Private Credit As Catalyst For India’s Climate Finance

India finds itself at a key turning point in its shift to green energy. Its renewable energy capacity has crossed 200 GW, moving closer to the ambitious goal of 500 GW of non-fossil fuel capacity by 2030. Yet, despite this quick uptake, money flowing into India's renewable sector remains relatively low. The Finance Ministry's recent report on climate funding points out a growing puzzle: India leads in adoption but falls behind in getting the money it needs to keep up and grow its green plans.

The Gap in Climate Funding and Its Hurdles
In 2023, India pulled in US$12.4 billion for renewable projects, which is significantly less than regions with lower clean energy penetration. As per the Asian Development Bank, India needs US$250 billion in yearly climate investments to reach its 2030 targets. The financing gap is most pronounced in emerging green sectors like transport and energy saving, where regular banks still hold back. MNCs are already incorporating renewables and clean mobility solutions into their business plans basis the Environmental, Social, and Governance (ESG) mandates and economic benefits. However, small and medium-sized businesses, which are key to India's industry and transport, are falling behind. They lack access to cheap and flexible loans. Often, regular banks follow stringent rules or shy away in funding them due to higher perceived risk in their rapidly evolving projects.

How Private Credit is Changing in Climate Finance
In the past, private equity was the main source of climate funding. But now, there's more demand for private credit investments. This is because they offer custom funding options and fill a gap in transition finance. As per a report by the United Nations, credit is expected to contribute a major part of the capital to fund decarbonization, accounting for ~60% of total investment in the space. 

Private credit deals in India have grown by over 20% in value in FY 2024–25, while investment in climate financing has stayed flat or seen small increases, falling way behind the yearly US$170 billion needed to reach the country's climate targets. This is where private credit can make a big difference. 

Private credit stands out because it can adjust to the special needs of new green sectors. In contrast to other lending companies, private credit companies provide flexible funding, creating debt with longer payback times, custom schedules, and new types of collateral. This helps a lot for businesses with prolonged incubation or irregular cash flows, particularly in clean energy or electric vehicle projects.

The Road Ahead
In the future, the role of private credit will continue to increase. For India to openly tap the potential of its clean energy sectors, a focused strategy is essential to cultivate an environment where private credit can flourish. This involves creating crystal clear criteria and classifications for ESG investments, encouraging partnerships between the public and private sectors, and increasing access to international climate funding. To attract more private funding and reduce investment risks for smaller players, it is essential to step up innovative financial instruments like green bonds, blended finance, and sustainability-linked loans.

As India inches towards its net-zero goals, private credit will be important in assuring that all sectors and industries are included. The conclusion is obvious: applying private credit is not just an option but an important strategy for minimising the climate financing gap and building an all-encompassing, ecological future for everyone.

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