HANS SHODH SUDHA, Vol. 2, Issue 4, (2022), pp.

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GREEN FINANCE IN INDIA: TREND AND CHALLENGES

Md. Kashif Ansari (Faculty mentor)1, Yukta Anand2

1 Md. Kashif Ansari, Assistant Professor, Hansraj College, University of Delhi, kashif@hrc.du.ac.in
2 Yukta Anand, Pursuing M. Com (DSE, DU), B. Com(H) (Hansraj College, DU), yuktaanand2@gmail.com

Abstract
Sustainable finance implies the usage of funds for financing projects which are of social, economic and
environmental importance and thus includes ‚green finance‛, ‚climate finance‛ and ‚low-carbon finance‛.
Green finance is very critical to attain ‚low carbon – green growth‛. It plays a principal role of linking
economic growth, environmental improvement and the financial industry with each other. Financing of
such environmentally important projects has always been a challenging task for the Indian economy;
especially the financing required to attain the production of 175 Gigawatts of renewable energy by 2022. In
India, factors like high capital costs, lack of adequate debt financing and short-term maturity of loans have
always acted as a hindrance for financing of renewable energy projects. The paper is divided into multiple
sections. Firstly, it identifies the importance of green finance. The second section discusses the various
measures taken up by the Government of India and the Indian economy in this direction. Further, section
three talks about the various challenges for the Indian economy. The last section provides concluding
remarks as to what lies ahead for the economy of India to further its green investments.
Keywords: Sustainable Development Goals, Paris Agreement, Green Initiatives, Green Bonds, Green
Investments

can be taken as the 19th century when the

Introduction: signals of climate change started appearing);
which will prove detrimental to the human
1. IMPORTANCE OF GREEN FINANCE
health, food production, and can even threaten
Climate change acts as a great threat to the the survival of some communities and the
environment; mainly due to the excessive usage biodiversity at large. Many governments have
of fossil fuels. If the usage of fossil fuels started to be cautious of this issue and have
continues at the existing level, the temperature agreed to abide by and follow the path of
of our planet is likely to increase by 4 to 6 Sustainable Development Goals (SDGs) and the
degree Celsius above the pre-industrial level Paris Agreement (adopted in 2015) which states
(pre-industrial level refers to the time period that the global warming should be well below 2
before the industrial revolution started which degree Celsius and the countries should pursue

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efforts to limit the increase to 1.5 degree international private players.

Celsius, compared to pre-industrial levels.
The renewable energy sector in India is
Another major problem which persists in the primarily owned by the private sector, unlike
global economy is the problem of low rate of the conventional forms of energy – where two-
investment. After the global financial crisis of third of the ownership rests with the Central
2008, the economies and the central banks of and State governments. This poses a greater
emany high-income countries tried to stir up challenge for the financing of such projects -
income, spending and employment, mainly by given the uncertainties of the private sector.
lowering the rate of interest and this strategy
Thus, Green Finance can be defined as ‚The
proved successful to some extent. Yet, a
strategic alignment of the financial sector to
problem with significantly lowering of interest
promote projects which seek to achieve climate
rates persists i.e., investors borrow mainly for
change mitigation, renewable energy
speculative purposes at lower rate of interests.
advancement, low carbon emissions, efficient
The result of this led to the overall decrease in
use of resources and, thus strive to achieve a
the quality of investments.
greener economy at large.‛ There are three
What was and is actually required is the major constituents of green finance –
increase in long-term investments for green and environmental improvement, financial sector,
environmentally constructive projects. In and economic growth.
majority of the countries, the public sector has
Such green projects can not only help to reduce
not been able to afford such long-term
the carbon emissions but also foster energy
financing and the private sector has always
security and energy self-sufficiency – in line
been unwilling to do so - given the associated
with the Sustainable Development Goals and
risks and the low rate of return.
the Paris Agreement.
The funding of such green projects in any
2. GREEN FINANCE INITIATIVES IN INDIA
economy is dependent primarily on three
sources: The first ever strategic step taken in this
direction by the government of India was the
a) Domestic public finance – Funding
signing of International Solar Alliance (ISA)
provided directly by the government of
with France on 1st December, 2015, the aim of
a country.
which was to address the climate concerns by
b) International public finance – Funding
taking joint global efforts in this regard.
provided by international organizations
Financing for green projects becomes more
and international development banks.
crucial for a developing country like India –
c) Private sector finance – Funding
given the increased demand for energy due to
provided by both domestic and

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high economic growth, rapid industrialization, projects.

