Posted in Finance Articles, Total Reads: 8001
, Published on 20 October 2011
Don't be surprised to see a credit amount mentioned in your account with the transaction remark put as "green banking" the next time you see your bank account statement. Yes! the green banking is rewarding! It is not only beneficial for the banks and the economy but for the normal customers like you and me as well. This is one among the most novel and innovative green banking initiatives introduced by banks - novel because your bank balance is getting increased and innovative because it is very simple to understand. Every time there is a paperless transaction in the bank, the bank is able to save some money and as a part of green banking initiative a portion of this amount isgiven to its customer. This will encourage more paperless transactions by the customers and in the process help to reduce the carbon footprint as well. It is a win-win-win situation for you, the bank and the environment.
The above green banking initiative is implemented by Citizens Bank of Pennsylvania and is known as Green$ense. It is not far enough that such green initiatives will be taken by Indian Banks.
In India the concept of green banking is catching up and banks are actively looking for methods to portray themselves as a Green Bank.
Going green is in fact more than just becoming environment friendly. Going green is looked upon as a way to reduce costs and mitigate risk.
Green Banking refers to the initiative by banks to encourage environment friendly investments, to give lending priority to those industries which have already turned green or are trying to grow green and thereby help to restore the natural environment. This initiative of green banking is mutually beneficial to the banks, industries and the economy. Moreover Green banking will ensure that the asset qualities of banks are improved in future.Contrary to the belief, environmental friendly technologies make economic sense for the industries andactually lessen their financial burden as well. The polluting industries face more resistance and often forced to close down or face massive resistance from the public. This adds to their cost enormously. So adopting environmentally sustainable technologies or modes of production is no more considered as a financial burden, rather it brings new business opportunities and higher profit. Green banking optimises costs, reduces the risk, enhance banks reputations and contribute to the common good of environmental sustainability. So it serves both the commercial objective of the bank as well as its social responsibility.
Many Indian banks have started to realize the importance and they are taking up various GREEN BANKING initiatives:
"Human aur Hariyali" campaign which introduced solar powered ATM`s. The banks expects to save 1980 Kwh of energy annually. They are also supporting environment friendly finance programmes and providing incentives to go green.
Exclusive group for working on climate change and more specifically carbon credits advisory to the clients to deal with clean development mechanism (CDM), carbon credits of Kyoto protocol and voluntary emission reduction (VERs) authority.
Entered into agreements with multilateral agencies and buyers of carbon credit like KfW Bankergruppe, Federal republic of Germany to offer complete range of CDM related services tailor made to suit the needs of the clients.
Green home loan scheme which supports environment friendly housing projects and offer subsidy and interest rates reduction.
50% waiver in processing fee of cars that use alternate mode of energy like electricity and CNG. Cars like Reva, LPG or CNG versions of Tata and Maruti variants.
Facility of e-statement and for each e-statement registration by a customer, Axis bank will donate a note book to the needy and poor.
Importance and relevance of Green Banking
Banks affect the environment indirectly by financing intermediaries that have an external impact on the environment. They are the major source of long term funding to various industries such as cement, fertilizers, nuclear power, steel, oil and gas, paper etc. which pollute the environment heavily.
Being a major source of fund provider, banks can play a crucial role in ensuring environmentally sustainable and socially responsible investments in the economy. Banks should try and reduce the increase in carbon footprint caused by them either directly and indirectly and should play a vital role in ensuring sustainable and environment friendly development.
In addition, if the lending decisions of the banks are not done prudently as per the environmental criteria, then it may lead to credit risk, legal risk and reputational risk. It is at the interest of the banks to practice green banking and thereby avoiding the aforesaid risks involved in the banking sector.
