Here's how exporters are driving growth by leveraging government-backed green financing initiatives

Authored by Pramit Joshi, Senior Director, Credlix

The threat of climate crisis looms ominously over the global macro economy, and wiser heads straddling governments, the private sector, civil society, regulators, bankers, and financiers have been burning the midnight oil, striving to arrive at a new paradigm that prioritizes harmonization between economy and environment. 

Green finance emerges as an instrumental agent of change at such a critical intersection. Be it the creation of solar power assets, installation of wind energy towers, hydel power set-ups, or biomass-powered power plants- all these and more can become rightful recipients of green financing. 

The preliminary hiccups 

In a country like India, renewable energy resources have a perfect platform for transforming the export ecosystem. In great measure, the central government has bolstered this renewable energy push, proactively incentivizing an array of schemes fostering clean energy production. Leading from the front is the honourable Prime Minister, who has set an ambitious target for the country to achieve a renewable energy generation capacity of 500 GW by 2030. 

From the fast-paced ground developments, one can glean that India’s export industry has been progressing respectably well on this trajectory. However, a few obstacles and impasses can waylay our progress. 

• Cost and credit entry barriers: First and foremost, several exporters are deterred from entering the clean energy domain because of the high investment appetite demanded by these projects. It does not help that within the Indian banking and NBFC domain, exporters are often treated like persona non grata and disbursed loans only after securing inordinately high collaterals. Loans are also extended at uneconomical rates discouraging private players from risk-taking. There is no preference for exporters who are utilising renewable energy or having ESG certifications from the lenders. Such a linkage may help promote green energy. 
• Long gestation periods: These projects naturally have a long-gestation period that runs into several quarters, if not years. Exporters shorn of a reliable flow of credit cannot stomach such enormous risks and often distance themselves. Alternatively, bigger players drag their feet because of the prolonged investment window that promises subdued ROI. Opex model for some of these projects can be a good way for exporters to move to green energy, but again there has to be a preference by lenders towards manufacturers & exporters relying on green energy. 
• Lack of technical expertise: Even if the first two problems were to be overcome, small exporters are still at sea because of the advanced technological & financial know-how and expertise required to succeed in such a complex business segment. 

Leaping ahead with a sustainable scheme 

Introduced by SIDBI, the sustainable finance scheme encourages exporters to step into the clean energy field and accentuate India’s heft in energy productivity. A mini-universe of business ideas ranging from environmentally friendly labelling, enabling green buildings, clean energy projects, microfinance, etc., can be funded via SIDBI’s credit disbursal mechanisms. The norms for being credit-worthy under this scheme are fairly straightforward. An exporter must not be in default and should have a healthy track record when it comes to operational performance. The company should also be deemed to be of an investment grade, and OEMs of solar equipment, green machinery, and other ancillary products can also receive funding from SIDBI. 

Another mechanism implemented to great success in the USA and European countries are grading local suppliers based on their ESG scores. As a result, large companies and manufacturers prioritize suppliers that comply with environmentally conducive production standards and often enjoy higher positioning vis-a-vis other suppliers who still rely on old production paradigms. This has the beneficial effect of ESG manufacturing practices taking root in the current production dynamic and helps organizations furnish finance to firms pushing the envelope on climate-conscious manufacturing. 

The evolving landscape 

A report by the Reserve Bank of India states that the energy sector has been categorized in the Priority Sector Lending slot under the green financing initiative. Consequently, credit to this sector by the end of FY20 shot up to an impressive Rs 36,543 crore, which racks up to a sizable 7.9 per cent of the total outstanding lending to the private sector. 

Green bonds are also gaining traction within the broader financial markets. Sovereign-controlled organizations and private firms issue these bonds to raise funds for clean energy initiatives. The 2019 Green Bond Impact report estimates that a whopping USD 640 million had been raised via these bonds for Indian projects. 

Additionally, MSMEs, exporters, and other suppliers that have deployed solar assets for their manufacturing units or are involved with exporting solar power cells or modules can be incentivized further by banks and financial institutions, which are more than willing to lend funds to these exporters at cheaper and subsidized rates. Some of the Lenders esp. Banks do raise capital from Developmental Institutions and Impact Investment Funds such as IFC, ADB etc. where the direct push is to build environmentally friendly lending balance sheets. This in turn creates an impetus for Lenders to channel lending to sustainable sectors. 

The government's nudge 

The central government’s push towards transforming India into a clean energy-surplus country, which has been weaned away from its reliance on fossil-fuel energy sources, is abundantly evident from the PLI or the production-linked investment scheme. In late September, the Ministry of New and Renewable Energy gave the green light to release the second tranche of Rs 19,500 crore targeted at stimulating the manufacturing of solar modules in India. This fund release will lead to the creation of a massive 65 GW of modules. It will result in investments running into Rs 94,000 crore, not to mention direct employment to close to 2 lakh people and indirect employment to almost 8 lakh labourers. 

Indian government's commitment towards transforming India into an energy superpower of tomorrow is also evident from the enormous fiscal push that is being lent to bolster the Production Linked Incentive (PLI) for domestic solar cells and module manufacturing. As a result, the total allocation for this scheme has been recalibrated to a whopping Rs 24,000 crore from the Rs 4,500 crore disbursed earlier. 

A brighter tomorrow 

Green financing has immense potential to draft a new growth narrative for India. Cheaper, cleaner power will usher in the benefits of a healthier workforce, a drastic cut in energy costs, a general plummet in inflationary pressures, and the confidence to build a self-assured and head-strong young demographic. However, all these promises can take root in reality only when policy actions powered by insights and attention to granular details are implemented. 

Better credit access, encouragement to the export sector with direct environmental impact linked metrics to borrowing, dissemination of technical know-how, and unwavering support for green financing initiatives can work holistically to grow exports in a sustainable and climate-friendly manner. With G20 goals and larger responsibility as the fastest-growing economy, India has to lead the way in green financing for exports.