The government of India finds itself in a challenging position as it seeks to sell its stake in the Industrial Development Bank of India (IDBI). Most recent news reports suggest limited interest from domestic and global financial institutes. Besides Kotak Mahindra Bank, CSB Bank and Emirates NBD, no other financial institutes made it to the list of contenders.
There is a growing global trend among major financial institutions to put in place a "no new coal" policy for all new investments. A study by the Institute for Energy Economics and Financial Analysis highlights that over 200 globally significant financial institutions have established coal exclusion policies. Meanwhile, only two Indian commercial banks have a coal exclusion policy, Federal Bank and Suryoday Small Finance Bank. Both Suryoday Bank and Federal Bank’s coal exclusion policy was a result of the International Finance Corporation’s (IFC) intervention.
In July 2021, IFC infused $126 million by taking five percent stake in Federal Bank. Following this, IFC worked with Federal Bank to chalk out a path to reduce its exposure to coal with an objective of wiping off coal exposure from its loan books by 2030.
India’s banking sector is made to look better compared to several years ago when increased non-performing assets (NPA) put several banks in the red. The energy sector, especially coal-fired thermal power plants, made up a huge percentage of those NPAs. IDBI was particularly exposed and on the verge of a crash before Life Insurance Corporation (LIC) was made to rescue the bank. Rakesh Sharma, who has been heading the bank since LIC took over, has done a stellar job at turning things around at IDBI, but the threat of increased exposure to a declining coal industry could undo the good work. According to the data from Global Coal Exit List, between 2019 and 2021, IDBI provided lending and underwriting services worth more than Rs 1,600 crore to various companies engaged in coal expansion.
Limited Options
Seven years ago, when the Indian government announced plans to sell 15 percent of its stake in IDBI, the IFC emerged as a top contender. However, times have changed, and financial institutions around the world have come to recognise the importance of aligning their investments with climate goals. With major international financial institutions and their ‘no new coal’ policy, the Indian government now faces limited options in attracting international investors for IDBI. This shift underscores the urgent need for India to reassess how it packages its energy strategies and sustainable alternatives. India already has ambitious renewable energy plans, but its coal baggage and failure to articulate a coal phaseout plan is stymying its growth.
While IFC’s recently updated policy does not allow it to partner with financial institutes that continue to fund new coal, it remains open to partnering with financial institutions that currently have high exposure to coal projects but are willing to work with IFC in charting out a path towards reducing its exposure to zero by 2030, as well as ruling out any new coal investments. IFC’s expertise could be of immense help to Indian financial institutions that are struggling to cope with bad loans given out to coal power projects in the past.
The IFC's move is not an isolated one. Numerous international financial institutions have announced their commitment to a "no new coal" policy. These institutions have recognised the inherent risks associated with coal investments. From environmental concerns to the potential for stranded assets, the financial sector is awakening to the urgent need for a transition to cleaner energy sources.
Given the global trend toward sustainable finance, the government of India faces limited options for selling its stake in IDBI. Without a commitment to a "no new coal" policy, major international financial institutions are likely to shy away from investing in the bank. This predicament reflects the growing importance of environmental considerations in investment decisions. These challenges will likely remain for all government divestment initiatives.
Wake-up Call
This shift in international financial institutions' stance is a wake-up call for the Indian government. India, as a global leader in renewable energy potential, must seize this opportunity to announce a no new coal policy. Doing so will unlock the global pool of funds that remain inaccessible due to a minor technicality.
According to India’s own National Electricity Policy, India does not need any new coal power capacity beyond what is already under construction. The estimates are for 2027, however, with enough renewable energy capacity along with storage capacity, India may not need more coal in the long term as well. By developing a clear roadmap for renewable energy deployment and actively promoting the transition, the government can not only attract international investments but also secure a cleaner, healthier and more sustainable future for its citizens.
The need for a "no new coal" policy should not be seen as a hindrance but rather as an opportunity. The demand for clean energy investment is rising globally, and India has immense potential to lead this transition. By committing to a comprehensive renewable energy strategy, the government can attract investment from forward-thinking financial institutions eager to support sustainable projects. This, in turn, would stimulate job creation, enhance energy security, and contribute to the fight against climate change.
Joe Athialy is the Executive Director of Centre for Financial Accountability, a Delhi-based think tank that aims to strengthen and improve financial accountability within India. Views are personal, and do not represent the stand of this publication.
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