State-owned NBFCs looking to tap into India's first sovereign green bonds

Leading non-banking financial companies (NBFCs) are preparing to place bets on the country’s first sovereign green bond issuance, which was announced in the Union Budget 2022.

The power sector’s state-owned NBFCs -- Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) -- have approached the finance ministry, requesting a nod to anchor the maiden green bond issuance by the Indian government. Senior officials said the two NBFCs are comfortable with both domestic and international bond issuances, as they have experience in the same.

“PFC and REC have pitched for a role in the sovereign green bond issuance. The two NBFCs can act as a channel for funds from the international bond market, as well as domestic. At the same time, the two can also help utilise the fund as it is expected the fund would be utilised in decarbonisation projects, which is typically in the energy and allied sectors that PFC and REC currently operate,” said a senior official in the know of the discussion.

The finance ministry is yet to confirm their participation and draw broad contours of the bond issuance.

Business Standard recently reported the power ministry has proposed that PFC get development financial institution (DFI) status to steer global climate funding and net zero investment in the country. In a public statement, REC said it is being considered for the DFI status.

Another NBFC that is looking to tap into this green bond is Indian Railway Finance Corporation (IRFC), the financing arm under the Railways ministry. Senior officials said IRFC is looking to bet on green bonds this fiscal year, both domestically and internationally, and sovereign green bond issue is on their agenda.

The financial institution, which is already certified to issue green bonds internationally, is waiting for the Centre to make its first green bond offering to see the domestic market’s appetite. “Once the fine print of the framework is ready, IRFC can get into that segment,” the official said.

IRFC has been scouting the international market to raise low-cost funds for sustainable railway projects, such as the electrification of tracks, procurement of electric locomotives, and diversification of freight basket. As part of India’s declared nationally determined contributions or climate goals to the UNFCC, the national transporter will be a net zero carbon entity by 2030.

The company has been mandated to raise Rs 66,500 crore for the Railways this year. It has already raised $1.1 billion (Rs 8,500 crore) through syndicated offshore yen loans for green projects.

In her Union Budget speech, Finance Minister Nirmala Sitharaman said, in order to tap the interest of investors in the growing green energy space, sovereign green bonds will be issued for mobilising resources for green infrastructure. These would be part of the government's overall market borrowings in 2022-23. The proceeds from the issuance, however, will be deployed in public sector projects which help reduce the carbon intensity of the economy.

The Centre is reportedly looking to first test the waters for green bonds with small issuances. According to the borrowing plan for the second half of FY23, the finance ministry has said it will issue Rs 16,000 crore of sovereign green bonds by March 2023. The Centre’s overall market borrowing for the current fiscal year has been scheduled at Rs 14.3 trillion, of which close to Rs 6 trillion is left for the next six months.