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“We have committed to financing 500 MW of clean energy annually"
In a conversation with Sustainability Outlook, Mr. Rana Kapoor, Managing Director and CEO, YES Bank shares his thoughts on responsible banking and the outlook for sustainable financing in India especially with focus on renewable energy financing. He also shares his perspectives on the role of financial institutions would need to play for India to emerge as a sustainability economy by 2040.
As an Industry captain, what is your take on the slew of resource oriented sustainability measures being unveiled by the Govt.? Do you see these as practical for a highly aspirational and rather ‘impatient’ country such as ours?
Indian Government is looking to lead the way in terms of progressive policy making for Renewable Energy sector with an aim of giving directions to Global Climate Change talks and leading the group of renewable energy resource rich countries globally. This positive frame of thinking is the major driving force behind this confidence in the sector.
There is definitely a wave of change in RE financing mainly with its adoption in the mainstream development agenda of the Government and business agenda of developers, promoters and financiers alike. Indian banking sector is also responding by building capacity in-house and externally to scale up RE financing.
Knowledge is increasingly becoming a key part of financial institutions and Renewable Energy financing is very local in nature. Need of the hour is having new sources of debt finance like corporate debt market, which is still in the nascent phase in India and requires the depth with real time trading platforms and market makers. This will allow foreign debt funding to come directly to the sector. Sector specific bonds like (RE bonds, Green bonds) can be used to generate resources.
As one of the first movers in the in the Responsible Investment space in the Indian banking sector, what have been your learnings and experiences?
The initial impetus for investments in renewable energy projects in India came from the tax incentives and accelerated depreciation, which attracted significant private sector participation from across industries.
However, project financing on non-recourse basis was particularly difficult due to challenges in resource estimation/revenue forecasting, ability of discoms to meet high tariff obligations, lack of grid-parity, bankability of Power Purchase Agreements, security coverage and inexperience/ seriousness of promoters setting-up projects (mainly for taxation benefits).
However, last 2-3 years have seen emergence of Independent Power Producers who have been investing in implementation of large capacities, with focused approach. This has enabled the gradual shift in financing to nonrecourse funding model for the developers with strong track record and execution capabilities. In the current environment, there is reasonable appetite for funding viable and reasonably structured projects.
The scenario is slightly different for small-size projects, wherein, the industry is working towards churning-out standardized products which will make renewable energy accessible to each and every household in the country.
Given our interaction with stakeholders, we expect to witness significant support for smallsize projects over next few months.
Another perspective of equal importance is to understand the ecosystem of RE i.e. the evacuation system management, which includes smart grids and storage systems, is very different from the traditional system.
This provides for future sources of investments, which have to be made in parallel to RE investments to realize its full potential. The understanding of the ecosystem is also essential to look at decentralized solutions to provide energy access to the hinterlands, which the current grid system is not able to service.
YES Bank recently announced Green Bonds– do you seriously see the Green Bonds market gain steam in India? Do you see this directed at Domestic investors or international participants? What enablers do you think are prerequisites to shape this interesting, yet unexplored source of, long term capital?
The highly successful issuance of India’s first ever Green Infrastructure Bonds issue by YES BANK is a landmark transaction in the realm of Green Infrastructure Financing in India. The issue received a total subscription of INR 1000 crores, which is twice the original issue amount, reflecting the faith and trust reposed in YES BANK’s knowledge and innovation driven business model by leading domestic Institutional investors.
The issue launched on February 16, 2015 for INR 500 crores plus green shoe option witnessed strong demand from leading investors including Insurance companies, Pension & Provident Funds, Foreign Portfolio Investors, New Pension Schemes and Mutual Funds, and was closed on February 24, 2015.
Given the Govt. of India’s focus on India’s Renewable Energy Potential and target of 175 GW of additional capacity installation by 2022, it is estimated that the renewable energy sector will require significant structured financing.
