India’s updated climate action plan, which includes achieving 50% of installed electricity generation capacity through non-fossil fuel sources, reducing the emissions intensity of GDP by a 45% by 2030 compared to 2005 levels and the pledge to reach net zero by 2070 requires financial commitments from Indian and international sources.
The MNRE estimates an annual investment of approximately $25 billion to achieve the RE generation target of 500 GW by 2030. In this context, the Parliamentary Standing Committee on Energy in its 21st Report on “Financial Constraints in the renewable energy sector” he recommended to the MNRE “to explore the possibility of prescribing the Obligation of Renewable Finances in the Obligation of Purchase of Renewables lines for banks and financial institutions in order to make them invest a specific percentage of its investment in the renewable energy sector.” Banks and financial institutions and foreign investors play a critical role in shaping India’s transition to a low-carbon economy.
Loans up to ₹30 crore for RE generation projects are covered under RBI’s Priority Sector Lending (PSL) guidelines.
As the Standing Committee Report points out, the borrowing limit for the renewable energy sector is inadequate to meet the needs of the industry. Indian banks have recently been pushing to include EV and green hydrogen loans under the PSL category.
RBI’s discussion paper on climate risk and sustainable finance expects banks to set internal targets to increase green finance.
Along the lines of the RPO trajectory published by the Ministry of Power, the RBI, in consultation with the Centre, could consider publishing a 10-year trajectory for regulated entities to gradually increase their share of loans to green projects. Initially, this trajectory could be voluntary and, depending on the progress achieved, incremental targets for systemically important institutions could be considered to expand the availability of green finance.
The recent RBI Climate Risk and Sustainable Finance Survey Report (July 2022) reveals that most banks will gradually reduce their exposure to high-carbon companies in the coming years, and some banks have mobilized new capital for the promotion of green. loans and investments or set an incremental lending target for sustainable finance.
At the same time, 85 percent of respondents to the RBI survey believe that “structural changes in the traditional approach to lending and investment would be needed to support green finance, including the assessment and certification of green credentials of every project and understanding of the corporate path. map to achieve net zero.”
A medium-term path for green loans, along with declaring them as part of the global loan portfolio, will help banks assess the risk of stranded fossil fuel assets and apply higher due diligence standards to new proposals financing of industries with high emissions. Also, RBI could gradually introduce trading in green loan certificates. A higher proportion of green loans in banks’ portfolios would also allow them to raise funds from global investors.
The writers are with Cyril Amarchand Mangaldas