and urbanization. Initiatives like ‚Make in
Viability gap funding is a one-time grant for
India‛ and other Smart City Projects were also
infrastructure projects which are economically
introduced in the country to scale up the
justifiable but not financially viable – meaning
required financing for such increasing
those projects which are necessary for the
consumption and production. India is expected
development of the economy as a whole(for
to witness an addition of 600 million consumers
example – a bus route is to be set up in a
of electricity by 2040, which will lead to a
location with no access to road transportation),
profound increase in the electricity demand
but which may not be earning any profits in
(International Energy Agency, IEA 2015). At
financial terms i.e., the revenue earned from
present, the government of India is primarily
operation of the infrastructure project (sale of
dependent on debt funds for financing such
tickets in this case) may actually be less than
green and renewable energy projects.
the expenses incurred to keep the project in
According to the report of ‘Task Force for
operation(like fuel, staff salary, and other
Creating National Infrastructure Pipeline’,
costs). A glaring instance of this incentive has
India is projected to require infrastructure
been its usage by the Solar Energy Corporation
funding of $4.5 trillion by 2040 mainly for green
of India (SECI) for the generation of solar
housing, electric vehicles, and for achieving
energy.
national renewable energy targets.
Generation-based incentive focuses on the
The Ministry of New and Renewable Energy
actual generation of solar and wind energy
(MNRE) was formed in 2006 which stands
rather than focusing only on the setting up of
responsible for the tasks like research and
projects. It provides an incentive of INR 2.00 for
development, protection of intellectual
each unit (kWh) of solar power generation and
property and promotion and coordination of
an incentive of INR 0.50 for each unit (kWh) of
renewable energy resources. Three types of
wind power generation.
incentive schemes prevail in the Indian context
of renewable energy financing i.e., accelerated In addition to these incentives, several other
depreciation (AD), viability gap funding (VGF) efforts have been made to establish new
and generation-based incentive (GBI). mechanisms and institutions to accelerate the
generation of green and clean energy
Accelerated depreciation is a tax-based
production in India.
incentive for the developers of the projects.
Earlier introduced in 2009 mainly for wind 2.1 Priority sector lending (PSL) recognition
projects and discontinued in 2012, it was
reinstated in 2014 and now continues to drive The Reserve Bank of India (RBI) has labelled
the zeal of investment mainly for solar power the sector of green financing and renewable

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energy as a ‚Priority sector‛ in April 2015. It green energy and to mobilize the funds of the
was done to boost up the competitiveness of private sector for such projects.
the Indian economy and to enhance
Consequently, several other banks like State
employability. The guidelines stated that the
Bank of India, Union Bank, etc. have converted
banks ought to allocate 40% of their net credit
themselves into green banks. SBI offers long-
or an amount equivalent to off-balance sheet
term loans at concessional rates of interest to
exposure, whichever is higher, for the priority
finance green projects and has launched ‘Green
sectors like wind mills, solar power generators,
Home Loan Scheme’ for providing loans at
street lighting systems, micro-hydel plants and
concessional rates for residential projects which
the like.
are environment-friendly. Bank of Baroda has
A positive trend in this direction commenced initiated a scheme for assisting the small and
around the year 2019. In the preceding years, medium-sized enterprises (SMEs) in the
the required finance was not flowing from the acquisition of the required equipment and
banks to such a crucial sector. This was mainly necessary measures to enhance energy
due to the including of ‘renewable energy’ conservation.
within the term ‘energy’ which resulted in a
Likewise, ICICI bank has been able the provide
large amount of fund flowing to the non-
the necessary finance for undertaking projects
renewable energy sector. But now, banks like
related to clean energy, energy efficiency,
Bank of Baroda, Canara Bank, Central Bank of
mitigation of greenhouse gas emissions, and
India, Punjab National Bank, and other
clean technologies.
nationalized banks have increased their priority
sector lending to housing, education and 2.3 Green Bonds
renewable energy.
Green bonds are those fixed-income securities,
2.2 Green Banks the proceeds of which are used for financing
projects which are environmentally viable. Like
The first ever step in the direction of green
every other bond, these bonds also have to
bank in India was the conversion of ‘Indian
acquire the required credit rating from the
Renewable Energy Development Agency
rating agencies to become financially viable.
(IREDA)’ – a Non-Banking Financial Company
The first green bond in India was launched by
(NBFC) into a green bank, in the year 2016.
YES Bank in the year 2015. Subsequently,
Green bank refers to an institution which
IREDA launched its unique 5-year green bonds
finances environment-friendly practices and
in 2017 which were named ‘Green Masala
strives to reduce carbon emissions with the
bonds’. These bonds became the first to be
help of banking activities. IREDA was
listed on the International Securities Market
established with the aim of boosting clean and

