India’s updated climate change action plan which include achieving 50 per cent of installed electric generation capacity through non-fossil fuel-based sources, reducing emissions intensity of GDP by 45 per cent by 2030 compared to 2005 levels and pledge to reach net zero by 2070 require financial commitments from Indian and international sources.

The MNRE estimates roughly $25 billion annual investment to meet the RE generation target of 500 GW by 2030. Against this backdrop, the Parliamentary Standing Committee on Energy in its 21st Report on “Financial Constraints In Renewable Energy Sector” recommended to MNRE “to explore the possibility of prescribing Renewable Finance Obligation on the lines of Renewable Purchase Obligation for banks and financial institutions in order to make them invest a specific percentage of their investment in renewable energy sector.” Banks and financial institutions, and foreign investors have a critical role in shaping India’s move towards a low-carbon economy.

Loans up to ₹30 crore to RE generation projects are covered under RBI’s Priority Sector Lending (PSL) Guidelines.

As the Standing Committee Report notes, the loan limit for RE sector is inadequate to meet the industry needs. Recently, Indian banks have urged to include loans for electric vehicles and green hydrogen under the PSL category.

RBI’s Discussion Paper on Climate Risk and Sustainable Finance expects banks to set internal targets to increase green funding.

On 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 based on the progress made incremental targets could be considered for systemically important institutions to expand the availability of green finance.

RBI’s recent Report of the Survey on Climate Risk and Sustainable Finance (July 2022) reveals that most of the banks will gradually reduced their exposure to high-carbon emitting businesses in the coming years, and a few banks have either mobilised new capital to for green lending and investment or set a target for incremental lending for sustainable finance.

At the same time, 85 per cent of respondents in RBI survey believe “structural changes would be needed in the traditional lending and investment approach to support green financing, including the evaluation and certification of the green credentials of each project, and understanding the corporate road map to achieve net-zero.”

A medium-term trajectory for green lending coupled with their reporting as a share of the overall loan portfolio will help banks assess the risk of stranded fossil fuel assets and apply higher diligence standards to new funding proposals from high emission industries. In addition, RBI could gradually introduce trading of green loan certificates. A higher share of green loans in banks’ portfolio would also enable them to raise funding from global investors.

The writers are with Cyril Amarchand Mangaldas