Report
Greening India’s Financial Market
Opportunities for a Green Bank in India
Arunabha Ghosh, Kanika Chawla, Neeraj Kuldeep, Manu Agarwal, Anjali Jaiswal, Sameer Kwatra, Nehmat Kaur, Bhaskar Deol, and Eric Weiner
April 2016 | Sustainable Finance
Suggested citation: Ghosh, Arunabha, Kanika Chawla, Neeraj Kuldeep, Manu Agarwal, Anjali Jaiswal, Sameer Kwatra, Nehmat Kaur, Bhaskar Deol, and Eric Weiner. 2016. Greening India’s Financial Market - Opportunities for a Green Bank in India. New Delhi; New York: Council on Energy, Environment and Water and Natural Resources Defense Council.
Overview
This report, in collaboration with the Natural Resources Defense Council (NRDC), analyses the potential role of green banks in accelerating low-carbon development in India. To achieve India’s clean energy and climate goals, an innovative financial institution like the green bank can leverage limited public funds to reduce capital costs and risks involved. This report highlights the potential of the green bank in the Indian context and incorporates international green bank models. It also discusses concrete recommendations in favour of expanding green banking solutions in India.
This report is a part of the India Clean Energy Finance series which also includes Reenergising India’s Solar Energy Market through Financing, A Second Wind for India’s Energy Market: Financing Mechanisms to Support India’s National Wind Energy Mission, and Greening India’s Financial Market: How Green Bonds Can Drive Clean Energy Deployment.
Key highlights
- Green banks help in bridging the gap between the perceived risk associated with clean energy investments and the expectations of private lenders by offering products such as subordinated debt, partial credit guarantees, insurance, or loan-loss reserves.
- They focus on creating demand for clean energy projects, in addition to providing attractive financing.
Value proposition for green banks in India
- Green banks can provide lower interest rates and longer terms of financing to match the payback period and enable more projects to be built - a critical role as India scales its clean energy market.
- They can offer products such as partial credit guarantees, insurance, or loan-loss reserves that reduce the risk and therefore the cost of capital.
- The ability of green banks to attract international investment and finance smaller projects at a lower cost for developers makes them a key tool to quickly scale the domestic market.
- They can issue green bonds, which enable access to scalable, long-term, and low-cost debt capital from institutional investors across the world.
- Existing institutions in India play some of the roles of a green bank, but no single institution currently offers the exact type and breadth of financing activities that a green bank can provide.
Examples of green banks around the world
Source: Institutions listed in OECD, “Policy Perspectives: Green Investment Banks,” p. 6 (2015)
Key recommendations
- Attract large institutional investors by warehousing smaller project loans and selling them at scale through securitisation.
- Facilitate the development of business models based on leasing and third-party financing for rooftop solar PV at lower costs to overcome investment barriers.
- Reduce the cost of domestic capital by offering lower rates, fixed interest rates, and longer debt tenors to attract international investment. This also reduces the overall burden of high-cost debt for solar projects.
- Increase transparency and immediate sharing of market information to bridge gaps in information and reduce perceived risk.
- Disseminate data and de-risk investments by sharing track record and familiarising bankers with the technologies and financing arrangements.
- Develop standardised and transparent energy performance contracts (EPCs) that promote finance models which include energy-saving monitoring and verification. Also, standardise to reduce costs of individual project.
Green banks offer solutions to overcome local financing barriers for clean energy and can play a significant role in accelerating low-carbon development projects.