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(ISM). energy projects’, ‘Bridge loan against

generation-based incentive (GBI) scheme claims
According to a report by IndiaCorpLaw
payable to renewable energy developers under
(September 2021), Indian corporates have been
Ministry of New and Renewable Energy
able to raise nearly $4.96 billion through such
(MNRE) scheme for GBI grid interactive wind
green bonds. Also, Ghaziabad Nagar Nigam
and solar power projects’, ‘IREDA scheme for
has become the first issuer of Green Municipal
discounting of energy bills’ – for fostering a
Bonds, in the year 2021.
climate of green finance in our economy. As of
The report further stated that India is the financial year 2020-2021, IREDA has
second largest emerging issuer of green bonds, successfully sanctioned loans worth INR 11,000
after China. The successful acceptance of such crore and disbursed loans worth INR 8800
green bonds depends on their risk perception crores. (IREDA 2021)
by the investors. What is required further in
2.5 Crowd funding
this regard in the Indian economy is increased
awareness among the investors, a standardized Crowd funding, which basically implies many
process and lucrative incentives for the issuers investors investing in a specific project via a
and the investors. pooled fund, has been successfully able to
mobilize the required funds from the private
2.4 Soft loans from IREDA
investors in countries like Western Europe and
IREDA offers loans at concessional rates for North America. In India too, it is witnessing
several environmentally-concerned projects. It great popularity due to increasing awareness
gets its funding from international banks and and use of information and communication
other agencies. European Investment Bank technology (ICT). In India, ‘Bettervest’ and
(EIB) granted a long-duration loan of Euro 150 ‘SunFunder’ have been able to induce the
million for financing projects of renewable needed investment for green projects.
energy and the World Bank extended $100
Bettervest is a Germany-based crowd funding
million to IREDA for the construction and
platform. It has invested in projects like ‘Boond
development of solar parks. In addition to the
Engineering’ and ‘MeraGao Power’ to
soft loans, IREDA plays an agency role by
strengthen renewable energy production and
engaging in the discounting of energy bills,
consumption in the rural India.
providing credit enhancement facilities, and the
like. SunFunder, which is based in Kenya, launched
a $47 million ‘Beyond the Grid’ (BTG) fund in
Recently, IREDA has come up with some new
2017, focusing on Sub-Saharan Africa, India
schemes and polices – ‘Loan against
and the Pacific region. The aim of this fund is to
securitization of future cash flow of renewable
bridge the gap between the demand and

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supply of reliable electricity and to provide problem in our country. The country has listed
debt capital financing to off-grid solar out various circulars, polices and agendas
companies. revolving around the environment,
sustainability, and renewable energy, but they
3. CHALLENGES FOR INDIAN ECONOMY
are not linked to each other. For instance,
A major problem that has always existed in the India’s 12th Five Year Plan exhibits core
Indian economy is the high cost of debt. This, indicators that ‘reflect the vision of rapid,
coupled with the short tenure of loans, makes sustainable and more inclusive growth’
investing in green projects a less lucrative (Government of India, 2012, p35). On the other
option for the investors. hand, the environmental targets specify that
India plans to increase the forest area by 1
A second issue that persists is the disclosure million hectares per year, its renewable energy
requirement for the issuance of green bonds. capacity by 30,000 Megawatts and to reduce the
Securities and Exchange Board of India (SEBI) emissions by 20 to 25 percent (Government of
lists down disclosure requirements for offer India, 2012, p35-36). But these quantifiable
document and does not state anything in standards are not established and incorporated
particular. It just states that the annual reports into the above-mentioned environmental
shall include ‘a brief description of such targets. Thus, such a barrier has always kept
project(s) and/or asset(s) disbursed’ (SEBI, 2017, the size of India’s green financial market much
p3). Looking at the future viability of such below the full potential level.
projects, these projects require a large amount
of funding from various stakeholders and thus The Global Business Practices (GBP) list out
they require a properly sketched out report, four main components of green financing to
rather than just a uni-dimensional summary. serve as guidelines for the bond issuers –
process for project evaluation and selection, use
Further, SEBI has demanded the issuers to of proceeds, management of proceeds, and
estimate ‘qualitative performance indicators reporting. They demand an appropriate
and, where feasible, quantitative performance and elaborate description of the entire process
measures’ (SEBI, 2017, p3) but it has not in a legal manner. SEBI, on the contrary,
established any particular metrics for the same. requires the issuers to disclose in a brief
Thus, the lack of standardization and the usage manner only the manner of utilization of funds,
of diverse range of indicators create a problem thus making the investors doubt the credibility
and thus render different projects of green projects in our country.
incomparable.
Another significant issue that persists is the
Lack of a proper framework and policies which issue of ‘greenwashing’ which implies an act of
are aligned with each other pose a significant making misleading claims about a green project

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and then capitalizing on such claims and other financial market of India has been able to
such environmentally rich products. Many successfully avoid any major scandals or
Indian corporations and government agencies revelations due to the fact that it has not been
have been involved in such activities. HCL was able to realize and capitalize its full potential.
found guilty when it declared to remove
India has a long way to go until it becomes a
brominated flame and toxic poly vinyl chloride
self-sufficient and resilient green economy. A
from the manufacturing of its computers, once
balanced and sound mix of investors, issuers
it was able to get some economically viable
and green investment projects is recommended
alternatives. However, Greenpeace criticized
for the economy of India to provide it with the
the company for avoiding its duty and
much-needed competitive edge for a
responsibility by making false claims and
sustainable and green future in the coming
promises – without any clear resolution for the
years.
use of eco-friendly materials (Insight, 2009).
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4. CONCLUDING REMARKS
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