21 Jul 2016 17:52 IST

The changing climate of financing

Green lending is very niche, for which we need specialised institutions

For years, many of us have been obsessed with ‘greenbacks’, a nickname for the US dollar, an international currency that we all yearn to own.

But now it is time for us to shift our obsession to something that rhymes with greenback: Green Bank.

What is it?

As economies get on the ‘go green’ bandwagon, can green financing be far behind? Today, as more and more wind, solar, biomass, geothermal, and other energy efficiency projects pop up on the landscape, they demand funding. And the growing (but justified) paranoia about climate change is causing investors and financiers to pull out of dirty projects and focus instead on anything that is green.

So, there is pull, and there is push. What is needed is intermediation.

Bridging the funding gap

Intermediation, as those of you familiar with banking know, is a go-between function bridging those who have the money to invest or lend, and those who need funds.

Intermediation is, therefore, the core function of banks, non-banking financial companies, mutual funds, private equity, venture capital, hedge funds and other financial institutions.

While lending is a very specialised activity, this has not been the case in India. Typically, if you go to a bank with a project, the man across the table will talk less about the project’s earning capacity and more about what collateral security you will have to offer — your house, jewels, property, what have you.

Informed intermediation

But that is not how banking should be. Funds ought to be lent to projects that are viable, and are capable of paying back from the earnings they yield.

This, of course, calls for deep knowledge of various domains; a bank officer should be able to assess the project, make a judgement and then lend.

Now, if banks ask for security back-up for green projects, the world will not get very far in building a green world. There is only so much security available, while green projects are (or, at least, ought to be) exploding. The situation demands intermediation of an informed kind.

Green lending is a very specialised form of lending and we need specialised lending institutions, to wit, green banks.

Specialised banks

Elsewhere in the world, green banks have begun to spring up. The first is said to be the Connecticut Green Bank, that was set up in 2011. It has so far supported investments worth $700 million, which is great, considering green economies began to gather momentum only much later.

The second was the New York Green Bank, which has mid-wifed investments of $200 million, with another $350 million in the pipeline. If you think these numbers aren’t very impressive, keep in mind that these are small banks with a local footprint. Green funding (or ‘climate funding’) is much, much larger.

To give you some perspective: various entities raised $11 billion in 2013 by issuing ‘green bonds’ (debt instruments where the avowed purpose of utilisation is a green project). This figure rose to $36 billion in 2014 and $42 billion in 2015. And these ‘green bonds’ have barely scratched the surface.

Indian scene

India is in dire need of a green bank. Today, by far, the only dedicated funding institution of green projects is the government-owned Indian Renewable Energy Development Agency. And this is not even a bank.

Public sector banks such as SBI and IDBI are active lenders, giving funds for renewable energy and energy efficiency projects, as are Yes Bank and Axis Bank from the private sector. But none of these is a dedicated green bank.

Green advantages

However, there is a big need for one. A dedicated green bank offers several advantages.

~ First: There can easily be a different dispensation. For example, the Reserve Bank may need them to put away lesser amounts as reserves for a rainy day, perhaps backed by some kind of insurance or government guarantee.

~ Second: As mentioned earlier, these banks could specialise in renewable energy and energy efficiency projects, and hence lend on the basis of the assessed project viability, rather than availability of collateral.

~ Third: These banks will surely be able to attract their own capital, considering the huge global appetite for green lending.

‘Green Bank’ is an idea whose time is fast approaching. For students, it might be a good idea to keep an eye out for the developments on this front, and look for career opportunities.

For starters, I suggest you keep checking an outfit that calls itself Coalition of Green Capital .

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