Why Budget’s Capital Market Push Matters for RE financing

The 2025–26 Union Budget highlighted a series of measures to strengthen India’s domestic corporate bond market, including the introduction of a market-making framework and new derivative instruments. This is particularly relevant for India’s power sector. With significant expansion planned across both thermal and renewable energy to meet India’s growing electricity demand, the availability of a well-functioning capital market will be critical to finance this growth.

Estimated Investment Requirements

As per the latest information, the current planned capacity of thermal energy among key listed power companies stands at 58.2GW. A recent report by the Central Electricity Authority (CEA) identifies another 2.9GW for the central sector and 11.5GW for the state sector pipeline thermal capacity till 2030. In total, the current thermal capacity (planned and in the pipeline) adds up to at least 70.6GW.

The current planned and pipeline renewable energy capacity across listed power sector companies is 117.4GW. Based on CEA estimates of average capital costs of thermal and renewable assets, the planned investment in new power generation assets over the next few years is likely to exceed ₹15trn ($172bn).

Role of Public financing

Much of the funding for power projects flows from domestic savings and investments, channelled via the banking sector and capital markets respectively. For example, Adani Power, the largest private thermal power producer, has a current long-term debt of over ₹350bn ($3.9bn) from domestic banking institutions, and plans to issue Non-Convertible Debentures (NCDs) worth ₹110bn ($1.2bn). The green energy arm of the Adani Group, Adani Green Energy, has 65% of its existing long-term debt stemming from domestic banking institutions.

Public sector power companies primarily borrow from public financial institutions or tap into the domestic bond market. NTPC has current outstanding bonds worth ₹500bn ($5.6bn) in the domestic capital market and long-term bank debt of over ₹700bn ($7.8bn). State governments issue State Development Loans, alongside borrowings from banking institutions, to finance thermal projects.

Increasing Stress on Public Banking Institutions

Government-owned non-banking financial companies (NBFCs) are the largest public financiers of the power sector, led by the PFC Group with a power portfolio of INR9 trillion ($100bn). Apart from NBFCs, Indian banks lent ₹1,374bn ($15.3bn) for coal projects between 2016 and 2023, of which public sector banks accounted for 75.6% of total bank lending. Over time, the State Bank of India has emerged as the largest power sector lender.

High exposure to the power sector, given its track record of project commissioning delays and the banking sector’s past experience with significant non-performing assets, represents a notable risk for banks. In June 2025, the Reserve Bank of India (RBI) issued guidelines for lenders to set aside 1% of the loan value for under-construction infrastructure projects to cover potential losses, known as asset provisioning requirement.

As India expands its power generation capacity, these risks are expected to grow. The continued reliance on domestic banks and NBFCs will further strain balance sheets, given regulatory exposure limits and prudential constraints.

Need to Tap Domestic and Global Institutional Capital

As global financial institutions move away from financing fossil fuel assets due to climate-related financial risks, thermal projects are likely to remain reliant on domestic capital. This underscores the importance of enabling renewable energy projects to access global capital markets to ease pressure on domestic banks.

Refinancing operational renewable energy assets through domestic and international bond markets, especially green bonds, offers a viable solution. Such assets have lower risk profiles, stable revenues under power purchase agreements, and limited operating costs. Despite having the world’s second-largest renewable energy capacity, India ranks 18th globally in green debt market size, signalling potential for expansion.

Infrastructure Debt Funds and Infrastructure Investment Trusts also provide refinancing and capital recycling opportunities. However, despite the RBI issuing revised guidelines for IDFs in 2023, the uptake of IDFs remains low due to regulatory challenges. The InvIT market also remains small despite clear potential to attract long-term domestic and foreign institutional capital.

Need for Diversified Financing

In attempting to cater to the growing demand for financing in the power sector, while minimising sector specific risk, India’s banks face a difficult situation. This requires a two-step solution: first, deepening the domestic capital market; and second, tapping global debt and capital markets for renewable energy project financing. The budget’s emphasis on strengthening the corporate bond market provides an important enabling signal in this direction.

(Shantanu Srivastava is Research Lead, Sustainable Finance & Climate Risk, South Asia, while Meenakshi Vishwanathan is Energy Finance Intern at IEEFA. The views expressed are personal.)