Mumbai: Axis Bank will raise at least $500 million through green bonds from the international market, the first such issue for the private lender, according to two bankers.

India’s third largest private bank would be the fifth issuer of green bonds ever since Yes Bank issued the first such bond in February 2015 to raise 1,000 crore. Other lenders that have raised green bonds include IDBI Bank and Exim Bank.

“The initial pricing guidance for the Axis Bank issue is 175 basis points over the US Treasury note," said one of the bankers cited above, asking not to be named. One basis point is one-hundredth of a percentage point. The bonds were to be priced late evening on Monday after assessing demand from US investors.

Green bonds are like any other debt instrument but the funds raised from such a bond sale are used exclusively for renewable energy projects. With the Indian government and private sector increasingly focusing on renewable energy projects, the demand for such funds is expected to rise over time.

India has a target of installing 100GW of solar power capacity and 60GW of wind power capacity by 2022. The total installed capacity of renewable energy stands at 30GW, of which wind energy projects account for 24GW, solar contributes 5GW and the rest comes from smaller sources, such as biomass.

A number of international investors have earmarked specific sums of money to invest in clean energy projects, which allows products such as green bonds to secure strong interest.

“There is access to wider base of investors which drives down the cost for the issuer. But for the investor, a green bond is similar to any other bond and tied to the issuer’s rating," said the second banker. This access reduces the cost of borrowing for the issuer by at least 15 bps.

For instance, an Indian private bank will have to pay at least 190 bps above US Treasury notes to raise capital through medium-term notes (MTN). But the bank can raise funds through green bonds at 15-20 bps lower.

Green bond issuances from India have picked up but still remain sporadic, said the second banker quoted above. A total of 8,700 crore has been raised through green bonds so far from both onshore and offshore markets, according to industry estimates. Most of this was raised by banks to be lent further to companies.

The total issuance volume of green bonds globally so far in 2016 is $23 billion, according to Climate Bond Initiative, a not-for-profit entity that has laid down broad principles for the market. The share of issuances by Indian entities was 3% of the total green bond issuance of $42 billion globally in 2015.

Globally, green bond sales are expected to rise sharply and Bank of America Merrill Lynch expects issuances to hit $80 billion for the year. “We project $80-90 billion in issuance this year, bringing the total size of the green bond market to $175-185 billion, nearly twice versus the previous year," the bank said in a note on Monday.

IDBI Bank is also looking to issue a second set of green bonds. “We are part of an international coalition that exists to fund green projects. We haven’t set aside any amount for this year; however, we have quite a few renewable power projects in pipeline and we will raise funds to extend credit for these. The funds raised will be part of $2 billion MTN programme," said N.S. Venkatesh, chief financial officer at the bank.

Fitch Ratings has assigned a rating of BBB- with a stable outlook to the proposed $500 million bond issue by Axis Bank, said the rating agency in a note on Monday. Moody’s Investors Services has rated the bonds.

The tenor is likely to be around five years, and the notes are to be issued by Axis Bank’s Dubai International Financial Centre branch, said Fitch.

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