extruded brick. There is a
 20

gamut of reasons- real or imaginary-because of which its market acceptance so far has
been limited in northern and western India. The sale is concentrated largely in the
government/quasi-government sector. The sale of REB’s or extruded bricks to private
sector is negligible. On the whole, REB is as yet a fringe product in northern/western
India. The mainstreaming of REB in relation to the market is the top-most priority. If this
is addressed, credit position will also ease quickly. TERI/LRC’s need to mobilize policy
support-compulsion, incentives- for promotion of REB’s. If such support is implemented,
brick entrepreneurs as well as banks will come forward to establish/assist REB projects.

8.3.2 Capital Investment Subsidy

The case for capital investment subsidy rests on finaicial viability results. The model
project seems to present an over optimistic picture. There is a need to produce a realistic
project report which brings out (this is likely) viability gap for REB project-separately for
Greenfield and brownfield. Given capital investment and absence of ready
market/noticeable price premium, there is a prima facie case for capital investment
subsidy. The concept of viability-gap is relevant in this context. The desirable quantum
will have to be worked out. The subsidy may be phased out in course of time.

The case for subsidy support can be anchored into the following existing programmes.

Technology Upgradation, e.g., Capital Subsidy Linked Programme For Upgradation

of Small-scale- Industries. The salient features of the scheme are outlined under Box-
C. The Scheme enumerates a list of eligible technologies. VSBK, a brick making
technology is included in the list. TERI will have to stipulate REB- production
technologies and make out a case for inclusion of these into the list of eligible
technologies. On the policy front this appears to be the most practical, quick and
potentially high impact making measure.
If we envision a bolder and more ambitious initiative, we shall have to work out a
case for technology upgradation-cum-resource-efficiency in the brick sector on the
pattern of Textile Upgradation. Such a fund, by its very character, cannot remain
 21

limited to REB production technology. It will include a range of energy-saving,

environment-conserving, productivity- enhancing solutions in the brick sector. It will
be called Brick Industry Upgradation Fund.

SIDBI operates a scheme to fund energy-saving technologies. It is a cut-and-dried

programme, in relation to the objective of promoting production of REB’s. TERI can
make an effort to persuade SIDBI to widen the scope of the scheme. However, given the
scheme-content and SIDBI- orientation, the prospects of success are not encouraging.
Even if it succeeds, the scheme will have to be distributed through banks and the outlook
for effective distribution is not cheerful. We would, therefore, put this initiative lower
down the scale.
 22

Box C
Credit Linked Subsidy
Machinery Capital subsidy at the revised rate of 15 per cent of the eligible investment in plant
and under the Scheme shall be available only for such projects, where terms loans have been
sanctioned by the eligible PLI on or after September 29, 2005 . Machinery purchased under Hire
Purchase Scheme of the NSIC are also eligible for subsidy under this Scheme .

Industry graduating from small scale to medium scale on account of sanction of additional loan
under CLCSS shall be eligible for assistance.

Eligibility for capital subsidy under the Scheme is not linked to any refinance Scheme of the
Nodal Agency (ies). Hence, it is not necessary that the PLI will have to seek refinance in respect
of the term loans sanctioned by them from any of the refinancing Nodal Agencies.

Activity Technology Need Cost Advantages

(Rs. in lakh)
Building bricks – Clay 1. Vertical Shaft Brick 9 The building brick industry in the small
and Fly ash Kiln (VSBK) 2 Shafts. scale is using traditional bull trench kiln
manufacture. 0.40 and clamp kiln which are highly energy
2. Jaw Crusher. intensive and polluting, poor in providing
3 uniform temperature and occupy lot of
3. Auger Mill. space. The Vertical Shaft Brick Kiln is
4.50 highly energy efficient and consumes less
4. Pug Mill/Extruder. than 50% fuel. Dried bricks can be fired
0.80 and taken out in 24 hours. The land
5. Wire cutting table. requirement for one kiln is only 2000 sq.
0.20 meters.
6. Shaping press Jaw crusher is used for crushing coal to
size 0-15 mm and also used for crushing
large size clay bolder. It is essential for
crushing the clay and also reducing the
size of the coal for charging in the kiln.
Mixing clay and other raw materials
(waste material like fly ash etc.)
intimately with clay to produce a
homogeneous mass.
The mixer from auger mill is passed on to
pug mill for pugging and for mixing and
extruding the material in required size.
The equipment is used for cutting the
extruded mass in to required length for
thickness.
The machine is used for repressing the
wire cut clots in to required final size and
shape.
 23

8.3.3 Subsidy For Shed Construction

A significant part of the investment in REB project is on account of shed-construction.

The modal project report estimates a shed of 48000 [Link] to cost around Rs.48 lacs. In
case of a brownfield project, drying shed construction is likely to account for 25% to 30%
of project cost.

