GREEN BANKING IN INDIA FOR SUSTAINABLE DEVELOPNEMT: A STUDY

Dr. SURESH VADDEAssociate Professor

Department of Accounting & FinanceCollege of Business & Economics

Mekelle University, Mekelle, EthiopiaEmail: sureshvadde1@gmail.com

ABSTRACT

Environmental protection and awareness, and sustainable, ecological measures have emerged as

significant themes of our age and an increasing number of “green” technologies are also finding

their way into the banking branch. Sustainable development can best be achieved by allowing

markets to work within an appropriate framework of cost efficient regulations and economic

instruments. One of the major economic agents influencing overall industrial activity and

economic growth is the financial institutions such as banking sector. In a globalised economy,

the industries and firms are vulnerable to stringent environmental policies, severe law suits or

consumer boycotts. Since banking sector is one of the major stake holders in the industrial

sector, it can find itself faced with credit risk and liability risks. Further, environmental

impact might affect the quality of assets and also rate of return of banks in the long-run. Thus

the banks should go green and play a pro-active role to take environmental and ecological

aspects as part of their lending principle, which would force industries to go for mandated

investment for environmental management, use of appropriate technologies and management

systems. This paper explores the importance of green banking, green banking products and

providing banks in India. Finally it concludes with green banking strategies, green mortgages

and initiatives taken by Indian banks.

Key words: sustainable development, globalised economy, banking sector, environment and

eco friendly etc...

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INTRODUCTION

Green banking is like a normal bank, which considers all the social and environmental/ecological

factors with an aim to protect the environment and conserve natural resources. It is also called as

an ethical bank or a sustainable bank. They are controlled by the same authorities but with an

additional agenda toward taking care of the Earth's environment/habitats/resources. The banking

sector influences the economic growth and development in terms of both quality and quantity,

there by changing the nature of economic growth. Banking sector is one of the major sources of

financing investment for commercial projects which is one of the most important economic

activities for economic growth. Therefore, banking sector can play a crucial role in promoting

environmentally sustainable and socially responsible investment (SRI). Banks may not be the

polluters themselves but they will probably have a banking relationship with some

companies/investment projects that are polluters or could be in future.

Banking sector is generally considered as environmental friendly in terms of emissions

and pollutions. Internal environmental impact of the banking sector such as use of energy, paper

and water are relatively low and clean. Environmental impact of banks is not physically

related to their banking activities but with the customer’s activities. Therefore, environmental

impact of bank’s external activity is huge though difficult to estimate. Moreover, environment

management in the banking business is like risk management. It increases the enterprise value

and lowers loss ratio as higher quality loan portfolio results in higher earnings. Thus,

encouraging environmentally responsible investments and prudent lending should be

one of the responsibilities of the banking sector. Further, those industries which have already

become green and those, which are making serious attempts to grow green, should be

accorded priority to lending by the banks. This method of finance can be called as “Green

Banking”, an effort by the banks to make the industries grow green and in the process restore the

natural environment. This concept of “Green Banking” will be mutually beneficial to the

banks, industries and the economy. Not only “Green Banking” will ensure the greening of the

industries but it will also facilitate in improving the asset quality of the banks in future.

Internationally, there is a growing concern about the role of banking and institutional

investors for environmentally responsible/socially responsible investment projects3. Banking and

other financial institutions are more effective towards achieving this goal for the kind of

intermediary role they play in any economy and for their potential reach to the number of

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investors. Environment is no longer the exclusive concern of the government and the direct

polluters, but also the other partners and stake- holders in the business like financial institutions

such as banking institutions can play a very important role in fostering linkage between

economic development and environmental protection. To substantiate, quality of service, the

implementation of environmental conservation measures, support to the deprived section of the

society, concern about the quality of life and nature are the basic principles that the financial

institutions are relying on in their business strategy in recent years.

WHY GREEN BANK IS NECESSARY

Banks can do much more to help the environment than just promote online banking. A truly

green bank can reduce their carbon footprint by building more efficient branches, implementing

more energy-efficient operational procedures, offering transportation services for their

employees and carefully screening their lending in environment-sensitive industries. Banks can

also support eco-friendly groups, offer green lending and raise money for local environment

initiatives. Banks that go to these significant lengths to be eco-friendly are a little more difficult

to find than the banks that claim to be green by merely offering online services. Banks that offer

rate incentives on CDs, money market accounts, online savings accounts and checking accounts

for online banking also help the green banking cause by rewarding online banking customers. It

take a little bit of an incentive to convert some people away from paper statements and branch

banking. 

