India’s financial sector is moving towards green lending, with banks and NBFCs committing ₹24.8 trillion ($296.65 billion) in loans to facilitate the shift to renewable energy by 2030. Rural Electrification Corporation Ltd (REC), Power Finance Corporation (PFC) and the Indian Renewable Energy Development Agency Ltd (IREDA) lead these commitments with combined pledges of ₹14 trillion ($167.47 billion).
With the rapid growth of NBFC lending to the power sector, concerns over concentration risk have emerged. Many NBFCs, especially those focusing on infrastructure and power, depend on bank borrowings. Incremental bank loans to NBFCs increased by ₹1.6 trillion ($12.68 billion) in the first 10 months of FY2024, largely due to pricing differentials that made bank funding more attractive to NBFCs.
The Reserve Bank of India has voiced concern over the growing exposure of banks to NBFCs. According to the RBI, exposures of the top 50 government-owned NBFCs, totalling ₹7.8 trillion ($93.3 billion), accounted for 40 per cent of the total corporate credit in the NBFC sector during FY2023, all linked to the power industry. This significant concentration introduces risks, as a downturn in the power sector or challenges faced by a few large NBFCs could have a ripple effect throughout the sector.
New RBI norms
To address these concerns, the RBI introduced new guidelines, tightening lending norms, including a 25 per cent increase in risk weights for bank loans to NBFCs rated AAA to A (these ratings indicate high credit quality). However, this raises funding costs for NBFCs and limits bank exposure.
Many larger NBFCs are increasingly turning to the bond market for funding. Bonds provide long-term capital and allow NBFCs to secure funds without depending entirely on banks. NBFCs raised more than 80 per cent of the total bond market fundraising in FY2025. However, most issuances are in the domestic market, where NBFCs also compete with banks, public sector undertakings and large corporates.
Smaller NBFCs face difficulties accessing the bond market due to higher risk profiles and bond costs. To overcome this, many are adopting co-lending models, where NBFCs source loans and banks handle underwriting and funding. Co-lending assets under management for NBFCs are nearing ₹1 trillion ($11.96 billion), highlighting increasing collaboration between NBFCs and banks.
In addition, a nascent private credit market is emerging through Alternative Investment Funds (AIFs), providing smaller NBFCs another capital-raising avenue. AIFs have grown significantly, with annual credit rising from ₹150 billion ($1.79 billion) in FY2019 to ₹666 billion ($7.97 billion) in FY2024, a 37 per cent compounded annual growth rate. They raise money from domestic and global institutions and high-net-worth individuals, and channel this capital to low-rated firms, typically rated A and BB. This offers critical funding for smaller NBFCs struggling to secure traditional loans or issue bonds. Besides the domestic market, NBFCs should also tap into the offshore bond market for cost-effective financing lines, given the reduction in global interest rates. The rate cut by the US Fed creates a favourable environment for large NBFCs to raise dollar-denominated bonds.
This can help power-focused NBFCs in India access global sustainable finance markets and raise green debt.
Larger banks should access green finance lines through sustainable finance markets, to co-lend with smaller NBFCs for clean energy projects, which helps reduce concentration risks.
Through the AIF route, environmental, social, and governance (ESG)-focused foreign portfolio investors can invest in India’s clean energy sector via green debt-focused AIFs.
The writers are with Institute for Energy Economics and Financial Analysis