Green Lending Gets Stalled: Banks Seek Incentives

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Lenders are advocating for revised terms, including adjustments to priority-sector lending (PSL) norms and relaxation in reserve requirements, to ramp up green and sustainable financing initiatives.

Speaking at a financial inclusion conference organized by the Indian Merchants Chamber (IMC), S Rana, Deputy Managing Director (Small and Medium Enterprises) at State Bank of India (SBI), emphasized the need for incentivizing green finance. He highlighted that the Reserve Bank of India (RBI) has already permitted loans up to Rs 30 crore for green energy projects such as wind and solar under the PSL category.

Currently, banks are mandated to ensure that a certain portion of their lending, specifically Rs 4,000 crore for every Rs 10,000 crore in loans, qualifies as PSL. Rana noted that failing to meet this requirement incurs costs for lenders, prompting discussions with the regulator to reconsider norms and encourage financing for sustainability and green projects.

In February 2024, during the launch of a green-deposit scheme, SBI requested the RBI to lower the cash reserve ratio (CRR) applicable to green deposits mobilized from customers. Banks typically maintain a CRR of 4.5% on all deposits, without any specific exemption for green deposits. Additionally, they must invest 18% of their net demand and time liabilities in government bonds to meet the statutory liquidity ratio (SLR).

Dinesh Khara, Chairman of SBI, proposed integrating CRR reduction into the broader policy framework for all banks. Meanwhile, M Narendra, Co-Chairman of IMC’s financial services committee, urged a review of PSL norms to encompass funding for green projects, expanding into new areas and enhancing existing limits. Currently, renewable energy projects up to Rs 30 crore qualify for PSL status.

Kadambelil Paul Thomas, Managing Director and CEO of ESAF Small Finance Bank, highlighted that while many lenders are financing green projects on a small scale, there is a lack of sufficient incentives. He stressed the importance of revisiting current norms, including PSL regulations and incentives, to bolster funding in line with India’s evolving needs.

According to the RBI’s Report on Currency and Finance (RCF) FY23, India requires an additional annual investment of at least 2.5% of GDP for green financing until 2030 to bridge the infrastructure gap necessary for achieving climate-change objectives. This estimate underscores the substantial investment required in socio-economic infrastructure as part of a successful green transition plan.

The report also emphasizes that these investment needs do not explicitly factor in requirements for mitigating and adapting to climate change impacts, suggesting that the actual funding demands could be higher. The gap between current infrastructure levels and what could have been achieved without climate-related disruptions is estimated to be approximately 5.2% of GDP, highlighting the scale of the challenge ahead.