Are RBI’s green bonds a flop?

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In today’s edition of The Daily Brief:

• India’s green bond struggle
• Bajaj Finance exits co-branded cards

India’s green bond struggle

On Friday, the Reserve Bank of India (RBI) held an auction for ₹5,000 crore worth of sovereign green bonds. These bonds, backed by the government, are designed to show India’s commitment to sustainability while raising money for eco-friendly projects. They’re supposed to be safe investments that help fight climate change. Sounds like a win-win, right?

Well, not quite. The response was pretty underwhelming. Out of the ₹5,000 crore on offer, only ₹1,502 crore was sold, at a yield of 6.79%. The remaining ₹3,498 crore had to be picked up by primary dealers—the underwriters who stepped in when buyers didn’t show up.

This raises some big questions. Why was the demand so low? And more importantly, what does this mean for India’s green bond market? Before we get into that, let’s take a closer look at what sovereign green bonds are and why they’re important.

A green bond is basically a loan where the money raised is only used for sustainable projects. Think solar power plants, clean public transport, or better water management. Green bonds first appeared in 2007, created to give investors a way to fund climate-friendly projects. The European Investment Bank issued the very first one. India joined the green bond club much later, launching its first sovereign green bond in January 2023.

So, where does the money from these bonds go? India’s Ministry of Finance has clear rules about this, outlined in the Sovereign Green Bond Framework. These bonds must follow the Green Bond Principles set by the International Capital Market Association (ICMA). The funds can only be used for specific “green” projects, like renewable energy, conserving biodiversity, or providing clean water. Plus, the government has to report how the funds are used every year.

Green bonds matter because India has massive climate finance needs. To meet our climate goals, we need around $170 billion every year. Right now, we’re only managing about $44 billion annually. Sovereign green bonds were supposed to help bridge this gap while signaling to the world that India is serious about tackling climate change.

When India issued its first sovereign green bonds last year, it was a big hit. The ₹16,000-crore issue was oversubscribed more than four times. Investors were even willing to accept lower returns—a “greenium”—of six basis points. Public sector banks and insurance companies were the main buyers, but even foreign investors showed confidence, despite the tough global economic conditions.

The funds from India’s first sovereign green bonds were used for impactful projects like renewable energy and sustainable water management. But just a few months later, the excitement seems to have fizzled out. Why did this happen?

Why the Latest Auction Struggled

Let’s think about it from an investor’s point of view. What would you look for in a bond? Better returns? Easy access to your money when needed? Low risk? Green bonds, unfortunately, don’t tick these boxes. Compared to regular government securities (G-Secs), green bonds offer lower returns and less flexibility, with no clear extra benefits.

By design, green bonds come with lower yields. That’s because they’re meant to make it easier for expensive and risky sustainability projects to get funding—projects that might not otherwise find financial backing. The idea is noble: provide cheap loans for climate-friendly projects. But here’s the problem—why would anyone accept lower returns than a regular G-Sec if there’s nothing else to sweeten the deal?

Then there’s the issue of liquidity. Green bonds don’t trade as much as regular G-Secs because there are fewer of them in the market. This means investors can’t easily buy or sell these bonds if they need cash quickly, which is a big drawback.

On top of that, the pool of potential buyers for sovereign green bonds in India is quite limited. It’s mostly institutional investors like banks and insurance companies. Retail investors—everyday people like us—tend to avoid them. Why? Because they prefer products that are well-known, easy to trade and have clear benefits. Without a strong secondary market or perks like tax breaks or risk-sharing options, there’s little to attract them.

All in all, there aren’t enough people trading green bonds. So, even if you buy one, selling it later becomes much harder. Your money essentially gets locked in for a long time.

As Vikas Goel, CEO of PNB Gilts, explained: “Even though the yield is similar to what the 10-year benchmark was auctioned at, this is a different bond. There isn’t enough outstanding in this bond, so there’s no liquidity. It’s like having another 10-year security. And since it can’t be traded in the secondary market, no one will take large positions on this.”

In simple terms, if you’re looking for a safe place to invest your money, there’s almost no reason to choose green bonds over regular G-Secs—unless you want to feel good about supporting sustainability. However, from a purely financial perspective, green bonds are less attractive. They’re an unproven product that offers lower returns and is much harder to sell.

