Indian banks unprepared for central bank’s ESG push: survey

Published Tue, Feb 28, 2023 · 03:59 PM

Indian banks are not prepared to adopt environmental, social and governance (ESG) norms as part of their lending models for reasons such as a lack of clarity on how such rules apply to lenders, said two sources citing a recent survey.

The sources said that the Reserve Bank of India (RBI), which has acknowledged climate change as a source of financial risk, would likely use the findings to frame the first set of guidelines to boost green finance. They added that the guidelines would likely be issued later this year.

Globally, a rising number of loans are being restructured to link them to a borrower’s ESG performance. Such ESG-based lending surged to US$322 billion globally in 2021, from US$6 billion in 2016. It now accounts for more than 12 per cent of total lending, according to research by London-based Acuity Knowledge Partners published in January.

One source said the survey showed that a majority of domestic banks, particularly small and medium-sized ones, were grappling with issues such as which ESG definitions were applicable to lenders, how the norms would be built into lending decisions, and the lack of technology and systems to track their implementation.

“There is also a low incentive to switch to these norms,” the source said, speaking on condition of anonymity as the results of the survey have not been made public.

The RBI and the Indian Banks’ Association, which conducted the survey, did not respond to an email seeking comment.

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RBI governor Shaktikanta Das said earlier this month that the central bank would “soon” issue guidelines for regulated entities to increase green lending, to accept green deposits and to mitigate risks related to climate change. While green loans can be ESG-linked, they are issued solely to finance environmentally sustainable projects.

These guidelines, the RBI’s first step towards implementing ESG norms, will help India meet its target of reducing its carbon emissions to net zero by 2070.

As a precursor, the RBI released a discussion paper last July that, besides acknowledging the risk of climate change, emphasised the need for a strategy to address the risk.

Some large private and public sector banks are already lending to projects related to renewable energy, electric vehicles and battery storage, among others.

For example, the State Bank of India and the Agence Francaise de Developpement recently signed a climate finance loan worth some US$106 million. Private banks such as Axis Bank and HDFC Bank are establishing an ESG culture, with the latter also constituting a board-governed environmental policy in 2019.

But, at least four private and public sector bankers that Reuters spoke to said that for most lenders, monitoring ESG parameters would be a key challenge.

“Banks currently do not know how to monitor parameters regarding the ESG framework and how to quantify them. There is no technology in place,” an official at a state-run bank said, declining to be named as they were not allowed to speak to the media.

The bankers also said it would cost lenders both time and money to conduct internal research and train staff to align with ESG goals, while most banks had not yet assessed if they need to hire further to implement these norms.

R Gandhi, former deputy governor of the RBI, said the transition towards ESG would be “progressively longish”, and the central bank would probably first ask a subset of the larger banks to implement the norms.

Those banks, he added, would probably first turn to large corporates, and it would take a long time before they pass it to micro borrowers and retail customers. REUTERS

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