E-Paper
Lenders bank on green bonds to fund projects
With the growing need to support clean energy projects amid climate change talks, banks are looking at green bonds as an attractive source of funding.
With the growing need to support clean energy projects amid climate change talks, banks are looking at green bonds as an attractive source of funding.
Last week, India’s third-largest private lender, Axis Bank, raised $500 million by issuing certified green bond to finance climate change solutions. Axis Bank would be the fifth issuer of green bonds ever since Yes Bank issued the first such bond in February 2015 to raise Rs 1,000 crore.
In March, Exim Bank of India issued a five-year $500-million green bond to fund projects in countries, including Bangladesh and Sri Lanka. The issue was subscribed nearly 3.2 times.
In November, IDBI Bank raised $350 million (about Rs 2,300 crore) to use the entire funds towards financing assets in India.
A bond is a debt instrument with which a company raises money from investors. The bond issuer gets capital while investors receive fixed income in the form of interest. When the bond matures, the money is repaid.
Green bonds are similar, but funds raised are used exclusively for renewable energy projects. Such a bond also gets a tax-exempt status and typically carries a lower interest rate than loans offered by commercial banks.
“This is still at a nascent stage. But we are seeing a shift in credit away from non-renewable infrastructure projects as government focus increases in the renewable energy sector. Fossil fuel projects are also under stress and banks’ appetite to lend to them is less,” said Saswata Guha, director, financial institutions, Fitch Ratings.
India has set a target of installing 100 gigawatt (GW) of solar power capacity and 60 GW of wind power capacity by 2022. This will need an investment of around Rs 17.5 lakh crore. The total installed capacity of renewable energy currently stands at 30 GW.
“These are still initial days,” said NS Venkatesh, chief financial officer of IDBI Bank. “Later on, there will be 100% allocation to green funds, against the current 15% to 25%… This will bring in a diverse pool of investors, which will help decrease the cost for the bond issuer… It brings in another source of funding.”
Around $23 billion of green bonds have been issued so far in 2016, according to not-for-profit entity Climate Bond Initiative. India accounted for 3% of of the total $42 billion of green bonds issued globally in 2015.
Higher interest rates and unattractive terms under which debt is available in India raise the cost of renewable energy by 24% to 32%, compared to the US and Europe, the report added.
Banks raising such bonds benefit about 10 basis points (bps), compared to the rate on existing bonds, said Venkatesh.
