Perspectives from ISB

In the recently released “Currency and Finance 2022-23” report, the Reserve Bank of India (RBI) sounded a cautionary note about the vulnerability of banking groups in the face of climate-related risks. Climate stress tests have unveiled an interesting insight: regarding climate vulnerability, public sector banks (PSBs) in India may find themselves on shakier ground than their private counterparts.

In climate finance, a remarkable shift has been unfolding in recent years. Bank credit directed towards green industries focusing on sustainability and environmental responsibility has surged ahead of investments in ‘brown’ industries—those associated with high carbon emissions. This shift signifies a growing awareness of our planet’s profound climate risks. Strikingly, this trend has been driven primarily by private banks.

It is important to note a crucial aspect of this increased green financing on the bank’s balance sheet. The gross non-performing asset ratio is quite high for green financing of industries. This is especially true for public sector banks. Either there is an issue in the due diligence part or a need for better monitoring of red flags occasionally. The private lenders do a better job on this front. This highlights a unique challenge that public sector banks face. Green financing needs a more nuanced approach, so training their existing personnel towards the financial aspects of green financing is the need of the hour.

SBI’s ESG Commitment: Leading Sustainability in India

The State Bank of India (SBI) has been at the forefront of green financing in India. Its commitment has earned it a ‘B’ score in the Carbon Disclosure Project (CDP) for the fiscal year 2021-22. The score displays the commitment and endeavour towards mitigating climate change impacts on the environment and society.

In 2023, SBI unveiled its ESG framework (Environmental, Social and Governance framework), fortifying its commitment and dedication towards sustainability. The framework underlines the practices and blueprint for bank managers to manage risks and harness opportunities that come along the way in the form of projects that address sustainability issues.

The growing urgency for financing projects that address sustainability issues and the need for climate action has led SBI to identify some of the key industries and areas of focus, like the electric vehicles (EV) industry, which is growing at a rapid pace in India pioneered by both the large industrial houses and startups alike. Also, a connected industry is the battery manufacturing industry, which is crucial for the success of EVs, besides industries such as the renewable energy, small hydropower, etc. SBI is at the forefront of developing customised products for these industries. Given the benefits provided by the central and state governments, the products offered by the banks become even more attractive.

SBI’s Corporate Centre Sustainability Committee (CCSC) executes the Sustainability and Business Responsibility (SBR) Policy to facilitate its sustainability agenda. One of the most important aspects businesses need is to align the sustainability strategy with their core business strategy. This is exactly what the SBR policy does for SBI. Once the core business strategy is aligned, it becomes easier for businesses to foray into new fields with synergy.

As a responsible institution, SBI recognises its pivotal role in helping India achieve the United Nations’ 2030 agenda for sustainable development. The bank has introduced various products and services to support India’s sustainability goals in line with this commitment.

Empowering Sustainability: SBI’s Innovative Green Financing Solutions

Finance For Biofuel Projects: SBI extends loans to corporations looking to transition from traditional fossil fuels like coal to more sustainable biomass feedstocks. The industry is capital-intensive, and there is a dire need for capital to set up plants. Therefore, this product addresses the crucial need for financing a sector that traditional banking firms usually ignore.

Compressed Biogas (CBG) under SATAT Scheme: Under the Sustainable Alternative towards Affordable Transportation (SATAT) scheme, SBI offers financing for CBG plants. This initiative not only contributes to employment generation but also fosters sustainable industrialisation.

Green Car Loan: SBI encourages eco-friendly mobility through its green car loan scheme. This programme offers extended repayment periods of up to eight years and provides concession on the interest rates of 0.2% compared to regular car loans, which makes it an attractive product. Combined with the income tax benefits already given by the income tax department, the product becomes even more attractive.

Financing Polyhouse: To enhance crop yields and, at the same time, promote sustainability, SBI offers financing for polyhouse farming projects. This addresses some of the crucial challenges and helps attain goals related to zero hunger, good health, sustainable consumption, and production of the SDG.

Financing Solar Photovoltaic Pump Sets: SBI supports the purchase of solar water pumping systems that align with the Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan (PM KUSUM) Yojana of the Government of India. This addresses the dual aspects of providing sustainable livelihoods for farmers and reducing the environmental footprint.

E-Rickshaw Scheme: SBI has approved ₹120.6 million in financing electric rickshaws, promoting cleaner fuels and environmentally friendly practices.

In addition to these initiatives, SBI has implemented a comprehensive framework for rating borrowers based on ESG criteria. This framework mandates ESG ratings for specified borrowers with significant exposures, emphasising the bank’s commitment to responsible lending practices.

Moreover, SBI has established a Green Bond Framework that aligns with the Climate Bonds Standard Version 2.1 by the Climate Bonds Initiative (CBI). This framework enhances transparency and disclosures to investors that set out eligibility criteria for green projects, which is crucial for a bank to reduce bad loans and addresses red-tapism to an extent.

SBI’s commitment to transparency and accountability in green financing extends to obtaining and sharing a second-party opinion (SPO) from external auditors at the pre-issuance stage. This opinion assesses the environmental and social benefits of SBI’s framework and its alignment with international sustainability principles.

SBI: Pioneering Sustainability in India’s Financial Landscape

SBI’s dedication to climate finance and sustainability underscores its pivotal role in shaping India’s sustainable future. With a commitment to responsible banking and green investments, SBI is not just a financial institution; it’s a catalyst for positive change in the face of climate challenges. This will create a snowball effect in the financial industry where more big players enter financing sustainable initiatives, which will help better manage the risks associated with such projects.

The remarkable journey of SBI in the realm of climate finance and supporting sustainable initiatives in India lies a couple of valuable lessons that the banking industry in India and world over can learn and implement.

  1. Balancing risks and profitability– As we are aware about the risks associated with the projects that focus on sustainability and climate change mitigation initiatives, it becomes important to incorporate and implement a customized ESG framework according to the capability of the institution. More financial institutions should come forward and adopt ESG practices that will boost their risk handling capacity. Also aligning core business strategy with the strategy of sustainability is an important lesson. We have examples in other industries like HUL, IKEA, Infosys etc having aligned their core strategy with sustainability, it is time for the financial industry to proactively take this up.
  2. Transparency and accountability– SBI’s commitment to transparency and accountability is evident in its Green Bond Framework, which includes external audits and opinions on its environment and social impact projects. This also adheres to the standards that are recognised internationally.
  3. Awareness creation through education– Initiatives of SBI to create awareness about environment friendly cars and E-rickshaws and initiatives to drive their adoption is a valuable lesson that other financial institutions can emulate. The importance of customer education and awareness in driving change and adoption cannot be understated. This drives the businesses of the bank at the same time promoting sustainable practices that mitigate effects of climate change.

About the author:

Abhinav, a PGP student at the Indian School of Business, is a core member of the Public Policy Club. With extensive experience in GST administration, State Bank of India, and an agro-tourism startup, his diverse background showcases his versatility and passion for public policy.

DISCLAIMER : The views expressed in this blog/article are author’s personal.

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