Citigroup had recently announced plans to lend, invest, and facilitate deals worth $100 billion by 2025, to support projects that will fight climate change and protect the environment. While this might seem to be a lofty target, the company had previously set a goal of $50 billion for similar initiatives in 2007, and was able to achieve it in 2013, three years ahead of the schedule.
The thing that stands out the most is what Citigroup’s CEO, Michael Corbat, had to say on this:
“Simply put, it is a $100 billion investment in sustainable growth. These efforts do not constitute philanthropy, nor do they represent costs. In fact, they reduce costs.”
In a pleasant departure from their stance of shying away from investing in renewable and sustainable development technologies, banks have now been planning huge funds for these sectors.
Press Information Bureau (the nodal agency of the Government of India for information dissemination) recently released a list of commitments from Indian banks and financial institutions (FIs) to invest in green energy projects. This would include biomass, small hydro, solar and wind energy based initiatives. The Indian government had asked banks to set specific lending targets for renewable energy projects over the next five years and present the same at the RE-INVEST 2015 summit. In addition to the banks, during the summit, 213 companies vowed to set up renewable energy capacity of 266 GW over the next five years.
All in all, 30 Indian banks and FIs have committed to finance 70.505 GW of green energy, to the tune of ₹3526.40 billion (~$57 billion) by 2021-22. These “green energy financing commitments” were made to the Ministry of New and Renewable Energy at the summit.
The targets set by Public sector banks (PSB – banks where a majority stake is held by the government) amounts to ₹1707 billion (~$28 billion). The big ones in the list are State Bank of India, IDBI Bank , Bank of Baroda, and Bank of India. The largest PSB, State Bank of India, has committed to provide ₹750 billion ($12.5 billion) in debt funding for 15GW of renewable energy projects.
The green commitments also include prominent private banks including ICICI Bank and Yes Bank, with a total combined goal to finance 12.5 GW of renewable projects.
Yes Bank in particular seems excited to expand its exposure to the renewable energy sector. The bank had recently raised ₹10 billion ($160 million) via a green infrastructure bond issue. Last year, the International Finance Corporation (IFC) provided a loan of $100 million through Yes Bank to an Indian wind energy project developer for a 170 MW wind energy project.
To take the excitement with a pinch of salt, the announcements come with a rider that the projects have to be “bankable and meet the eligibility norms”. Since the norms have not been defined, they are open to interpretation, which further means that the commitments only show intent and are not binding. But even then, at least the banks have started warming up to financing renewable energy, something which only a few years back was seen only as corporate social responsibility.
Specifically, in the case of India, financing has been a major issue for the renewable energy industry. Unfortunately, renewable energy is considered a sub-sector to the power sector for lending purposes in the Indian banking regime. Several power sector companies are reeling under heavy losses, and the banks have exhausted their lending limits to the power sector. As a result, the banks are unable to disburse any fresh funds to renewable energy projects.
Still, the bank loans are hardly much to talk about with double digit interest rates (upto 13-14%), limited tenure (10-12 years) and conservative debt equity ratios (typically 70:30). Compare this with the other end of the spectrum – ACWA has able to finance its 200MW project in Dubai at a interest rate of less than 4%, at a debt equity ratio of only 86:14!
The recent drop in interest rates in India, as a result of the central bank’s actions is especially heartening for the renewables sector. The central bank (Reserve Bank of India), is also set to to revise its priority sector lending (PSL) guidelines for banks, so that renewable energy projects come under the ambit of priority financing.
However the banks and FIs are still worried about the bankability of projects, chiefly due to bad shape of both the grid, and poor financial health of the Discom’s themselves.
The government has initiated policy level reforms to open the grid, however ground work it seems, is yet to begin. In order to improve the grid itself, Power Grid Corporation of India Limited has been entrusted to implement “Green Energy Corridor Project” for evacuation of renewable energy from generation points to the actual points of consumption across the country.
Of course, both the project developers and MNRE have also been exploring foreign venues to raise low cost capital, these include – banks like the German KfW, US Export-Import Bank, and multilateral banks like Asian Development Bank and the International Finance Corporation.
In order to create a level playing field for renewables, India recently doubled the carbon tax it levies on coal. More on that here.