The absence of shed is responsible for loss to the brick industry, REB or otherwise, on
account of green bricks being damaged in the event of unseasonal rain. It also deters the
industry from stockpiling greenbricks in excess of a selected limit. It is responsible for
the seasonal character of the industry; bringing in its wake market imperfections,
seasonal migrant labour, absentee-landlord style of management. TERI needs to push for
a scheme for subsidy against shed-construction. The acquisition of extruder/other REB
production equipment can be made a condition for subsidy against shed construction.
This will escalate entrepreneurial interest in REB projects.

We are proposing shed construction subsidy as the next best option to capital investment
subsidy for the whole project proposed above. There will not be case for both.

8.3.4 Interest Subsidy For REB Projects

We propose this as an alternative to capital investment subsidy. In absence of financial

viability analysis, it is not possible to propose the quantum but, interest subsidy, generally
speaking is a far more acceptable proposal to policy-makers than capital investment
subsidy. Ministry of New And Renewable Energy, (MNRE) Govt of India extends loans
to buyers of solar water heater@ 5% pa because it saves energy/conserves environment.
 24

8.3.4 Insurance For Brick Sector

The unseasonal rain and consequent damage to brick kilns is a risk characterizing the
industry. There does not exists any insurance scheme to cover the risk. The industry in
Gujarat held a dialogue with the insurance companies but it has not fructified into any
risk cover. The insurance companies reportedly insisted on shed construction. The brick
producers took a stand that if they built a shed, they need not spend on insurance risk
cover.

The marine salt industry in India involves investment mainly in earthwork. The cyclones
used to cause damage by destroying earthwork. There was no insurance cover. However,
it broke the lagjam and insurance cover is now available. We need to draw from this
parallel.

TERI, LRC’s and the industry need to take up the task of securing insurance cover for the
industry. This will have the following salutary effect.

The aversion of some bank branches to the sector on account of risk of unseasonal
rain will diminish
The brick sector will begin to weigh actively the cost of insurance cover versus that
of building drying/storage shed, and to some extent, move in the direction of
investing in shed. Investment in shed will pave way for production of REB

9.0 Conclusion

TERI/LRC’s need to organize ground-work in terms of development of

definition/standards for REB, technology package and establishment of techno-economic
viability of REB project. On the credit front, quick promotion of demo projects based on
available (rather than optimum) credit is a priority. Simultaneously, they should work
towards catalyzing of REB specific credit initiative and mobilize entrepreneurs who will
avail of such credit initiative. TERI/LRC should be selective/focused in terms of tie-up
 25

with banks/geographical areas. Such limited tieups will materialize quicker than national
credit policy at this stage.

The market access support policy will contribute maximum to entrepreneur as well as
bank interest in REB projects.

In addition, TERI/LRC’s need to work to secure either capital investment or shed

construction subsidy or interest subsidy for REB projects. They also need to promote
insurance cover for the industry.

The policy support will unlock bank credit faster and better for REB projects.

Brick Industry Upgradation Fund, on the pattern of Textile Industry, which encompasses
not only REB project but also other energy/environment-saving action is the optimum
goal toward which TERI should work.
 26

Annexure
List of Interviewees
Brick Producers
Nagpur

Paul Bricks
Indora Chowk
Kanti Road
9822222117

Paliwal Bricks
Shree Sai Sadan
Bhide Road
Sitabuldi
Nagpur
0712-2522283

Laxmi Bricks
Plot No. 50, Gawande Layout
Khamla Squre
Ring Road
Nagpur
0712-2289492

DDR Bricks
Juni Mangalwari
Gangabai Ghat Road
Nagpur
9422802506

National Bricks
926, Deshpande Layout
Wardhman Nagar
Nagpur
07122771557, 9372277857

Ahmedabad

Dalwadi Brothers
6, Kam Durga Society – 2
Ankur Cross Road
Naranpura
Ahmedabad
079-27495113, 9426067992
 27

Arpan Corporation
16, Shyam Gokul Complex,
Vijay Char Rasta
Navrangpura
Ahmedabad
09327921305

Arvind Brick Mfg Co.

9, VArai Mata Colony
Opp. Verai Mata
Isanpur
Ahmedabad
079-25394736, 9824031818

Mr. Ghanshyam Prajapati

12, Sagar Shopping Centre
Opp. LIC Office
N.H. 8 Naroda
Ahmedabad
Tel: 22811462, 9879782511

Shri Harihar Bricks Works

2-B, Preeti Apartment
Opp. Jivan Prakash Society
Nr. Canara Bank
Naranpura
Ahmedabad
Tel: 27475313, 3825035966

Punjab
Paramjitsingh Makkad
Rakesh Singhala
Mr. Jaggi
Kullbhushan
Daljit Singh

Bankers
Dpy GM- SIDBI- Chandighar
Dpy GM- Corporation Bank, Ahmedabad
Branch Manager- Naroda Co-Op Bank, Ahmedabad
 28

Dpy GM- Naroda Co-Op Bank, Ahmedabad

Branch Manager, Ambavdi- Central Bank, Ahmedabad
General Manager- Central Bank, Ahmedabad

Local Resource Center

Rajan Raval-CEPT University- Ahmedabad

Pritpal -PSCST