Removing investment barriers to fund India’s energy transitionSagar Asapur & Ashish Fernandes
India wants half of its electricity from non-fossil sources by 2030, which means about 280 GW of solar and 140 GW of wind as per the Central Electricity Authority’s (CEA) estimates. The scale of investment required to achieve this target cannot be met without India’s domestic commercial banks stepping in. Unfortunately, they are largely missing from the action. A recent Bloomberg New Energy Finance (BNEF) analysis found that during FY 2019-21, $7.5 billion was invested in new RE projects in India – out of which Indian public sector banks contributed just 1%. The 12 largest public sector banks had a market capitalisation of over ₹7 trillion during FY 2021-22 and have yet to ramp up their lending in line with India’s NDCs. Our analysis in March 2022 showed that private sector banks are doing slightly better when it comes to green lending – BNEF reported that only 19% of the new RE financing came from Indian private sector banks. Crucially, this data is from a time of historically low interest rates: the RBI benchmark rate at 4% for two years. Today however we are in a different era, with rising interest rates and inflation likely to persist for the foreseeable future.
The National Investment and Infrastructure Fund (NIIF) estimates $560 billion investments in renewable energy (RE), green hydrogen and EVs to meet India’s clean energy targets by 2030. Mobilising such amounts is by no means impossible, but it will not happen with a laissez faire approach. India will need a dedicated effort to mobilise domestic and low-cost international finance, in the face of many risks that hinder finance flows to emerging economies: political, credit, and currency risks, etc. The response to RBI’s first issuance of sovereign green bonds has been encouraging, but we will need domestic commercial banks to play a much bigger role than they have so far, both in mitigating risks as well as in mobilising capital.
Indian commercial banks are facing pressure to improve climate-related financial disclosures and ESG ratings, even as awareness of climate risks grows. Some have started committing to end financing of fossil fuels, but if India is to finance the clean energy transition that the government has committed to, barriers to scaling up RE investments must be lowered. This will involve hard decisions and necessitate strong safeguards against corporate abuse.
The electricity sector is plagued by poor discom finances, with overdue payments to private generators the norm, not the exception. Poor discom finances are in part due to excessive and expensive coal power contracts, and this, ironically, is now harming the renewable energy industry, with RE generators also facing delayed payments, and as a result putting their loans at risk of being classified as NPAs. If the RE sector is seen as necessary for the country’s energy transition, there has to be a foolproof payment mechanism that does not allow mismanaged discoms to jeopardise the country’s renewable energy targets.
Similarly, the RE sector is classed along with conventional power and distribution as far as lending limits go. Classing renewable energy as a separate sector would allow banks to increase lending. RE is one of the priority sectors under Priority Sector Loan scheme but banks can meet this target with a paltry loan of just ₹30 crore. There is a strong case to raise this minimum target by a factor of 10 or more, to 300 or 500 crores.
Bonds are a common choice for refinancing RE in India. The Union Budget in 2019-20 had proposed to create a Credit Enhancement Guarantee Corporation to increase sources of capital for infrastructure financing which can provide such guarantee to issuers. However, we are yet to see this institution take shape.
Indian commercial banks can play a key role in leveraging international finance as well. A green equity approach in partnership with international financial institutions (IFIs) can increase climate finance and help banks reduce their exposure to fossil fuels. For example, the International Finance Corporation (IFC) had acquired an equity stake in Federal Bank, conditional to it reducing exposure to coal and fossil fuels. Indian commercial banks can engage with MDBs to avail low-cost capital at concessional rates. In 2017, the World Bank lent $625 million to the SBI expressly to finance rooftop PV.
At the recently held COP27, for the first time a political decision was made to reform the MDBs and IFIs and align their spending to climate goals. As it assumes G20 presidency for 2023, India must prioritise this, particularly in an era of rising interest rates.
With the centre’s nod, domestic banks can also engage with MDBs to create a suite of risk sharing facilities (RSF) and partial credit guarantees (PCG). The $1 billion “first loss risk sharing” fund that will be launched by the government in collaboration with the World Bank, SIDBI and NITI Aayog is an excellent first step. It would act as a derisking mechanism for banks in case of default of loans on purchase of EVs, thus bringing down the cost of EV financing for customers.
Banks can also engage with MDBs in blended finance transactions to de-risk renewable energy or other energy transition investments by using a variety of instruments including guarantees, foreign exchange hedging, subordinated debt or equity and grants depending on type/s of risks that need to be mitigated.
Foreign banks and Indian NBFCs are the leading debt providers for new RE projects in India. The sector is now maturing and no longer carries the risk it did 5 or 10 years ago. And yet, India is adding new RE capacity at just 30% of the rate needed to meet its domestic targets. Clearly, there is a need to ramp up finance and public sector banks must play a larger role than they have thus far. Perhaps it is time to seriously consider a dedicated green bank that can mobilise public, private and international finance specifically for India’s energy transition. The response of the capital markets to the RBI’s green bond issuance shows that there is a strong appetite for lending to finance India’s green transition.