In a significant shift towards sustainable financing, Indian banks are redirecting their focus from non-renewable energy projects to renewable sources, as indicated by recent data from the Reserve Bank of India (RBI).
According to the latest sectoral deployment of credit data released by the RBI, credit to petroleum, coal products, and nuclear fuels has seen a decline, falling by 13% year-on-year (YoY) and 1% month-on-month (MoM) to Rs 1.31 trillion in January. Similarly, credit to mining and quarrying, including coal, dropped 7% YoY and 5% MoM to Rs 54,123 crore.
Contrastingly, credit to renewable energy sources is on the rise, with a 17% YoY and 11% MoM increase to Rs 5,404 crore in January, as per the RBI’s data.
‘As a lender, we have already started evaluating borrowers based on their ESG rating,’ stated State Bank of India Chairman Dinesh Kara. ‘Though it is not impacting our decision in terms of interest rates, we are sharing ESG ratings with borrowers to raise awareness of their standing.’
Kara also mentioned the bank’s requirement to report Scope 3 emissions to the Securities and Exchange Board of India, indicating a growing awareness in the ecosystem that could impact pricing in the future.
The draft standard disclosure framework on climate-related financial risks issued by the RBI has made lenders cautious about disbursing funds to carbon emission-heavy corporates. This framework, asking for feedback by April end, mandates banks to report governance, strategy, and risk management processes from FY26, and climate finance metrics and targets from FY28.
‘A shift is evident as lenders are now less interested in funding thermal plants due to higher carbon emissions,’ explained a senior private bank official. ‘Businesses, including major players like Adani and Ambani, are shifting focus to renewables from coal.’
Banks are moderating exposure to carbon-heavy entities to align with India’s zero carbon emission target by 2070. A public sector bank official emphasized the shift towards renewable funding, stating, ‘ESG is an area where all banks are actively working. The focus has majorly shifted to the renewable sector.’
Despite this shift, analysts note that the non-renewable power segment still dominates India’s overall power mix, accounting for 75% of power generation as of December. Thermal power generation is expected to continue playing a significant role, providing reliable support during peak demand periods.
SBI Caps’ report suggests a need for capital recycling from operational projects to fund new ones, with promising prospects seen in InvITs in the transmission sector. Energy companies are diversifying into non-fossil fuel sources, with the potential for equity listings and strategic partnerships in renewable arms to unlock value.
