India ranks third globally in terms of greenhouse-gas (GHG) emissions, with the country needing substantial investments to meet its goals under the Paris Agreement – to reduce GHG emissions by 2030. IFC estimates a total climate-smart investment opportunity of $3 trillion in India by 2030.
In the last week of July 2021, IFC and two investment funds managed by IFC Asset Management Co – IFC Financial Institutions Growth Fund, LP, and IFC Emerging Asia Fund, LP – made an equity investment for a 4.99 per cent stake in Federal Bank Limited (FBL). The investment will also support FBL’s commitment to environmental, social and governance (ESG) standards, while strengthening its Tier I capital adequacy ratio (CAR) and expanding its micro, small and medium sized enterprises (MSME) and climate finance portfolios, which are key for growth opportunities, as the country recovers from the pandemic.
IFC Asset Management Co (AMC), a division of IFC, mobilises and manages capital to invest in businesses in developing and frontier markets. Created in 2009, AMC provides leading institutional investors with unique access to IFC’s emerging markets investment pipeline and investment expertise, while providing positive development impact in the countries in which it invests. Investors in AMC-managed funds include sovereign wealth funds, pension funds and development-finance institutions. It has raised over $10 billion across 13 investment funds covering equity, debt, and fund of-funds products.
Capital infusion
“Increased financing for climate friendly projects, as well as more financing for small businesses to help accelerate India’s economic recovery from Covid-19, are expected in the wake of a $126 million (Rs916 crore) equity investment in FBL,” explains Shyam Srinivasan, MD & CEO, Federal Bank. “After the bank’s board approved issuance of shares to the IFC group to an extent of 4.99 per cent of the bank’s paid-up capital, IFC has become a shareholder of the bank. The addition of this marquee name to the list of our prominent shareholders reinforces the trust and confidence reposed by the IFC group on the bank and its management. The infusion of quality capital further strengthens Tier 1 and overall capital adequacy ratio (CAR) of the bank.” Federal Bank, a private sector bank with a network of 1,289 banking outlets and 1,957 ATMs spread across the country, had a total business mix (deposits plus advances) of Rs3.05 lakh crore as on March 2021. Its CAR, computed as per Basel III guidelines, stood at 14.62 per cent as on March 2021.
This move is in line with IFC’s strategy to support green growth by spurring investments to build back better and greener, seizing the opportunities to help India meet its climate goals and build a greener, resilient future
“The fresh equity investment is expected to see Federal Bank grow and strengthen its ESG portfolio, with increased green portfolio financing for projects including energy efficiency, renewable energy, climate smart agriculture, green buildings, and waste management,” adds Srinivasan.
“This move is in line with IFC’s strategy to support green growth by spurring investments to build back better and greener, seizing the opportunities to help India meet its climate goals and build a greener, resilient future,” explains Roshika Singh, acting country manager, IFC, India, adding: “The investment is also expected to create tens of thousands of jobs, with micro, small and medium sized enterprises gaining access to much needed financing, which will also help ensure an inclusive recovery.”
India’s MSMEs have faced increasing difficulty gaining access to the financing they need, even before the impacts of the pandemic. Critical for the country’s development, about 63 million MSMEs typically contribute nearly 30 per cent to GDP, but about 11 million MSMEs remain fully or partially excluded from India’s formal financial system, with an estimated financing gap of some $400 billion. The Covid-19 pandemic has further squeezed the availability of funding for MSMEs. In addition, the investment also marks IFC’s first venture in India aligned to the greening equity approach, which will enable FBL – an IFC partner for over a decade – to reduce its exposure to coal and increase its climate lending.
With Federal Bank’s focus on ESG, IFC will also consult with the bank on developing a new Environmental & Social Management System (ESMS) that will be applied to its entire portfolio. To further strengthen FBL’s environmental and social sustainability (E&S) capacity, IFC will also implement an E&S technical advisory program.
Also, under the World Bank group (WBG) Climate Change Action plan, IFC is putting climate action at the heart of its development work. IFC is working to align investments with the goals of the Paris Agreement, intensifying support to help clients decarbonise and deploying standards and tools to catalyse private sector financing for climate.