1. Credit Risk:
The credit risk can happen indirectly in the case when banks lend to companies whose businesses are adversely affected due to changes in environmental regulation. The costs of meeting new environmental requirements might be enough to put some companies out of business. Credit risk can also arise when a bank had given advances to a real estate firm whose property value fell because of environmental issues. Moreover small and medium enterprises (SMEs) engaged in manufacturing business do not have sufficient capital to shift to clean production methods. Hence there are chances of credit risk in these loan portfolios as well in case government comes out with stringent environment regulatory rules.
2. Legal Risk
Banks are at a legal risk if they themselves don't comply with the environmental regulations. But more than inadequate environmental practices followed by debtors may lead to legal risk. The banks will be at a legal risk when they take possession of a collateral property (under SARFAESI or due to loan default) which is contaminated or is a pollution causing asset. For example, A company which has taken loan may incur legal liability to clean up the contaminated site which may further lead to bankruptcy. In such a case the bank's ability to recover the loan is stalled and if the polluted site is part of the collateral security, the value of the property intended to set off default losses is also reduced. If a bank has a proactive environment management system put in place then it can reduce this risk to a great extent.
Banks should watch out from financing environmentally objectionable projects. Banks are certain to lose their reputation if they are involved in some big projects which adversely affect the environment and causes pollution. In addition if loans are advanced to industries which pollute the environment, those industries will face restriction from public and are often forced to shut down their business, thereby creating over and above the reputational risk causing credit risk as well.
The Green banking, on one hand it provideschallenges to the banks and on the other hand it provide many opportunities as well. It is strongly believed that within the foreseeable future carbon will have a price tag attached to it. And it gives banks a role to play in transition to a low carbon economy.
Banks may formulate innovative financial solutions and re design the existing ones so as to incorporate environmental perspectives. Some areas of development could be:
Green financial products - Loans with financial concessions to companies which undertake environmental friendly projects such as manufacturers of fuel efficient automobiles, solar and wind equipment etc. Banks can also introduce a ‘Green Fund’ to provide climate conscious customers the option of investing in environmental friendly projects. Besides introducing specific green banking products, banks can incorporate an Environmental Impact Assessment (EIA) in their project appraisal while financing any project to measure the nature and magnitude of environmental impact as well as suggest environmental risk mitigation measures.
Carbon credit business- Indian banks can involve themselves in carbon credit business, wherein they can provide all the services in the area of Clean development Mechanisms (CDMs) and carbon credits including services of identification and funding of CDM projects, advisory services for registration of CDM projects and commercialization of CERs under different structures to meet the requirements of its customers, acting as an intermediary for buying certified Emission Reductions CERs on behalf of end-users or carbon funds, financing against CERs and CERs receivables, and other related banking services. As India has huge potential for carbon credit business, Indian banks can set up dedicated carbon credit cells to capture a major share of this carbon credit business.
Future of Green Banking
In future the Green banking will become the order of the day. And we expect a lot of associated green products, green services and green regulations would come into picture.
Recognize and reward the environment conscious financial institutions- The Reserve Bank of India or regulatory authority will recognize and reward the environment conscious providers of green loans on an annual basis. By doing this environmentally irresponsible firms may run the risk of hurting their bottom-line as well as their image in the market.
GRISIL - Green Rating and Information Services of India Ltd - Green rating agencies will be set up to provide green analysis of lenders and users of green loans via different ratings.
Eco friendly Investment funds - Green mutual funds will be in markets and climate conscious customers can invest in environment friendly projects. Moreover investment in these would attract tax concessions as well.
Green insurance - The IRDA shall come up with green insurance in which cover is provided for different kinds of environmental risks
Financial institutions and banks in particular have an important role to play in this context by contributing to the creation of a strong and successful low carbon economy. They should expand the use of environmental information in the credit extension and investment decisions. The endeavour will help them proactively improve their environmental performance and creating long term value for their business.
In future, business with a higher carbon footprint would be seen as a riskier business and banks may keep themselves away from financing such business and would look for financing new technology solutions that capture or reduce carbon emissions.
The Green Banking is thus the order of the day and it will definitely benefit the banks, the industries and the environment as a whole.