Banking on green projects

Written by Kumud Das | Sitanshu Swain | Updated: Jul 3 2011, 08:49am hrs
Recently, Naina Lal Kidwai, group general manager and country head, HSBC India, had sought regulations for banks on funding projects that may not be environmentally sustainable. Kidwai had expressed the need for certain uniform standards or guidelines to be adopted by the banks for funding projects that are not environmentally friendly.

When asked if there are projects that the bank does not finance because of environmental concerns, she says, Since there are no fixed standards, if I dont lend, somebody else will. But we definitely seek an environmental audit or the road map of the company on clean technologies before we lend. In case the company does not have a clear strategy, we will not be comfortable lending.

However, the scenario seems to be changing swiftly since the Indian economy has seen the emergence of green banking.

Thanks to the increased awareness about global warming, banks are now putting their acts together, taking into consideration the environmental concerns more seriously than before.

As part of its green banking initiatives, State Bank of India (SBI), the countrys largest bank, has been encouraging customers by extending project loans on concessionary interest rates to reduce greenhouse gas (GHG) emissions by adopting efficient manufacturing practices through acquisition of latest technology. SBI offers an interest discount of 10 basis points on all such environment-friendly projects.

The bank also arranges consultancy services by roping in the services of empanelled consultants in CDM (Clean Development Mechanism) registration process. SBI has also launched a loan product to facilitate upfront finance to project developers by way of securitisation of carbon emission reduction (CER) receivables. Besides, for its own consumption, the bank has commissioned windmill projects and the power thus generated is being consumed by branches/ offices in Maharashtra, Gujarat and Tamil Nadu, thereby reducing dependence on thermal power.

Pratip Chaudhuri, chairman, says the bank is the first in the entire banking, insurance and financial services sector to have conceptualised and deployed wind farms for generation of green power to partly substitute consumption of thermal power by its offices in India. The bank has also launched a project to measure and manage organisation-level footprint to achieve carbon neutrality.

To encourage customers to reduce emission of GHGs, SBI has been extending project loans on concessionary interest rates, encouraging them to adopt efficient manufacturing practices through acquisition of latest technology. A pilot project to map the banks carbon footprint has been launched to help us in sustainable use of energy in a cost-effective way, says Chaudhuri.

ICICI Bank, the second largest commercial bank, has set up its Technology Finance Group (TFG) for implementing multilateral programmes on behalf of the government of India in the areas of collaborative research and development, energy, environment and healthcare.

The groups initiatives include efforts to attract and channel private financing into cleaner technologies, to create public-private partnerships to mitigate greenhouse gas emissions through energy efficiency and promote sustainable development.

TFG assisted the introduction of environmental management codes (ISO 14000) in India. It supported clean-coal concepts like coal washeries and coal bed methane for the first time in India. TFG also aided in the development of the first electric passenger car in India, currently being exported to several countries. It also assisted in the introduction of municipal shared savings concept through the energy service company (ESCO) route, which helps save expenditure on street lighting and water pumping.

In fiscal 2011, TFG in collaboration with leading institutes assisted various projects in the areas of solar energy, nuclear energy and drug discovery. This includes assistance to The Energy Resource Institute (TERI) for its project to build select laboratories for promoting sustainable development in energy efficiency.

The laboratories would be equipped to develop biomass energy systems, decentralised electricity solutions, characterise waste material and solar power systems. The laboratories will also promote energy efficiency in the industry through various means including certification of solar lighting products, says Chanda Kochhar, MD & CEO, ICICI Bank.

Speaking about Canara Banks initiatives, executive director Archana Bhargava elaborates that the bank is extending loans for installing solar lighting systems.

So far, we have financed 50,000 such units. We have lent a sum of R5-8 lakh for each unit, taking our total outstanding to R50 crore. All such financing has been made at an interest rate of 2% only. It could become possible thanks to the schemes being run by Nabard and the ministry of new and renewable energy. We are planning to finance 5,000 more such units during the current fiscal.

M Narendra, CMD, Indian Overseas Bank, adds that banks are aggressively financing projects related to windmills, biomass energy and solar power. These projects have got the potential to earn carbon credits as they are cost efficient, though the initial investment may be higher, observes Narendra.

Nagesh Pydah, CMD, Oriental Bank of Commerce, too, says that the bank is willing to finance those project which fall under the energy audit programme of the central government. We want to treat such units as SMEs and are ready to lend them at an interest rate in the region of 10.5 to 11%, he says.

In fact, currently the Indian Banks Association is collaborating with the British High Commission to prepare the first ever document for making Mumbai a carbon-finance hub. With a view to discussing the barriers that the financial institutions and banks are facing in their investment in low-carbon technology projects and to identify the potential to make Mumbai a carbon-finance hub, a roundtable was held by the British High Commission, in association with IBA, recently in Mumbai.

After the event, we are in touch with banks and stock exchanges in the country to understand their views on the topic, We will be collecting their views and discussing them further with relevant stakeholders, says a person familiar with the development.

The report is also expected to throw light on hindrances that deter banks from funding environment- friendly projects as they feel that investing in such projects is time consuming and financing traditional projects offer better returns than an environment-friendly project.

Hence, banks are of the view that the venture capitalists should come first and banks would follow them. Moreover, banks are of the view that the risks for such projects need to be covered, which they suggest can be done by the government or multilateral institutions facilitating flow of finance to such projects.

Rana Kapoor, managing director and CEO of YES Bank, says that there is a relative dearth of professional intermediaries exclusively focused on the sustainability space. In some cases, small ticket sizes coupled with diligence costs make the economics of the transaction unattractive to tradition intermediaries, he explains. In certain instances, lack of proven business model/technology and verifiable track record as well as the lack of reliable impact metrics make identification, assessment and measurement of transaction risks extremely difficult, adds Kapoor.

However, of late, banks funding environment-friendly projects are getting regulatory push even if such projects dont provide higher returns.

KC Chakrabarty, deputy governor of RBI, has even called for popularising non-financial reporting by banks. It is time the markets and rating agencies appreciated the risks and losses that a bank takes while funding social sector projects, he says. Unless you appreciate this aspect of a companys business, non-financial reporting will not stabilise. A bank has to be appreciated for adding value to the society by financing the poor, or by financing socially or environmentally-relevant projects, he says.

Explaining that non-financial reporting is sustainability reporting, he adds that such reporting should talk about what a company does, other than its core business, in adding value to the society. But so long as those who award banks for their higher profits and high net interest margin (NIM) dont appreciate these activities, non-financial reporting will only remain on paper and will never stabilise, he laments.

Saying that ultimately banks are in the intermediation business, Chakrabarty adds, For the good of the economy, intermediation has to be efficient, which means operating at lower margins or doing service at a lower cost. And who does the most efficient job One who does the job with the least margins. But a bank that is doing inefficient intermediation, though it may be making profits, gets all the appreciation because it reports higher NIM and profits.

So, we must change our outlook to judge the performance of a bank or a company that creates social values and thus non-financial reporting, concludes Chakrabarty.