Banks may soon approach the Reserve Bank of India (RBI) to extend the priority-sector lending (PSL) status to “sustainable finance” to improve credit flow to this segment, given the increasingly critical role it is going to play in shaping the development needs of countries across the globe.
Banking sources told FE that lenders, especially foreign banks like Standard Chartered Bank, have decided to undertake a comprehensive analysis on sustainable financing under the aegis of the Indian Banks’ Association before submitting the proposal to the central bank for consideration.
“The idea is to first properly assess, with comprehensive data, the importance of sustainable financing and then make a case for extending the PSL status to the financing of green power, green hydrogen, electric vehicles or other sustainability projects,” said a senior banker. “Once the analysis is done, it will be submitted with the IBA first before taking up the issue with the RBI,” he added.
The PSL status is typically granted to those sectors which the government and the central bank consider critical for the basic development requirements of the country. Banks are mandated ensure adequate and timely credit to these sectors, in sync with the RBI stipulations from time to time.
At present, advances to agriculture, micro, small and medium enterprises, exports, education, housing, social infrastructure, renewable energy and others such as self-help groups for stipulated purposes qualify for the PSL tag.
Globally, sustainable finance is broadly defined as any form of financial product/service that promotes environmental, social and governance purposes while contributing to the achievement of relevant targets adopted by countries under frameworks, including the Paris agreement on climate and the Sustainable Development Goals of the United Nations. Some foreign banks in India, which want to scale up their sustainable finance, are especially keen on the PSL status for this segment. Any such move will make it easier for them to realise their PSL targets and enable them to better align their financing practices in India with those globally.
Commercial banks (including foreign banks with at least 20 branches in India) are required to extend at least 40% of their outstanding loans deployed in India or credit equivalent of their off-balance-sheet exposure, whichever is higher, to these sectors. Within the broader category, as much as 18% is meant for agriculture alone and 7.5% for micro enterprises. About 12% of these advances will have to be extended to weaker sections.
According to the RBI data on priority sector advances as of July 29, year-on-year growth is recorded in agriculture (13.2%), micro and small enterprises (19.2%), medium enterprises (49.1%), housing (2.5%), renewable energy (88.8%) and others (39.2%). But such loans to the education, social infrastructure and export sectors contracted by 11%, 15.8% and 31.5%, respectively.
Various aspects of sustainability have dominated the global financial discourse in recent years. The RBI had in July released a discussion paper on climate risk and sustainable finance to help regulated entities like banks deal with the issues arising out of global warming, among others. It had advised regulated entities to explore the feasibility of aligning their climate-related financial disclosures on the lines of the framework of the Financial Stability Board’s task force on climate-related financial disclosures.