By Tanvi Shah, Director and Head, CareEdge Advisory & Research
India’s power sector is undergoing a major shift, fuelled by the growing energy demand, increasing focus on clean energy and expanding grid infrastructure. This is creating significant investment and financing needs across power generation, storage and transmission. Further, distribution utilities are tasked with providing affordable and reliable electricity while also facilitating the integration of large-scale renewable energy.
This article dives into the credit growth trends and opportunities for power sector financiers, as well as performance trends and outlook. The analysis is based on the aggregate performance of the top five power-financing non-banking financial companies (NBFCs), which account for almost 25 per cent of the total NBFC lending in India.
Power sector: Riding on the capex cycle for green power
India stands out as one of the fastest growing economies, with a real GDP growth rate of 9.2 per cent in FY 2024, the highest in a decade, barring the post-pandemic period. India is expected to grow at more than 6.4 per cent during calendar years 2025-30.
The power sector played a key role in driving infrastructure and economic development, supported by the government, private players and institutional investors. India achieved the milestone of 50 per cent of installed non-fossil fuel capacity by June 2025, five years ahead of schedule, supported by enabling policy initiatives such as production-linked incentives, sovereign green bonds and interstate transmission system charge waivers.
India is the world’s third largest producer and second largest user of energy. The country’s installed power capacity has increased from 371.3 GW in FY 2020 to 475 GW in FY 2025, at a compound annual growth rate (CAGR) of 5 per cent over the past five years. While conventional sources currently account for 54 per cent of installed capacity, with the government’s ambitious targets, green energy installed capacity (including hydro, which currently accounts for 46 per cent) is expected to increase sharply in the medium term.
India’s transition towards green energy is fuelled by several key factors, including declining capital costs, increasing investor interest in green financing, rich resource potential, improved efficiency of renewable technologies, and favourable government policies such as the National Solar Mission, Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan and green energy corridors.
With India’s target of net-zero emissions by 2070, the key focus areas include domestic manufacturing of renewable energy components across the value chain, as well as green energy corridors, green hydrogen, battery energy storage systems (BESSs), pumped hydro and rooftop solar projects.
The government has implemented several policies and incentives to promote electric vehicle (EV) adoption, setting the target to achieve 100 per cent electric mobility for public transport and 40 per cent for private vehicles by 2030. With the growing focus on e-mobility, increasing disposable income, growing urbanisation and digitisation, railway electrification, and a surge in EV demand, peak power demand is expected to rise to 335 GW by 2030. In order to meet the investment needs of the power sector and attract private sector financing as well as investor interest, the government has rolled out initiatives such as:
- The Deendayal Upadhyay Gram Jyoti Yojana, the Pradhan Mantri Sahaj Bijli Har Ghar Yojana and the Integrated Power Development Scheme to strengthen the power distribution system.
- Allowing 100 per cent foreign direct investment in power generation projects through the automatic route.
- Encouraging private sector participation in generation and transmission.
NBFCs, with their improved asset quality and sustained profitability, are wellpositioned to finance the power sector’s investment requirement. These NBFCs have an edge with respect to their credit appraisal expertise and credit risk monitoring systems and processes.
Financing trends – Credit of power-financing NBFCs to clock 15-20 per cent CAGR till FY 2030
Power sector-financing NBFCs primarily focus on financing power generation, transmission, distribution and related activities. These NBFCs are key financing vehicles that provide funds for various power projects, including thermal power plants, transmission lines, and renewable energy projects such as solar power plants, wind farms, hydroelectric projects, bioenergy projects and clean energy generation. Banks’ credit towards the power sector accounted for only 17.3 per cent at Rs 6.8 billion of their total credit towards industries, as of March 31, 2025.
Over the years, power-financing NBFCs have seen significant traction supported by growing power demand. As of FY 2025, the outstanding credit of the top five power-financing NBFCs exceeded Rs 12 billion, registering a CAGR of about 11 per cent between FY 2020 and FY 2025. The loan book of these NBFCs comprises financing for power generation (33 per cent), power transmission and distribution (40 per cent), and renewable energy projects (18 per cent).
The loan book of the top five power-financing NBFCs towards the renewable sector exceeded Rs 2 billion, indicating a CAGR of 19 per cent between FY 2020 and FY 2025. In line with India’s ambitious renewable energy goals, these NBFCs are expected to increase their focus towards the renewable sector. Banks and NBFCs have committed to financing loans worth Rs 25 billion to facilitate the shift to renewable energy by 2030.
