The largest area of green financing is energy efficient machinery, which supports MSMEs in modernising production lines and reducing operational energy consumption. Meaningful capital is also being channelled into rooftop solar installations, electric vehicles, and enterprises operating in the water, sanitation, and hygiene sectors across clusters such as manufacturing, healthcare, and food processing.
ESG has become the new buzzword in lending industry. Lenders trying to attract cheaper funds are also now trying to link impact into their mainstream lending to avail the benefit of Impact funds. And rightly so specially for MSME lenders as MSMEs contribute significantly to India’s economic engine, driving close to a third of GDP, over a third of manufacturing output, and employing more than 120 million people. This makes MSMEs a natural focal point for sustainable and impact-linked funding.
However MSMEs face several industry wide barriers when adopting sustainable technologies, including limited technical understanding, concerns about upfront capital expenditure, uncertain return on investment timelines, and restricted access to formal financing due to thin credit histories or absence of collateral. Many operate within informal manufacturing clusters where exposure to new technologies is low and advisory support is limited, creating a gap between the availability of sustainable solutions and their practical adoption. Funds for these initiatives are either not available or are available but at exorbitant rates.
Another issue is that most lender do not know how to underwrite sustainability linked loans. Traditional MSME loans often rely heavily on formal documentation, historical income records, and collateral, which limits accessibility for small or first-generation entrepreneurs and slows the adoption of sustainable technologies. Green financing requires a different approach where project viability, energy savings, and productivity gains play a more central role than conventional documentation.
Some MSME focussed NBFCs structures their sustainability linked products by evaluating expected cash flows from the new machinery, solar savings, or electric vehicle operations, along with cluster specific operational insights. This enables them to serve borrowers with limited financial history by focusing on machine level viability and projected business outcomes.
Repayment structures are designed to align with project payback cycles, such as matching equated monthly instalments with savings generated from rooftop solar systems or increased productivity from new equipment. These flexible models make green products more accessible and commercially sustainable for MSMEs, allowing them to adopt new technologies without being constrained by traditional lending barriers.
Lending will have to evolve beyond just checking balance sheets and profit and loss statements if they want to really link ESG to lending
I can think of various models / ways/ solutions that align lending to sustainable goals which some Data Tech NBFCs have already adopted.
Revised credit assessment models
Credit assessment models and scorecards that focus on cash flow viability, project level productivity improvements, and sustainability potential rather than relying solely on traditional documentation. This enables underwriters to serve underserved MSMEs that may have strong operational potential but limited financial documentation.
By combining financial innovation with awareness building and targeted product design we can help close the affordability and knowledge gaps that prevent MSMEs from embracing green technologies. Green financing requires a different approach where project viability, energy savings, and productivity gains play a more central role than conventional documentation. Sustainability-linked credit solutions in the industry are increasingly being structured by assessing expected cash flows generated from new machinery, solar energy savings, or electric vehicle operations, supported by cluster-specific operational insights. This approach enables lenders to effectively serve borrowers with limited financial history by focusing on machine-level viability and projected business outcomes.
Repayment structures are designed to align with project payback cycles, such as matching equated monthly instalments with savings generated from rooftop solar systems or increased productivity from new equipment.
These flexible models make green products more accessible and commercially sustainable for MSMEs, allowing them to adopt new technologies without being constrained by traditional lending barriers.
Integrating ESG as part of knowledge transfer/training model
As sustainability linked lending gains importance across the financial ecosystem, lenders are increasingly recognising that environmental and social risks can directly impact long term business continuity and repayment capacity.
MSMEs often face challenges related to energy inefficiency, waste management, labour standards, and governance practices, which makes ESG integration a critical part of responsible lending. These principles are increasingly being embedded within industry-wide underwriting frameworks. The process typically begins with an Exclusion List aligned to IFC standards, screening out businesses operating in environmentally or socially harmful segments. An ESG Scorecard then evaluates borrowers on parameters such as energy consumption, waste management practices, labour welfare, and governance quality, categorising them into low, medium, or high ESG risk segments. These risk classifications are used during sanctioning, pricing, and post disbursement monitoring.
To ensure consistency, we are institutionalising an Environmental and Social Management System that applies ESG due diligence throughout the loan cycle. This integrated approach helps strengthen credit quality while supporting MSMEs that are committed to responsible and future ready growth.
Evaluating impact
Evaluating the environmental impact of MSMEs is becoming essential for lenders seeking to balance credit growth with sustainable development priorities. Industry practices now emphasize assessing energy usage, emissions, waste management systems, water efficiency, and compliance with environmental regulations.
Many lenders use ESG scorecards aligned with IFC frameworks as a mandatory part of the appraisal process. During on-site assessments, credit teams typically examine factors such as energy intensity, waste disposal mechanisms, water-use efficiency, regulatory compliance, and broader social impact. MSMEs are then categorised into low, medium, or high ESG-risk profiles. High-risk applicants are generally not financed, while medium-risk applicants may undergo deeper due diligence and receive guidance to strengthen their practices.
This scoring methodology feeds into Environmental and Social Management Systems that standardise evaluation, monitoring, and reporting. By directing capital toward responsible MSMEs, lenders enhance portfolio quality and support the sector’s alignment with India’s long-term sustainability goals.
Focused green products
Across the MSME sector, there is rising interest in solutions that improve productivity while reducing environmental footprints. Energy efficient machinery, rooftop solar systems, electric mobility solutions, water conservation initiatives, and waste management technologies are emerging as priority areas due to their dual benefits of cost savings and sustainability impact. Lenders focuses on green projects that offer strong commercial value to MSMEs along with measurable environmental outcomes.
The largest area of green financing is energy efficient machinery, which supports MSMEs in modernising production lines and reducing operational energy consumption. Meaningful capital is also being channelled into rooftop solar installations, electric vehicles, and enterprises operating in the water, sanitation, and hygiene sectors across clusters such as manufacturing, healthcare, and food processing. Many institutions collaborate with OEMs, solar integrators, and EV fleet operators through anchor driven models that help reduce adoption risks. Each green loan is evaluated through the ESG Scorecard and Environmental and Social Management System to ensure responsible deployment and effective impact measurement.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
This content is protected by copyright and may not be reused. If you want to cooperate with us and would like to reuse some of our content, please contact: editors@pv-magazine.com.
By submitting this form you agree to pv magazine using your data for the purposes of publishing your comment.
Your personal data will only be disclosed or otherwise transmitted to third parties for the purposes of spam filtering or if this is necessary for technical maintenance of the website. Any other transfer to third parties will not take place unless this is justified on the basis of applicable data protection regulations or if pv magazine is legally obliged to do so.
You may revoke this consent at any time with effect for the future, in which case your personal data will be deleted immediately. Otherwise, your data will be deleted if pv magazine has processed your request or the purpose of data storage is fulfilled.
Further information on data privacy can be found in our Data Protection Policy.