IMPORTANCE OF GREEN BANKING

Environmental protection and awareness, and sustainable, ecological measures have emerged as

significant themes of our age and an increasing number of “green” technologies are also finding

their way into the banking branch. Until recently, environmental concerns were not considered

relevant to the business operation of banks and financial institutions. Traditionally, banking

sector’s concern for environmentally degrading activities of clients is like interfering or

meddling in their business affairs. However, now it is being perceived that dealing with

environment brings risks to their business. Due to strict environmental disciplines imposed by

the competent authorities across the countries, the industries would have to follow certain

standards to run their business. In the case of failure, it would lead to closure of the industry’s

leading to a likelihood of default to the bank.

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The importance of Green Banking is immense for both the banks and economy by avoiding the

following risks involved in banking sector. The adoption of green banking strategies will help

the bank to deal with these risks involved in their business operation.

Green banking strategies involves two components:

i) Managing environment risk and

ii) Identifying opportunities for innovative environmentally oriented financial products.

To manage environmental risk, the banks have to design proper environmental management

systems to evaluate the risks involved in the investment projects. The risks can be internalized by

introducing differential interest rates and other techniques. Moreover, bank can withdraw itself

from financing high-risk projects. The second component of green banking entails creating

financial products and services that support commercial development with environmental

benefits. This includes investment in renewable energy projects, biodiversity conservation,

energy efficiency, investment in cleaner production. Thus, the banking and financial institutions

should prepare an environmental risk and liability guidelines on development of protective

policies and reporting for each project they Finance or invest. They can also have an

environmental assessment requirement for the projects seeking finance.

Environmental concerns are integrated into the international trade policy and often act as

trade barrier for environmentally sensitive goods (ESGs). So adopting environmentally

sustainable Technologies or modes of production is no more considered as a financial burden,

rather it brings new business opportunities and higher profit.

IMPERATIVES OF GREEN BANKING:

Green banking is very important in mitigating the following risks involving the banking sector:

Credit Risk: Due to climate change and global warming, there have been direct as well as

indirect costs to banks. It has been observed that due to global warming, there have been extreme

weather conditions which affect the economic assets financed by the banks, thus leading to high

incidence of credit default. Credit risk can also arise indirectly when banks lead to companies

whose businesses are adversely affected due to changes in environmental regulation.

Legal risk: Banks, like other business entities, face legal risk if they do not comply with relevant

environmental regulation. They may also face risk of direct lender liability for cleanup costs or

claims for damages in case they actually take possession of pollution causing assets.

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Reputation Risk: Due to increasing environmental awareness, banks are more prone to

reputation risk, if their direct or indirect actions are viewed as socially and environmentally

damaging. Reputation risks emerge from the financing of environmentally objectionable

projects.

As India has committed to reducing its carbon intensity by 20-25 percent from 2005

levels by 2020, we are working towards developing a low carbon economy. In a low carbon

economy, there will be many challenges and opportunities to banks. Green banking will be at the

forefront of this drive to harness banking expertise and build the post-carbon economy. The

biggest impact of the carbon cut commitment will be on small and medium Enterprise, steel and

cement industries which are carbon intensive. In order to avoid credit risk in these loan portfolios

as well as to grab new business opportunities, Indian banks must immediately adopt green

banking strategies to reduce the carbon footprint of individual banks will not only make them

socially responsible corporate citizens but will also help save substantially operational costs.

There are lot of opportunities and challenges for Indian banks in adopting ‘Green Banking’ as a

profitable business.

GREEN BANKING IN INDIA

Indian industry faces the challenges of controlling environmental impact of their business i.e.

reducing pollution and emission of their clients. Though government has been trying to address

the issue by framing environmental legislations and encouraging industry to follow

environmental technologies and practices, public awareness and inability to derive competitive

advantage by producing eco-friendly products. India’s is the world’s sixth largest and second

fastest growing country in terms of producing green house gases. Delhi, Mumbai and Chennai

are the three of the world’s ten most polluted cities.

The major polluting industries in India are-

(a) Primary metal industries namely zinc, copper, steel etc.

(b) Paper & pulp

(c) pesticides/insecticides

(d) Refines

(e) Fertilizers

(f) Tanneries

(g) Sugar

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(h) Textiles

(i) chemicals/pharmaceuticals etc.

The banking operation and investment by financial institutions should take care of environmental

Management of these polluting industries by improving the overall environment, the quality and

Conversation of life, level of efficiency in using materials and energy, quality of services and

Products. In this context, the role of banking sector, which is on major financing sources to the

Industries, assumes high importance.

ENVIRONMENTAL REGULATIONS IN INDIA:-

The environmental regulations in India can be broadly classified into two broad categories:

i) Command and control regulations

ii) Liability law.

