Indian banks are not prepared to adopt environmental, social and governance (ESG) norms as part of their lending models due to reasons including a lack of clarity on how they apply to lenders, a survey conducted by an industry body on behalf of the central bank showed, said two people aware of the matter.
The Reserve Bank of India (RBI), which has acknowledged climate change as a source of financial risk, will likely use the findings to frame the first set of guidelines to boost green finance, the people said. The guidelines will likely be issued later this year, they added.
Globally, a rising number of loans are being restructured to link them to a borrower’s ESG performance. Such ESG-based lending surged to $322 billion globally in 2021, from $6 billion in 2016, to account for over 12% of total lending, per research by London-based Acuity Knowledge Partners published in January.
The survey in India showed a majority of domestic banks, particularly mid-sized and small ones, are grappling with issues on the ESG definitions applicable to lenders, how the norms will be built into lending decisions and the lack of technology and systems to track their implementation, said one of the people.
“There is also a low incentive to switch to these norms,” the person said, speaking on condition of anonymity as the results of the survey are not public.
The RBI and the Indian Banks’ Association, which conducted the survey, did not respond to an email seeking comment.
Governor Shaktikanta Das said earlier this month that the central bank will “soon” issue guidelines for regulated entities to increase green lending, accept green deposits and 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 in 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.
“PROGRESSIVELY LONGISH” TRANSITION
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, State Bank of India and Agence Francaise de Developpement recently signed a climate finance loan worth 100 million euros (about $106 million). Meanwhile, private banks like Axis Bank Ltd and HDFC Bank Ltd 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 are 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.
The transition towards ESG will be “progressively longish” and the RBI will probably first ask a subset of the larger banks to implement the norms, said R Gandhi, the central bank’s former deputy governor.
Those banks, said Gandhi, will probably first turn to large corporates and it will take a long time before they pass it to micro borrowers and retail customers.