Even institutional investors, who are typically the biggest buyers of such bonds, aren’t particularly excited. SBI Chairman CS Setty summed it up well: “If investors have to take a lower rate of interest, awareness needs to be created, and we’re probably not ready for that. If we’re not pricing these green deposits differently, then there’s no differentiation at all.”

What’s missing here is an incentive—something that makes investors overlook the downsides of green bonds. Other countries have found ways to tackle this. In Europe, regulations require institutions to invest a portion of their funds in ESG (Environmental, Social, and Governance) products. Brazil ties its green bonds to national priorities, like preserving the Amazon rainforest, which makes them more appealing.

In India, there’s no such requirement or incentive. Green bonds have to compete directly with regular bonds based purely on financial returns—and they’re losing that battle.

Globally, though, green bonds are thriving. The market hit $575 billion in 2023, fueled by strong regulations and incentives. These policies create demand even when the returns are lower. In India, without similar measures, green bonds are left to stand on their own, which clearly isn’t working.

This auction’s failure isn’t just about bad timing or weak market conditions; it’s a wake-up call for policymakers. Green bonds aren’t like traditional financial products—they’re tools to align financial markets with sustainability goals. If they’re going to succeed, the government needs to make them more appealing to investors.

The bigger challenge here isn’t just selling bonds—it’s rethinking how we approach sustainable finance. If ESG bonds are always going to be less attractive financially, then we need to get creative about making them worthwhile for investors. It’s not just about raising funds; it’s about building a system that works for both sustainability and the people investing in it.

Bajaj Finance exits co-branded cards

Bajaj Finance seems to be slowing things down in the co-branded credit card game. Recently, they ended their partnerships with RBL Bank and DBS Bank India. If you already have one of these cards, no need to worry—they’ll still work just fine. But no new cards will be issued under these partnerships.

So, why does this matter? Are co-branded cards really that big of a deal? And how do these partnerships even work? More importantly, why are they starting to fade? Let’s break it all down.

What Are Co-Branded Cards?

Co-branded cards are basically a collaboration between a bank and a brand. The brand gets its logo on the card and uses perks to keep customers loyal. The bank handles the credit side of things and gains new customers in the process. And for you, the customer? You get sweet perks like discounts, cashback, or loyalty points.

Take the ICICI Amazon Pay Card, for example. It gave you special offers on Amazon purchases, turning your regular online shopping into a cashback fest. Similarly, the HDFC Flipkart Card made shopping during Big Billion Days even better. And if you’re a music fan, the HDFC Pixel Concert Card could even get you backstage access to Diljit Dosanjh’s shows!

Co-branded cards were a win-win-win deal. Here’s why everyone loved them:

For Banks Co-branded cards were a great way to attract customers. If someone shops on Amazon regularly, they’re likely to grab an Amazon-branded card. Once they do, they’re hooked. Why wouldn’t they use a card that gives them exclusive rewards for a platform they already use?

Plus, these cards drive more spending. Co-branded cardholders use their cards more often—banks report 1.2x higher spending compared to regular credit cards. Activation rates are also 70% higher, making these cards a reliable way to boost business.

For Brands For brands, it’s all about locking in customer loyalty. If you’ve got a card that gives you rewards on Flipkart, you’re more likely to shop there instead of going to a competitor. The more you shop, the more attached you get to the brand. This stickiness means customers are less likely to jump ship. Some brands were even finding creative new ways to use these cards, as we’ll explore later.

For Customers For customers, it’s a no-brainer. You’re spending the same money but getting something extra in return—cashbacks, discounts, or loyalty points that actually feel worthwhile. It’s a win for your wallet and your shopping habits.

For banks, co-branded credit card partnerships were a stroke of genius. They helped attract loyal customers and keep them coming back. According to industry reports, co-branded cards grew from just 3-5% of the credit card market in FY20 to 12-15% by FY24. And the growth doesn’t seem to be slowing down. By FY28, these cards are expected to make up over 25% of all credit cards, growing at a staggering 35-40% annually.

Take RBL Bank as an example—one of Bajaj Finance’s former partners. Bajaj Finance was a huge driver of new business for RBL, at one point contributing over 70% of RBL’s credit card acquisitions. Even now, 36% of their cards come through Bajaj. That’s no small number, especially when you consider RBL’s credit card advances reached ₹17,538 crore last quarter. More than a third of that came from one partnership. It’s easy to see why banks love co-branded cards—they’ve been a growth engine that’s hard to ignore.

