Does India need a Green Bank?

How much capital does India need to meet its net-zero targets by 2070? That’s a $170 billion question.

Today, despite the growing momentum on climate policy, the flow of capital for India’s green transition remains far below the country’s sizeable needs – falling short by a whopping 70 percent.

Could a dedicated public green bank be the answer? If this sounds familiar, it is. Around the world, governments have long turned to public financial institutions to correct credit market failures.

India itself has a legacy of creating state-backed lenders to direct capital toward strategic or underserved sectors. Take, for example, the National Bank for Agriculture and Rural Development (NABARD), established in 1982 as the apex development bank for sustainable agriculture and rural development, or the Small Industries Development Bank of India (SIDBI), set up in 1990 as the principal financial institution for the development of Micro, Small, and Medium Enterprises (MSMEs).

More recently, in 2021, India created the National Bank for Financing Infrastructure and Development (NaBFID) to tackle the challenges of financing India’s infrastructure. This experience offers timely lessons in designing a well-governed development finance institution that has climate finance as its defining purpose.

That said, the involvement of public financial institutions is not without complications. Recapitalizations, when they occur, including in India, are politically visible and fiscally burdensome.  This is in part because public lenders often operate with policy-driven mandates that expose them to higher credit risk and thinner margins, leaving their balance sheets vulnerable during downturns.

More subtly, their presence can displace private investment, particularly when mandates blur the line between complementing and competing with markets. But such pitfalls are not exclusive to the public sector. There is no shortage of examples where important private banks have mispriced risk, overstretched their balance sheets, and ultimately relied on public intervention.

What is needed for the establishment of a successful financial institution?

Successful public financial institutions, in India and elsewhere, tend to rest on two pillars. The first is governance. This includes boards composed of independent, competent members with diverse expertise. Attracting top talent—both at the board and management levels—needs market-based remuneration, however politically sensitive that may be. It also demands a strong, well-resourced risk management function with clear operational independence.

The second pillar is mandate. The institution’s role should be explicitly framed as one of creating markets, both on mitigation and adaptation, and crowding in private finance, not just substituting for it. To be more precise, the institution should position itself as an incubator of green start-ups, a lab for emerging green business models, and an explorer of innovative blended finance solutions.

One of the board’s mandates would be to regularly assess whether a maturing market should be handed over to private actors, allowing the institution to pivot to the next frontier. Since other finance institutions —such as SIDBI, NABARD, NaBFID, and the National Housing Bank (NHB) — are increasingly engaged in green finance, the mandate should also make clear that the new green bank’s role is to complement, not compete with, these entities.

Other instruments required to channel capital at speed and scale

But will that be enough? Unlikely. The scale and complexity of India’s green financing gap suggests that unless the institution is endowed with $40–50 billion in capital—enough to sustain the credit flows of $120 billion needed every year—India will still struggle to move the needle. The government will, therefore, need to mobilize other levers to channel capital at the speed and scale required. Among the range of policy tools available, four stand out for their potential to drive meaningful change at scale. They mix de-risking techniques with a “carrot and stick” regulatory approach.

First, mobilizing domestic capital markets. The green bond framework issued by the Indian capital market authority, the Securities and Exchange Board of India (SEBI), was a commendable step. But deeper participation from institutional investors remains elusive. In a recent panel discussion, the World Bank floated the idea of a "green priority sector" framework tailored for institutional investors. This is akin to the Priority Sector Lending (PSL) obligations that guide bank credit. Could pension and insurance funds, flush with Assets Under Management (approximately $480 billion), be gradually nudged to hold a minimum allocation of green bonds? Of course, such a shift would require a corresponding effort on the supply side. Many prospective issuers still struggle to reach the AA threshold that institutional investors typically demand in India. Here, targeted credit enhancement mechanisms—why not provided by the future green public institution? —could play a catalytic role.

The second avenue worth exploring is the scaling up—and greening—of India’s existing partial credit guarantee schemes, particularly for MSMEs. At present, active guarantee schemes represent just 1.4 percent of GDP. By international standards, that’s only half the level India could potentially reach. A more ambitious use of guarantees could de-risk private lending to green projects and unlock capital at the base of the pyramid.

A third lever lies in reorienting the country’s large development finance institutions—NABARD, SIDBI, NaBFID, and NHB—by tying a portion of their mandates to measurable green Key Performance Indicators (KPI). Such KPIs could incentivize them to scale up green credit while crowding in private banks and Non-Banking Financial Companies (NBFCs).

A final—and often overlooked—area for reform is the legal framework governing Corporate Social Responsibility (CSR). Though aimed at public good, CSR spending is tightly ringfenced by compliance rules that prevent its use alongside commercial capital in blended finance instruments. This limits innovation at a time when India urgently needs catalytic funding to de-risk green investments. Unlocking CSR funds for green blended finance would require not just regulatory reform, but a shift in mindset—viewing corporates as partners for sustainable development, not just donors.

Ultimately, India’s green transition cannot rely on a single instrument. Closing the climate finance gap will require the Government of India to activate both institutional and regulatory strategies in parallel. A dedicated green bank, if well-governed and adequately capitalized, can play a catalytic role in incubating markets and de-risking early-stage investments. But its impact will be magnified only if paired with bold regulatory measures, (such as green capital allocation mandates, expanded guarantee schemes, and reforms to CSR rules) that shift incentives across the financial system. It is the interplay of these levers, not any one intervention alone, that will determine India’s ability to mobilize capital at the scale, speed, and sophistication that the green transition demands.