Banks and non-banking financial companies (NBFC) are looking for greater promotion of green finance schemes and subsidy support for green projects from the government or central bank, said industry experts.
There is a need for awareness towards green financing since there are opportunities for financial institutions in this sector as the market is largely untapped, they said.
Apart from funds in the form of green deposits, financial institutions feel that there is a lack of incentive for them and subsidies can help them invest more in green projects, experts said.
Ashutosh Khajuria, Executive Director, Federal Bank, said, “The concept of green deposits is still nascent in India including divergent practices and taxonomies. If the government or the Reserve Bank of India (RBI) introduces specific schemes or policies for promoting green finance for micro small and medium enterprises (MSME), it would be beneficial as the present green projects are more focused on large corporate.”
Pankaj Gupta, Chief Executive Officer, MuFin Green Finance, said the government can push green finance through financial support by offering subsidies on investment to such projects.
“Financial support through subsidies can help the limited players in the green finance segment in the NBFC space as they can aggressively work on lending to more green projects,” said Gupta.
Echoing this, an executive of a private bank, who did not wish to be named, said that financial subsidies towards green projects can help banks to explore more such projects.
“Banks have limited money from green deposits. Awareness can help bring in more credit from customers but financial support from the government can help in boosting more investments,” the executive said.
Existing schemes
Under the Ministry of Social Justice and Empowerment’s National Scheduled Castes Finance and Development Corporation, the government provides financial assistance for loans of up to Rs 30 lakh at low interest rates.
RBI Deputy Governor M Rajeshwar Rao in a speech at an event in December 2022 said that the government in the Union Budget for 2022-23 announced that climate action would be a key priority and proposed that as a part of its overall market borrowings in 2022-23, sovereign green bonds (SGBs) will be issued for mobilising resources for green infrastructure.
“The proceeds will be deployed in public sector projects which will help in reducing the carbon intensity of the economy,” said Rao.
Green deposits and RBI’s framework
A green deposit is an interest-bearing deposit, received by the regulated entity, in this case, a bank or a deposit-taking NBFC, for a fixed period and the proceeds of which are earmarked for being allocated towards green finance or renewable energy projects.
The latest data from RBI’s sectoral deployment for April 2023 showed that bank credit to renewable energy projects, a part of the larger green finance segment, jumped 28 percent to Rs 4,614 crore in March 2023 from Rs 3,607 crore in March 2022. This comes after the credit to this sector rose 94 percent between March 2021 and March 2022 with the bank credit growing to Rs 3,607 crore from Rs 1,853 crore.
The central bank, in April 2023, brought out a framework for acceptance of green deposits of regulated entities (RE) which will be applicable from June 1, 2023.
“REs shall be required to allocate the proceeds raised through green deposits towards green activities or projects which encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation and value and improve natural ecosystems and biodiversity,” RBI said.
Dinesh Khara, Chairman, State Bank of India (SBI), in the lender’s annual report, said that RBI’s guidelines on green deposits open new opportunities on the liability side to green the bank’s balance sheet.
In line with this, experts said that banks are making policy changes and working to allocate more of their loan portfolio towards green deposits but this may take time.
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“Banks are actively calibrating their policies and products to increase the share of green products in their asset portfolio. Many banks have committed to a certain percentage of their loan book towards various green projects. We expect this trend to be accelerated given the focus both governments and corporates are putting towards this,” said Khajuria.
“The green deposit scheme is a work in progress. There is a need for higher incentives across the chain for financial institutions to inspire more confidence in green financing,” said Jindal Haria, Associate Director, India Ratings and Research.
Priority sector
Meanwhile, the RBI has included the small renewable energy sector under the priority sector lending (PSL) scheme, under which, firms in the renewable energy sector are eligible for loans up to Rs 30 crore while households are eligible for loans up to Rs 10 lakh for investing into renewable energy.
But experts highlighted there is a need to push green finance in one of the PSL sectors as it would benefit in funding more green projects.
Agriculture, micro, small and medium enterprises, export credit, education, housing and social infrastructure are among the other priority sectors for lending.
“There is a need to push green finance in PSL. Other than the existing renewable sector, the larger green finance needs to be added under PSL,” said Gupta.
“Green finance is a new sector among banks and NBFCs. There is a need to create awareness and bring in more confidence through policies and funding for financial institutions,” said Varun Sharma, Director, Advisory, FinAccountants.
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