Key Economic Update: India's Net-Zero Goal and Co-lending Challenges

India's First Step to Meet 2070 Net-Zero Goal

After three years since India announced its goal to become a net-zero economy by 2070, the planning process to achieve this goal has begun. The NITI Aayog has created special committees involving multiple sectors to develop a transition plan. In 2021, India joined a group of countries that set a target year for reaching net-zero carbon emissions. At COP26 in Glasgow, Prime Minister Narendra Modi presented a five-part ‘Panchamitra’ climate action plan for India and committed to achieving net-zero emissions by 2070, joining countries like the US, the UK, and China.

The NITI Aayog has initiated the policy framework to steer India towards its aim of achieving a net-zero economy by 2070, marking a significant step three years after the commitment was made. To facilitate this transition, dedicated multi-sectoral committees have been established under the guidance of NITI Aayog to develop a comprehensive transition plan. These committees are tasked with identifying key issues, charting pathways, and proposing policy actions across various dimensions of climate change.

Dr. Jitendra Singh stated that India is set to achieve its short-term and long-term targets under the Panchamrit action plan, such as reaching a non-fossil fuel energy capacity of 500 GW by 2030, fulfilling at least half of its energy requirements via renewable energy by 2030, and reducing CO2 emissions by 1 billion tons by 2030.

India has set a goal to achieve net-zero carbon emissions by 2070. To accomplish this, the NITI Aayog has formed special committees involving various sectors to create a transition plan. Key targets include reaching 500 GW of non-fossil fuel energy capacity by 2030, fulfilling half of the energy needs through renewables by 2030, and reducing CO2 emissions by 1 billion tons by 2030. This marks a significant step in India's commitment to combat climate change and transition towards a sustainable future.

Tech to Risk Perception: Co-lending Model Battles Multiple Issues

The bank-NBFC co-lending model, introduced by the Reserve Bank of India in 2018, hasn't fully taken off yet. Industry players attribute this to several issues, such as a lack of technological integration, different risk perceptions between banks and NBFCs, and larger NBFCs being slow to adopt the model. Co-lending involves multiple lending partners working together to provide loans to important sectors like MSMEs (micro, small, and medium enterprises).

The Finance Ministry’s Department of Financial Services (DFSS) recently set up a committee of banks and NBFCs, led by the State Bank of India (SBI), to address issues related to co-lending, credit to MSMEs, and curbing accelerated growth in certain consumer loans.

“Technological concerns remain in co-lending because India does not have too many tech players who can integrate with banks and NBFCs,” said Kishore Lodha, chief financial officer of U GRO Capital, a fintech. “There is also a difference between risk perceptions among the lending partners. There are multiple issues. When we undertake co-lending, we explain the risks along with guidance on what would be the NPA, credit cost, and ask our partners to price risk accordingly,” Lodha added, referring to non-performing assets.

There are typically two kinds of co-lending: CLM 1 and CLM 2. In CLM 1, the total amount is paid by both lenders simultaneously and therefore requires an integrated system between the partners for real-time processing and completion of Know Your Customer (KYC). In CLM 2, which is predominantly used, an NBFC joins hands with a larger peer or bank. The loan originates in partnership with the larger partner.

“Tech integration between both players takes time, energy, and effort. So, very limited transactions have strictly happened using the CLM 1 method,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings.

Fewer New Members Join EPFO in 2023-2024

The number of new members joining EPFO, a retirement fund organization, decreased by 4% in 2023-24 compared to the previous year. According to a report, EPFO added 10.9 million new members in 2023-24, which is lower than the 11.5 million new members added in 2022-23.

Retirement fund body EPFO's gross new subscribers' addition declined by over 4 percent to 10.9 million in 2023-24 compared to a year ago, as per a report by the Ministry of Statistics & Programme Implementation (MoSPI).

According to the report 'Payroll Reporting in India: An Employment Perspective January to April, 2024', the Employees' Provident Fund Organisation (EPFO) recorded a gross addition of 10,993,119 new members in 2023-24 compared to 11,498,453 in 2022-23.

The gross addition of new members was affected due to the pandemic, declining from 11,040,683 in 2019-20 to 8,548,898 in 2020-21. It bounced back to 10,865,063 in 2021-22.

The Centre as well as states had imposed lockdown restrictions in 2020 and 2021 to curb the spread of the deadly coronavirus in the country, which had hit economic activities as well as employment.

The data shows that in the last five fiscal years till 2023-24, the gross new members' addition by EPFO had not recovered to the pre-COVID level of 2018-19. The gross addition of new members was 13,944,349 in 2018-19.

Since April 2018, the ministry has been bringing out employment-related statistics in the formal sector covering the period from September 2017 onwards, using information on the number of subscribers who have joined three major schemes: the Employees' Provident Fund (EPF), Employees' State Insurance (ESI), and National Pension Scheme (NPS).