The command and control regulations are ex ante regulations that are designed to dissuade

environmentally damaging projects. This regulation is implemented by setting industry specific

pollution standards, scrutinizing the projects and granting/denying permissions by the concerned

authorities like Ministry of Environment and Forest.

The liability laws are ex post in nature and are implemented by enforcing authorities through

imposing fines, closing down the defaulting industries etc. Once legal framework for the

environmental pollution standards are formulated in India, the polluting industries either have to

close down or have to make necessary investment to comply with the standard. In this process

these industries will lose their competitiveness in the international market, which would directly

affect Indian economy and the banking sector.

As far as Green Banking in India is concerned, the banking and financial institutions are running

behind the schedules compared to global trends. The British business newspaper and Financial

Times which together nominated following banks for Sustainable Banking Awards in 2006 for

leadership and innovation in integrating social, environmental and corporate governance

objectives into their operations did not find a single Indian nationalized bank or major private

bank in the list except Yes bank. Banks need to be more careful in India about the environmental

aspects of their clients and products because-Future of exports and product market are going to

go through strict environmental rules and eco-friendly product will have better market. Increased

demand for pollution controls equipments will require more financial assistance from banks.

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GREEN BANKING STRATEGIES:

Indian Banks can adopt green banking as a business model for sustainable banking by launching

some of the following strategies:

Carbon credit business: Under the Kyoto protocol, clean development Mechanism (CDM)

provides for co-operation between annexure –1 and non annexure-1 (developing) countries. The

operational mechanism of CDM’s involves an investment by a legal entity from an annexure-1

country into a project in non-annexure-1 country, which results in emission reduction. These

emission reductions have to be certified by an appropriate authority and these certified Emission

Reductions (CERs) which are commonly known as carbon credits can be used to meet the

commitments of annexure-1 countries under the Kyoto protocol. These carbon credits are traded

in the markets. CDM projects are those projects that contribute to credible and sustained

reduction in GHG emissions. Indian banks can involve themselves in carbon credit business,

wherein they can provide all the services in the area of CDMs and carbon credits including

services of identification and funding of CDM projects, advisory services for registration of

CDM projects and commercialization of CERs under different structures to meet the

requirements of its customers, acting as an intermediary for buying CERs on behalf of end-users

or carbon funds, financing against CERs and CERs receivables, and other related banking

services. As India has huge potential for carbon credit business, Indian banks can set up

dedicated carbon credit cells to capture a major share of this carbon credit business.

Green Banking Financial Products: Indian banks should develop innovative green banking

financial products which can directly or indirectly help in the reduction of carbon emissions.

These banks can introduce a ‘Green Fund’ to provide climate conscious customers the option of

investing in environmental friendly projects. Banks can also introduce green bank loans with

financial concessions for environmental friendly products and projects. Besides introducing

specific green banking products, banks can incorporate an Environmental Impact Assessment

(EIA) in their project appraisal while financing any project to measure the nature and magnitude

of environmental impact as well as suggest environmental risk mitigation measures. Banks can

also conduct environmental audits of the financed projects. Banks need to redesign their credit

products to assist SMEs to adopt quality and conform to environmental standards. Banks should

also include green guidelines in their credit policies to raise the green loan portfolio.

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Green Mortgages

Banks such as Citigroup Inc., Bank of America, and JP Morgan Chase &Company are just a few

of the mortgage lenders offering special discounts on mortgages used to build or update

buildings and homes to be more green. One of the reasons for the push for green mortgages is

that green building and rebuilding tends to incorporate more energy-efficient materials and

building plans.

There are two types of green mortgages: the Energy Improvement Mortgage – it’s like a second

mortgage that is to be used to upgrade a home or building to energy efficient by installing energy

saving items such as solar panels and improved insulation - and the Energy Efficient Mortgages

for the construction of new energy efficient homes and buildings.

There are many states getting in on the green mortgage by offering subsidized green mortgages

so that more home-owners and business owners can “green-up” their buildings. In addition to

helping save the environment by using less energy, these mortgages offer many advantages to

consumers by reducing monies spent on high utility bills and on high costs of obtaining a

mortgage. The Residential Energy Services Network reported on a recent study showing that the

market value of a home increases $20 for every $1 decrease in energy costs.

Carbon Footprint Reduction: Carbon foot-print is a measure of the impact of our activities on

the environment. It relates to the amount of GHG we are producing in day-to-day business while

burning fossil fuels for electricity, heating, transportation, etc. Banks can reduce their carbon

footprints by adopting the following measures:

Paper-less Banking: As banks have computerized their branches, there is ample scope for doing

paperless or less-paper banking. Mostly PSBs use huge quantities of paper for office

correspondence, audit reporting, recording public transactions, etc. These banks can switch over

to electronic correspondence and reporting. Banks should encourage their customers also to

switch over to electronic transactions and popularise e-statements.