Financing support from these NBFCS will be crucial, not just for power generation but also for various components of the value chain. This encompasses green energy equipment such as solar panels, wind turbines and hydrogen electrolysers, as well as EV charging stations, BESSs, green hydrogen production, and technologies for smart grids and smart metering.
Renewable energy – attracting funding from power-financing NBFCs, private developers and foreign investors
The target capacity additions require significant capex over the next five years. Around three-fourths of this is expected to be allocated towards renewable power and associated infrastructure development, and the remaining one-fourth towards conventional energy. Generally, this fund requirement is contributed by 25 per cent equity (private developers) and 75 per cent debt (banks and NBFCs).
The government’s strong commitment to the renewable energy sector, along with its ambitious targets and the ever-increasing demand for power, is drawing global investors to India. The existence of 25-year government-backed power purchase agreements (PPAs) makes it even more appealing. Equity financing is often secured through initial public offerings, follow-on issues, convertible debentures and monetisation of operational assets. Private developers also get access to long-term capital by churning their operational assets through infrastructure investment trusts and other platforms, thereby attracting private equity capital, institutional investors and foreign investors into the green energy sector.
The sources of debt funding include power-financing NBFCs, banks, external commercial borrowing and foreign currency loans from multilateral institutions. Other sources include financing through various schemes such as the Green Climate Fund and green bonds. Ghaziabad Nagar Nigam, a civic body in Uttar Pradesh, is the first Indian local government to have issued a green bond. Sovereign green bonds are a game changer, though secondary market liquidity is yet to be established.
While the renewable sector has been significantly contributing towards the credit growth of power-financing NBFCs over the past few years, almost one-third of the credit outstanding is towards discoms.
Discoms account for one-third of the credit exposure of power-financing NBFCs
Government-backed power-financing NBFCs finance state-run discoms, which account for one-third of their total credit outstanding as on March 31, 2025. Discoms have been witnessing structural inefficiencies, ranging from poor operational and collection efficiencies, aggregate technical and commercial (AT&C) losses and billing leakages to delays in subsidy disbursals. However, there are encouraging signs of turnaround in discom performance (as per the 13th Annual Integrated Rating and Ranking of Power Distribution Utilities). The average cost of supply-average revenue realised gap narrowed to Re 0.39 per kWh in FY 2024 from Re 0.59 per kWh in FY 2023. The AT&C loss of 40 utilities declined during this period, with 32 discoms recording losses under 15 per cent. Digital and smart metering adoption, coupled with operational reforms under the Revamped Distribution Sector Scheme (RDSS), are slowly enhancing discom accountability.
These improvements are driven by government initiatives such as the Ujwal Discom Assurance Yojana, RDSS and smart metering programmes. Top-performing discoms have adopted best practices, such as digital payment tools such as UPI integration, grid modernisation, renewable energy integration via rooftop solar programmes and microgrids for rural electrification.
Still, the challenges surrounding discoms’ credit performance persist. Financing institutions need to remain cautious due to legacy issues, and the long-term solution lies in governance reforms and market-based incentives for improving operational efficiency.
Asset quality in the power sector
Power-financing NBFCs have made impressive strides in asset quality improvement, with gross non-performing assets declining from 7.3 per cent in FY 2020 to 1.6 per cent in FY 2025, and return on assets improving from 1.5 per cent in FY 2020 to 2.7 per cent in FY 2025. This positive trend has been driven by effective asset restructuring, successful recoveries, strategic write-offs, fewer slippages and increased provisioning. However, asset quality could be affected by discoms’ performance and financial health, project delays, fuel supply problems and other risks specific to the sector.
Conclusion
India’s energy transition is advancing at an unprecedented pace, underpinned by ambitious renewable targets and growing electrification needs. This transition also demands unprecedented levels of investment across the entire value chain, from generation and transmission to storage and distribution. Strengthening the financial ecosystem and focused support from banks and NBFCs will be key to sustaining the momentum. If supported by continuous reforms and strategic investments, India’s power sector is well positioned to emerge as a model for other economies pursuing a green energy transition. Success in financing the energy transition will ensure not only energy security but also the country’s economic competitiveness in the decades to come.