NBFCs have steadily carved out their space in climate finance in the past 3–4 years, addressing unique segments of the climate financing universe

Byline: Avishek Gupta, MD & CEO, Caspian Debt

Non-Banking Financial Companies (NBFCs) have long been playing an important role in enabling financial inclusion in India. Their ability to identify niche markets and create specialized lending models that manage risk effectively is something that defines their success. For the sectors underserved by traditional banks, including the climate financing sector, NBFCs’ role is becoming increasingly crucial.

NBFCs have steadily carved out their space in climate finance in the past 3–4 years, addressing unique segments of the climate financing universe. From financing of early growth-stage climate technology companies to large-scale infrastructure projects, to electric vehicle financing, these institutions have slowly been deepening the foundation for India’s green transformation.

Pioneering lending to climate technology startups:
When it comes to providing working capital to climate-tech startups and SMEs, NBFCs have been early movers. Caspian Debt, for instance, has been a pioneer in supporting early-stage clean energy, energy efficient sustainable agriculture, and energy storage initiatives. This strategic financing has helped many companies evolve into bankable entities over time. Along with Caspian Debt, that started financing this space 8 years ago, several other NBFCs have built a motley portfolio.

Large Scale to Decentralised Project Finance:
NBFCs have also played a crucial role in funding large-scale solar infrastructure projects, enabling the rapid expansion of solar energy in India. Taking learnings from them, other specialised NBFCs have focused on financing smaller decentralized projects before diversifying into broader areas.

Unlocking Retail Financing for a Greener Future
Some NBFCs, with roots in MSME retail finance, have started adding new products by offering solar rooftop loans. Backed by specialized equity investors, these NBFCs are leveraging their retail lending experience and networks to accelerate the adoption of solar energy among SMEs and households.

The electric vehicle (EV) segment, however, stands out as the fastest-growing climate financing niche. Over the past few years, numerous specialised NBFCs have emerged to finance electric two- and three-wheelers, capitalizing on proven vehicle finance models. Government subsidies have further fueled demand, creating a virtuous cycle that drove initial growth in this sector.

The Road Ahead: Financing Resilience for Vulnerable Communities
Despite these strides, a pressing question remains: will financing reach those who are most vulnerable to climate change? At Caspian Debt, we envision a future where more capital flows to lower-income populations, including small and marginal farmers. By adopting climate-smart technologies, these communities can bolster their resilience against climate shocks.

Our partnerships with Sa-Dhan, Sustain Plus, and GIZ exemplify this vision. With them, we’re crafting dedicated funding lines and technical support to help retail financial institutions finance climate-smart products for underserved households and farmers. This collaboration aims to bridge the gap between innovation and inclusion.

The Future Role of NBFCs in Climate Financing

There are two major possibilities or areas for NBFCs to work towards:

Expanding Green Financing sectors: NBFCs focused on infrastructure may be in a position to broaden their portfolios to include distributed assets like EV charging stations. Simultaneously, retail NBFCs are likely to embrace a wider range of green equipment, such as energy-efficient appliances, making these technologies accessible to households.

The Resurgence of Leasing Models: Leasing, a proven model for financing capital-intensive assets like aircraft and oil rigs, could become a game-changer for green infrastructure. Although India’s leasing sector faltered in the early 2000s due to odd bankruptcies and regulatory challenges, it holds immense potential for revival. With the right policy support, leasing could become a cornerstone for financing green capital expenditures. Especially considering that climate resilient solutions are capital intensive.

A Greener and Climate Resilient Future
The journey of NBFCs in climate financing reflects both their innovative spirit and their ability to adapt to India’s evolving needs. As they continue to innovate, these institutions will undoubtedly play a transformative role in building a more sustainable and resilient future especially for the most vulnerable populations.