But over the past year, things have started to sour for these partnerships. Back in March 2024, the Reserve Bank of India (RBI) stepped in and cracked down on how co-branded cards were being managed.

Why Did RBI Step In?

One reason is data misuse. For brands, co-branded cards weren’t just a way to keep customers—it was also a way to access valuable customer data. RBI found that some banks, like Federal Bank and South Indian Bank, were sharing sensitive customer information, including risk scores, with their brand partners. This data should have remained private. As a result, RBI ordered these banks to stop issuing new co-branded cards until they resolved compliance issues.

Another issue was misleading marketing. Some co-brand partners, like OneCard, were promoting their cards as if they were their own product, without making it clear that they were issued in partnership with a bank. This goes against RBI’s rules, which require transparency in co-branded partnerships.

Then there were cases where these partnerships weren’t true co-branded cards at all. Instead, they were structured in a way that blurred the lines between the roles of the bank and the partner. For instance, in Bajaj Finance’s co-branded cards, Bajaj acted more like a collections agent for the bank, using its expertise to recover dues and earn money from this. This wasn’t in line with the spirit of a co-branded card partnership.

RBI’s New Rules Changed the Game

RBI has now tightened the rules for co-branded cards. Brand partners are restricted to sourcing new card customers and offering their goods or services as part of the partnership. They can no longer handle critical aspects like collections. For Bajaj Finance, this change was a dealbreaker—it took away a key part of what made these partnerships viable for them.

The RBI’s guidelines on co-branded credit cards are now crystal clear:

• Co-brand partners can’t access transaction data.
• Banks must clearly identify themselves as the card issuer.
• Marketing must be transparent—it has to be clear that it’s a co-branded card, not just the brand’s card.
• Co-brand partners are limited to sourcing and can’t handle post-issuance tasks like collections.

The goal? To protect customer data, ensure transparency, and keep the system fair and clean.

For Bajaj Finance, these changes were a turning point. Their real strength lay in collections, where they had built a strong system, operating across more than 4,200 locations. But under the new rules, collections are no longer part of what co-brand partners are allowed to do. This change stripped away a core part of Bajaj’s business model. Faced with this, they decided to step back from co-branded cards and shift their focus to other areas.

What’s the takeaway?

Co-branded cards are still a big part of the credit card industry. When done right, they’re a win-win. Customers enjoy perks, brands strengthen customer loyalty, and banks grow their business. However, with stricter regulations, the scope for these partnerships has narrowed.

For companies like Bajaj Finance, this means going back to the drawing board to rethink their strategy. Co-branded cards can still thrive, but only if everyone plays by the rules and finds new ways to add value within the tighter framework.

Tidbits

1. India’s luxury market is on a roll. Big names like Louis Vuitton, Christian Dior, and Hermès raked in a combined ₹1,400 crore in sales in FY24. With rising incomes and more people aspiring to own premium products, the market is expected to grow even more. By 2030, it could reach a whopping $30 billion.
2. India is gearing up to reduce its reliance on imported batteries. The government has announced a ₹9,000 crore plan to boost local battery manufacturing. By focusing on key components like cathodes and anodes, the initiative aims to make electric vehicles (EVs) more affordable and turn India into a global hub for battery production.
3. Passenger vehicle sales saw a 4% increase year-on-year in November 2024, led by Maruti Suzuki and Toyota. Rural demand and festive shopping gave sales a nice boost, with SUVs emerging as a clear favorite among buyers.
4. On the international front, Donald Trump has issued a warning to BRICS nations, threatening 100% tariffs if they move forward with efforts to reduce reliance on the U.S. dollar. This tough stance highlights America’s determination to keep the dollar at the center of global trade, even as more countries push back.
5. In other news, the Indian government has withdrawn the windfall tax on crude oil production and exports of petrol, diesel, and aviation fuel. This tax, introduced during the 2022 oil price surge, brought in ₹25,000 crore in FY23. However, with oil prices stabilizing and domestic supply improving, the tax became less relevant and was finally scrapped after two and a half years.

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This post was first published on Substack.