Energy Consciousness: Developing energy- consciousness, adopting effective office time

management and automation solutions and using compact fluorescent lighting ( CFL) can help

banks save energy consumption considerably. Banks can conduct energy audits in all their

offices for effective energy management. They can also switch over to renewable energy ( solar,

wind, etc.) to manage their offices and ATMs.

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Using Mass Transportation System: PSBs can become fuel efficient organization by providing

common transport for group of officials posted at one office.

Green Buildings: The Indian banking industry uses more than one lakh premises for their

offices and residential houses throughout the country. These banks should develop and use

green buildings for their office and employee accommodation.

These measures will not only help banks reduce their carbon footprint but also save the

operational costs considerably.

Social Responsibility Services: As part of the green banking strategies, Indian banks can initiate

various social responsibility services such as tree plantation camps, maintenance of parks,

pollution check-up camps, etc.

INITIATIVE TAKEN BY INDIAN BANKS:

SBI has become the first bank in the country to venture into generation of green power by

installing windmills for captive use. As part of its green banking initiative, has installed 10

windmills with an aggregate capacity of 15 MW in the states of Tamil Nadu, Maharashtra and

Gujarat. It has planned to install an additional 20 MW capacity of windmills in Gujarat soon and

touch 100 MW power generation through windmills within five years, windmills are set up with

a definite objective of reducing the dependence on the polluting thermal power and not on purely

economic or business considerations. At present, the bank consumes 100 MW of power per

year. So, SBI will try to be energy neutral and reduce its carbon footprints. The total cost of

installation of a windmill of 1.5 MW is around Rs 10 crore. The operation cost is close to zero

and it is expect to recover the initial investment in four years. "Our mission is to make all Indian

banks go green and we are already discussing with 25 banks," said Suzlon CMD Tulsi R Tanti.

He said, "Suzlon, which currently holds 55% market share in the country is now more focused

on wind power development. Of the 11,000 MW installed wind energy in India, 6,000 MW has

been installed by Suzlon.

"There is 45,000 MW wind power potentiality in the country and we will target that

market here," Mr Tanti added. Mr Bhatt ( Chairman Of SBI) said, the bank will also support the

green initiatives of its clients and will offer them finance on priority and at concessionary rates of

interest. Towards that end, the bank has launched a loan product called ‘Carbon Credit Plus’ to

finance the future CER receivables of CDM projects.

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Earlier, Mr Bhatt referred to the upward bias in interest rates in the coming months as the

manufacturing sector activities are picking up. He said the credit growth will be much better than

the 18% registered last fiscal and it might even touch 23% as against RBI expectation of around

20% this year. According to him, retail and agriculture sectors will pick up in the second quarter,

while the third quarter will see huge build up in infrastructure front and increase in capex and

working capital. "The industry is working at 80% capacity now, which is close to its peak of

85% and so the credit growth will be fairly good this year," he added.

FUTURE OUTLOOK:

The model that the bank uses is different from other banks. Will the model itself be a limiting

factor on the ambitious growth and development plans of the bank? Will the day-to- day business

of being a bank dominate over the desire to be an instrument of social change? How does the

future look for SBI Bank now that other banks are also increasingly positioning themselves as

players in the sustainable economy sector? Can the bank still continue to fulfill its mandate to

strive for social objectives?

Peter Blom is convinced it can. According to him, many other banks entering the sustainability

space also invest billions in companies that don’t in any way contribute to a better world. And

there are issues of transparency too. He believes that the bank can profit from economies of

scale. As of now, SBI continues with its strong belief that it is the individual who can bring

about real change in the society and hopes to remain a platform for people who want to ‘make a

difference’ in the world.

CONCLUSION

In a rapidly changing market economy where globalization of markets has intensified the

competition, the industries and firms are vulnerable to stringent public policies, severe law

suits or consumer boycotts. This would affect the banks and financial institutions to recover

their return from investment. Thus, the banks should play a pro-active role to take environmental

and ecological aspects as part of their lending principle which would force industries to go

for mandated investment for environmental management, use of appropriate technologies and

management systems. As Green Bank has rapidly expanded its operations, the challenge for its

leadership has been on managing this growth successfully and prudently. Through strategic

partnerships Green Bank seeks out advice and insight from outside experts to gain fresh ideas on

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new product development, marketing and business solutions to overcome the inevitable problems

of rapid growth and to reach deeper into its customer base in an increasingly competitive market.

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