Green Securitisation – A Path to ‘Green Inclusion’
Green securitisation is a process where assets such as loans made for solar projects, wind projects, EV cars, buses, and two and three-wheelers can be pooled in the form of green collateral. The receivable of the green collateral is then assigned to an SPV.
February 25, 2025. By News Bureau
Securitisation volumes are expected to cross INR 2 Trillion in FY 2024-25. In FY 2023-24, securitisation volumes reached INR 1.9 trillion. If you look at the composition of securitisation volumes, you will see that vehicle loan securitisation (43 percent) microfinance (16 percent) and small business loans (11 percent) form the majority of the issuances. On further analysing the underlying assets, we will notice that a vast majority of the underlying loans are provided to first-time vehicle owners, small fleet operators, small business owners, and women entrepreneurs. Till a few years back priority sector assets (PSL) dominated the securitisation markets. It is only over the last few years that the non–PSL assets have also gained favour as an asset class. So clearly, we can see that securitisation has played a role in deepening financial inclusion in the country.
What is securitisation? To put it simply, it is a process where homogeneous or similar assets like housing loans, commercial and passenger vehicle loans, microfinance loans, and other consumer loans are pooled and repackaged as interest-bearing securities. These securities can take the form of bonds or Pass-Through Certificates (PTCs).
Taking a cue from the above, green securitisation is where assets such as loans made for solar projects, wind projects, EV cars, buses, and two and three-wheelers can be pooled in the form of green collateral. The receivable of the green collateral is then assigned to an SPV.
Now it is time for ‘Green Inclusion’ to be fuelled by ‘Green Securitisation’.
The asset securitisation described above has the advantages of activating stock assets, creating opportunities for credit enhancement, and isolating risk and therefore, can be a potential financing mode for renewable energy enterprises.
Renewable energy projects by nature lead to the generation of regular cash flows which lend themselves to securitisation due to their stable income profile. As a result, banks or other institutions can finance projects in their first few years of operation when they have to take into account higher risks such as construction risk. Then, after at least one year’s operation, when the cash flows have stabilised, they can be securitised as proven and mature investments for institutional investors.
In the above model, a fund or Special Purpose Vehicle (SPV) would purchase portfolios of debt secured against renewable energy projects from banks or other financiers. The SPV would finance this purchase by selling bonds/PTCs into the market. The bonds/PTCs could be in the form of 5 to 15-year amortising bonds which are suitable for annuities. For such a model to be successful, critical mass is important. The fund must be of sufficient in size that its bonds are liquid in the market and can be subsequently traded by bond investors. As illustrated above, this model has already been used successfully for asset classes like vehicle loans and small business loans.
The advantage of the securitisation structure is that retail or institutional investors with a lower risk appetite can participate in the debt of pure renewable energy assets.
This structure is designed to transfer to long-term investors the lowest-risk part of the capital structure of renewable energy assets that have a track record. This also enables banks to recycle their capital and lend new riskier development finance to facilitate the building of new renewable energy assets, and so facilitate the long-term funding requirements of renewable energy asset owners.
Green securitisations can also be one of the most effective potential means to promote small-scale developments in renewable energy projects such as green mortgages, electric vehicle loans, residential rooftop solar energy, and small SME loans for energy storage projects.
As we know, India has an ambitious target of achieving 500 GW of renewable power capacity by 2030. Solar power is central to this plan.
Securitisation and aggregation models can enable MSMEs to adopt RE solutions to make themselves more sustainable and competitive.
This kind of aggregation of smaller-scale projects needs to be promoted in the Indian context so that it can generate an attractive structure and size for institutional investors, mobilising finance that would otherwise not be available for sustainable purposes. Such aggregation is necessary for the sustainable development of a securitisation mechanism for green loans.
India Rating sees the Indian green securitisation opportunity being to the tune of INR 300 billion by 2030 just for electric vehicle loans and says that it can be an important tool for bridging the deficit in financing required for India to achieve its net zero targets.
To promote the growth of green securitisation, there are certain measures that stakeholders would need to deliberate and implement such as standardisation of contracts and other documentation and installation practices. Also, there would be a need to improve publicly available data addressing renewable energy risks, and lastly, inform investors on the valuation of renewable energy generation assets.
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