Need of Green Banking

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. Although the banking and financial institutions are not directly affected by the environmental degradation, there are indirect costs to banks. 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 industries leading to a likelihood of default to the bank. For example, the enactment of CERCLA in the US in late 1980s has resulted in huge loss to the banks in the US as banks held directly responsible for the environmental pollution of their clients and made to pay the remediation cost. This is the reason for which banks in the US are ahead of other countries in integrating environmental concerns into their business operations. In the recent years several other countries (more in Europe) are seen adopting policies that have made banks responsible for the misdeeds of their clients. Therefore, the financial institutions need to engage proactively with the stake holders on environmental and social policy issues and evaluate the impacts of their client’s investment. In turn, that would force the customers to take care of their management of environmental and social policy issues relating to investment. This should cover all project financing activities across all industries. The importance of green banking is immense for both the banks and economy by avoiding the following risks involved in banking sector.

Credit risk

It can arise indirectly where banks are lending to customers whose businesses are adversely affected by the cost of cleaning up pollution or due to changes in environmental regulations. The cost of meeting new requirements on emission levels may be sufficient to put some companies out of business. Credit risks may be higher due to the probability of customer default as a result of uncalculated expenses for capital investment in production facilities, loss of market share and third-party liability claim. Credit risks are also associated with lending on the security of real estate whose value has diminished owing to environmental problems (additional loss in the event of default). Further, the risk of loan default by debtors due to environmental liabilities due to fines and legal liabilities and reduced priority of repayment under bankruptcy.

Legal risk

It can occur in different forms. Obviously, banks like other companies are at risk if they do not comply with relevant environmental legislation. But more specifically, they are at risk of direct lender liability for cleanup costs or damages claims if they have taken possession of contaminated or pollution-causing assets. An environmental management system helps a bank to reduce risks and costs, enhance its image, and take advantage of revenue opportunities.

Reputation risk

In all likelihood, due to growing awareness about environmental safety, banking institutions are more prone to lose their reputations if they are involved in big projects, which are viewed as socially and environmentally damaging.

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:

1. Managing environmental risk, and
2.Identifying opportunities for innovative environmentally oriented financial products (IFC, 2007)

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, banks 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. These includes investment in renewable energy projects, biodiversity conservation, energy efficiency, investment in cleaner production process and technologies, bonds and mutual funds meant for environmental investments etc.

Initiative taken by Indian Banks

Public Sector Banks

State Bank of India (SBI) (Statistics as per Annual Report 2014-15)

1.     SBI had launched Green Channel Counter (GCC) facility at their branches in 2010 to change the traditional way of paper-based banking (SBI, 2014)

2.     The Bank had also collaborated with Suzlon Energy Ltd for the generation of wind power for selected branches by setting up of Windmills in Gujarat, Tamil Nadu & Maharashtra (Business Standard, 2014).

3.     It has become a signatory to the Carbon Disclosure Project in which they undertake various environmentally and socially sustainable initiatives through its branches spread across the length and breadth of the country.

4.     Export-Import Bank of India (EXIM) and SBI entered into an agreement to jointly provide long-term loans up to 14 years to Spain-based company Astonfeild Renewable Resources and Group T- Solar Global SA for building solar plant in India. Most of the financial institutions avoid giving long-term loans to such projects because of their uncertainty and technological changes.

5.     Bank has adopted energy efficient measures.

6.     SBI is the largest deployer of solar ATM’s.

7.     Bank has installed windmills in three states for its own energy needs.

8.     Paperless Banking is promoted and implemented across the country.

9.     Gives project loans at concessionary rate of interest to encourage reduction of greenhouse gases by adopting efficient manufacturing processes.

Punjab National Bank (PNB)- (Statistics as per annual report 2014-15 and per their websites)
The Bank has been actively pursuing the social policies since two-thirds of branches of the bank are in rural and semi-urban areas where the CSR is the core of normal day-to-day banking operations.

Punjab National Bank has been proactively catering to the needs and aspirations of the society and small & micro entrepreneurs and youth in particular. Towards improving the livelihood of farmers, the Bank has a well-defined setup in terms of Farmer’s training Centres (FTCs), Rural Self Employment Training Institutes (RSETIs), and Financial Literacy and Credit Counselling Centres (FLCCs).

To channelize the efforts of the Bank in the area of CSR, a separate wing i.e. PNB Prerna has been set up wherein the wives of the senior officers and female employees identify the needy organizations and beneficiaries who deserve to be supported for bringing about a change in the lives of differently-abled people and also people from the lower strata of the society. The CSR activities have been decentralized to circle levels. To encourage innovative ideas, a scheme to recognize the best CSR initiatives of the circles is also put in place.

It started emphasizing on green building practices to conserve resources like electricity, water, paper, etc.

PNB is putting their best efforts for rainwater harvesting in existing buildings and encourage environment friendly new constructions. Also, promoting wind energy and popularizing solar energy usage in rural areas.

Sapling of 3345 plants was executed in the 33 Tree Plantation camps organised during the year.

It started emphasizing on green building practices such as energy efficient lights, immediate repair of water leakage, printing on both sides of paper, mater censors for lights, fans, etc. Purchasing composite fax machines which can perform multiple functions.

The organisation had signed a green pledge with Ministry of New and renewable energy under which they had set up the butterfly park at the compound of Guruvayur temple which houses 18 types of medicinal plants.

They had formulated guidelines to ensure that all the necessary approvals and permissions, including from the Pollution Control Board has been obtained before the disbursement of term loans and for the project loans, compliance with environment and social safeguards including rehabilitation and resettlement of project-affected people is to be ensured as a pre-disbursement condition.

The Bank is also considering sustainable development with particular reference to the Equator Principles on project finance.