In 2022, the Reserve Bank of India said that most banks promised to support green financing. In July, the Centre said India will have a climate taxonomy soon. It is October and there is still no word on it. These things take time. Yet until there is a taxonomy, Indian banks will keep running around confused.
The latest sector-wise credit data shows that Indian banks have increased their exposure to fossil fuel-based industries by 20% in the last three months. However, when it comes to green finance, the growth is just around 14%.
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85% of scheduled banks had promised to change two things
2 years ago, the Reserve Bank of India (RBI) said that 85% of scheduled banks had promised to change two things. First is, how they lend. And second is investing to support green financing. A year later, just 10 Indian banks had shared figures on the amount of credit they’d given to green initiatives, according to a report by Climate Risk Horizons (CRH), an Indian research firm that specializes in climate financing.
44% of banks were unsure how to approach green financing
Nine other banks said that while they were financing green projects, they didn’t have the numbers to hand. A significant 44% of banks were unsure how to approach green financing. That’s the problem.
Basel Committee on Banking Supervision says, climate change affect the banks in two ways
Climate change could affect the business models of banks in two ways, according to the Basel Committee on Banking Supervision, which includes central banks and bank supervisors from 28 countries.
Reason 1: Banks could lose money due to extreme weather. It’s happening more. India had 318 extreme weather events in 2023.
Reason 2: countries are trying to cut carbon emissions. It is a shift towards green energy. It could hurt banks which have invested in non-green industries.
Why are Indian banks confused?
India has not yet created its own climate taxonomy.
A climate taxonomy helps decide if a new investment is green. Many countries have created their own taxonomies. Singapore is stopping to fund coal. DBS can help end Asian coal use.
Canada, China and Mexico have also created their own taxonomies. China’s default rate on loans for green projects is 0.4%, much lower than the average of around 2%.
Indian banks invested most in coal
“Indian public banks have invested more in coal. “Most public sector banks have increased their coal exposure, while some private sector banks have reduced it,” says Sagar Asapur, head of sustainable finance at CRH.
Indian banks that have moved towards green financing, like Federal Bank and HDFC Bank, have had to rely on external standards. This is difficult because definitions of green financing need to consider the stage of an economy’s development. Singapore’s approach to green financing may not work in India.
Indian banks that have adopted green financing are struggling.
Climate loans
Take the Federal Bank as an example. This Kerala-based bank has stopped financing coal projects and uses the same definition of a ‘climate loan’ as other banks. But it has been difficult. “We don’t have a green taxonomy. We have a team that checks each green loan proposal to see if it is green,” says Damodaran C, vice-president and chief risk officer at Federal Bank.
The senior executive adds that taxonomies require specific certifications and are aligned to the economy’s overall maturity. It is important to have a taxonomies for India that suits India’s priorities and levels of preparedness. Some global taxonomies are very complex and increase the cost of borrowing.
There is a clear and compelling case for a quick taxonomy.
There is no agreed climate taxonomy, which is slowing down progress on green financing. Indian Banks are also defining green finance in their own way, which might not stand up to government scrutiny.
Some Indian banks use their own tools. Others are using measures of climate risks based on returns on fossil fuel reserves or focusing entirely on carbon footprints.
Absence of concrete guidelines
A recent RBI survey shows that most Indian banks are not linking their climate-related financial disclosures with any international framework. Outlook Business asked Bank of Baroda officials about green financing. They said there are no concrete guidelines yet.
Preliminary stress tests have not led to new policies
The RBI has set out some principles and done a preliminary stress test. These tests have not led to new policies. Asapur says that the public doesn’t have access to the initial details of the Indian climate taxonomy. He says the government is not sure if it will use carbon credits or focus on one sector.
We need an Indian climate taxonomy. If there’s another delay, banks’ long-term plans will be affected. If banks keep making their own green financing plans, these may be questioned when the government’s taxonomy is introduced. A well-framed Indian taxonomy is important because private capital is investing in green initiatives and the Global North is defining what is green.
