RBI working on green finance framework

Even for domestic loans, rate of interest would be decided after taking into consideration ESG score

The Reserve Bank of India (RBI) is working on a framework for standardising green bond issuances and financing issues, to align India with other nations that already has such rules, according to sources.

The Indian Banks’ Association (IBA) held a meeting on Monday to provide their inputs to the central bank to develop the framework. Sources said RBI has just started the process and no concrete step has been taken.

Some domestic institutions — like the National Bank for Agriculture and Rural Development, Small Industries Development Bank of India (SIDBI), Exim Bank, YES Bank, Axis Bank — have their own exacting standards for green financing. The Reserve Bank asked IBA representatives to collate these standards and pass it on to the central bank.

“It will take some time before such standard come in to existence,” said a banker.

Green financing, or financing for sustainable and renewable projects, has assumed huge significance globally and reputed investors do not extend their loans for a project if a portion of it is not certified as green, said bankers. India is late in the game. Such standards and guidelines exist even in countries such as Bangladesh, Sri Lanka, Indonesia and Cambodia. Developed countries are way ahead in these aspects, while China has done some impressive work on green finance. China has managed to pursue a lot of serious investors to invest in the country, boosting its green credentials. While some banks and other institutions had raised green bonds recently, estimated at more than $2.5 billion, the definition of these bonds and the end-use varies with the issuer.

At the meet, one issue the bankers wanted the RBI to do was to standardise environmental, social and governance (ESG) practices across banking and finance to create a level playing field. ESG measures sustainability and ethical impact of an investment in a company.

“When an international investor lends for a project, the first thing he asks is the ESG score. It is not a standard practice in India yet. But it will become a critical evaluation factor for every loan that would be sanctioned,” said an official with a private sector bank.

Even for domestic loans, the rate of interest would be decided after taking into consideration the ESG score. The score also takes into account the impact on climate and how a change in environment would change the future of a project.

Given the rapid change in climatic conditions, the score is going to be a global standard and India is moving to develop its own yardsticks.