First climate development financial institution runs into FinMin roadblock

Ministry ready to offer provisions to ease global climate funding

The plan to have the country’s first climate-development financial institution (DFI) has hit a regulatory hurdle with the Union Ministry of Finance turning down the proposal of power sector lenders PFC Ltd and REC Ltd to be designated as such.

The finance ministry, however, has told the two non-banking financial companies (NBFCs) various dispensations under the existing DFI regime can be made available to them for routing global climate funding.

Last year, in September, the Union power ministry had pitched the proposals of PFC (earlier Power Finance Corporation) and REC (earlier Rural Electrification Corporation) to get DFI status, this paper had reported.

This would have made PFC and REC the country’s first such institutions to steer global climate funding and net zero investment in the country.

However, sources in the government and the two NBFCs said the proposal had been declined by the finance ministry on the grounds that there was a DFI in the country for funding infrastructure projects in the country.

“The ministry is of the view that a DFI tag is not necessary for what PFC and REC have proposed to achieve through it. Also, infrastructure lending already has a DFI and energy transition will effectively form a part of it,” said a senior official.

Under the National Bank for Financing Infrastructure and Development (NBFID) Act, 2021, DFI status helps a financial institution (FI) to access foreign funding, grants, and loans easily and in amounts higher than what a public financial institution (PFI), such as PFC and REC, can do.

Executives of PFC and REC said while the DFI tag would not be given, the finance ministry had assured them the various provisions and benefits of the NBFID could be given to them on a case-to-case basis.

“It has also been proposed that the two NBFCs should establish a subsidiary in Gujarat International Finance Tec-City, or GIFT City, to avail of several benefits that India’s first international financial services centre offers,” said a source privy to the discussion.

“There is a view that borrowing and lending in foreign currencies will form a major chunk of the green ambitions of PFC and REC. Hence a presence in GIFT City takes care of this need,” said an executive. PFC and REC have initiated the process of forming a subsidiary in GIFT City. In a recent post-results press conference, Vivek Kumar Dewangan, chairman and managing director, REC, said: “To facilitate dollar lending to new green energy sectors, especially those looking to export, REC is setting up a subsidiary in GIFT City.”

Additionally, the two companies are now eyeing becoming “nodal agencies” for climate and energy-transition funding in the country. Senior executives said no regulatory or legal steps would be required for it and the Union power ministry could designate them to be so.

Conventional power generation accounts for 47 per cent of PFC’s loan portfolio and that has declined steadily over the years. Its exposure to green energy has increased but remains at 10 per cent of its portfolio. Senior executives at PFC said the company wanted to place itself as the “net zero agency” of the country. It also recently amended its Memorandum of Association (MoA) so that it can lend to several non-power sectors as well.

In the case of REC, Dewangan recently said it was looking to decarbonise its lending portfolio with more exposure to green energy sectors.

REC is looking to increase the share of green-energy sectors in its loan portfolio to 30 per cent by 2030 from 6.8 per cent as of now. This would include the existing green-energy projects and newer sectors such as green hydrogen and green ammonia, Dewangan said.

According to industry estimates, India would require $10 trillion to meet its net zero target. Several multilateral, development and sovereign financing agencies have been pointing out the lack of a nodal agency in India for steering climate loans and aid.

The tag hurdle 
 

• Last year PFC, REC proposed to be India’s first climate-development financial institution (DFI)
• Move would have made them (PFC & REC) dedicated agencies to fund climate and energy transition
• FinMin has, however, declined the request, arguing that the DFI for infrastructure already exists under the NBFID Act, 2021 
• FinMin has offered to provide DFI-level provisions to PFC and REC
• PFC and REC are now proposing to the power ministry to be the dedicated agencies for climate and energy transition funding