Currently, there are a number of challenges in the existing financing mechanisms including sector limits, high interest rates and AssetLiability mismatch, and therefore there is a need to evolve innovative financing mechanisms to finance projects in the renewable energy and energy efficiency space. Green Infrastructure Bonds are one such specialized avenue to allow for financing to flow to vital green energy projects.
What role do you foresee for Banks, Infrastructure finance institutions and RBI for catalyzing resource sustainability related initiatives within the lending segment?
The Indian banking sector has been a critical support pillar for all the economic development that the country has seen.
A major part of all the financing for any sector comes in form of debt financing from the banks as corporate debt market is yet to take its footholds in India. At the same time banks are the keeper of public funds and have been regulated with various caps on their industry exposures and Priority Sector Lending (PSL) norms for directing finances to the right sectors of the economy.
According to an estimate total investment required to fund 100 GW solar target by 2022 will be in the tune of INR 6 lakh crores. Therefore, it is necessary to explore other financing mechanisms like dedicated RE bonds and creating depth in the corporate bond markets to make resources available for the large scale RE implementation.
In this regard, a recent suggestion by the RBI Internal Working Group on PSL guidelines for including renewable energy loans up to INR 10 Crores is a step in right direction.
The market for renewables is already in the next orbit of growth and the proactive banks already have many years of experience in providing finance to the sector. Therefore it requires large scale capital infusion from FIs, International funds, as well as private sector.
What has been the business case within your organization and what timeframe and coverage of activities is integral to delivering success on this front?
At YES BANK, we have the experience of providing funding to RE and we had the conviction to drive change which enabled us to take this audacious target.
YES BANK has been leading the private sector debt financing in RE financing in India having sanctioned over INR 5,000 Crores in the sector and active participation with all stakeholders including the Government in increasing investment attractiveness in the sector.
The Bank was amongst the only seven financial institutions representing the worldwide BFSI sector at the UN Climate Summit in New York, 2014, where it committed to finance 500 MW of clean energy every year. YES BANK was also the “Knowledge Partner” in recently concluded global renewable energy investment summit, RE-INVEST 2015 organized by the Ministry of New and Renewable Energy (MNRE), where the Green Energy Commitment of financing 5,000 MW of renewable energy projects over the next 5 years was made.
As an institution built on the cornerstone of Responsible Banking, YES BANK remains fully committed to helping the Government in establishing a platform for industry and other stakeholders for achieving 100 GW of installed Solar Power capacity in India.
What are the key ingredients for building India as a sustainability focused economy by 2040?
As we all know, climate change is a gamechanging phenomenon for businesses across the world. Meeting the challenge of taking action on climate change will require prudent financial innovation, skilled people, technical innovation and responsible stewardship from policy makers, corporates, financial institutions and most importantly from individuals.
I see positive signs and visibility from our Government, financial institutions and corporates to form new partnerships for change. This gives me the confidence that together we would be able to address the concerns of climate change.
In India’s journey towards becoming a sustainability driven economy by 2040, what is Yes Bank’s outlook for emerging areas in which there would be a greater role of sustainable financing?
India has the potential to be amongst the top 3 countries globally in the next five years in terms of installed capacity of renewable energy, thereby creating millions of new jobs, reducing poverty and achieving sustained socioeconomic development.
Bold initiatives, such as Green Energy Commitments, with proactive involvement of industry, will enable the Government to achieve its target of generating 100 GW of Solar, 60 GW of Wind, 10 GW of Bio-Energy and 5 GW of Small Hydro power by 2022.
With progressive policy adoption, like single window clearances for RE development and manufacturing projects and mainstreaming of renewable energy in the overall energy security for India, we believe that there will be adequate interest for investments to meet the targets.
Further, while the domestic investors are enthused about the way Renewable Energy sector is shaping up domestically, with over 200 GW of Green Energy Commitments received during RE-INVEST 2015, offshore investors are more likely to lead the way in investments both in project development and manufacturing as world renewable energy markets mature overseas.