Indian banks have shied away from issuing green bonds, something that could slow the South Asian nation's climate goals.
Most of green bonds issued in India in recent years were sold by nonfinancial corporates, especially those engaged in renewable energy. The extra costs associated with green finance, lack of demand and the dearth of investors in green bonds have acted as disincentives for banks. Indian issuers are also averse to overseas debt, keeping a much bigger pool of global green funds away from the nation's banks.
Still, as the country moves toward its sustainability goals, Indian banks will need to step up their funding of green projects, analysts say.
"Banks are critical in financing any sort of transition in an economy like India," Shilpa Singhal, portfolio manager and senior analyst at asset manager NN Investment Partners, told S&P Global Market Intelligence. Banks are "key conduits of government policy, in the sense that the government cannot execute this policy of decarbonization without banks taking that lead," Singhal added.
Prime Minister Narendra Modi's surprise announcement of India's commitment to net-zero emissions by 2070 at the 26th United Nations Climate Change Conference in Glasgow, Scotland, in November 2021 made the country the last of major global economies to commit to carbon goals. China, the world's biggest polluter, announced its own goal to become a net-zero emitter by 2060, while the European Union and the U.S. are committed to 2050.
Miniscule share
Indian banks have been virtually absent from the green bond market since 2017. By comparison, China's financial corporates issued 39.22% of green bonds in 2021, while nonfinancial corporates issued 32.18% of green bonds, according to data from the Climate Bonds Initiative.
"Banks are going to be the most important part in mobilizing green bonds as they form a part of government borrowing. The interest may not be so much for now but needs to be increased," Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors LLP, a treasury and foreign exchange consulting company, told Market Intelligence.
The first sale of a green bond was by Yes Bank Ltd. in 2015, but interest quickly petered out with no recorded green bonds aligned with the global definition issued by a major Indian bank since 2017. Banks, in general, have stayed away from raising funds in the bond markets in recent years.
"If you're talking about the international bond markets, I think Indian banks have not been issuing bonds. Part of the reason is that most of the banks have actually scaled down [their] offshore presence. [Banks] are also focusing more on the domestic markets and in particular rupee financing," Neeraj Gambhir, group executive and head of treasury, markets and wholesale banking products at Axis Bank Ltd., told Market Intelligence.
Less attractive
India should expand its priority sector lending rules to include a wider range of green projects, Gambhir said. The Reserve Bank of India included only the small-scale renewable sector in its program of requiring all commercial lenders to earmark a certain proportion of their funds for sectors, such as agriculture, small industries and education, that promote inclusive economic growth. Clearly defined standards for green finance would also help, Gambhir added.
The additional costs associated with green bonds have been a big obstacle for Indian financial institutions. That contrasts with incentives that many governments offer for green bonds, NNIP's Singhal said.
For example, Hong Kong has a green grant scheme that offers subsidies for eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services.
"I would like to see the banks lend more to green [projects] rather than issue green bonds," Dhruba Purkayastha, India director for Climate Policy Initiative, a climate think tank, told Market Intelligence. "Having said that, green bonds allow a particular category and a class of capital to come in and hopefully find their way into green investments."