$5 bn sustainability loans can be linked with target: BofA's Subramaniam

Bengaluru is worst-affected city, even as it continues to top start-up fundraising

Shankar Subramaniam, managing director and India head (corporate banking) of Bank of America, in an interview with Manojit Saha explains why demand for sustainability loans is increasing among the Indian corporate sector. Edited excerpts:

Larsen and Toubro (L&T) recently completed the transition of a $150 million loan into sustainability-linked loan (SLL). Are SLLs gaining popularity among Indian corporates? 

We are witnessing the beginning of an extremely positive trend. Over the past couple of years, the majority of corporates have declared their net-zero targets. They are now taking a step forward and ascribing a cost on not delivering on their targets. It is a step in the right direction as it conveys the strong commitment of corporates to their sustainability targets. As a result, SLLs are becoming popular. Besides L&T, our loans to Glenmark and Tata Power in 2022 were also structured in a manner that offered them pricing benefits on meeting their self-declared sustainability targets.

How big is the SLL pipeline? Are these loans concentrated only in certain sectors?

While it is difficult to put an exact number, one of the ways you can look at it is as a proportion of potential refinancing and new loans by Indian companies. Over the next 12-24 months, around $5 billion of such loans can be linked with sustainability targets. The opportunity is certainly there but it will ultimately depend on individual corporates and how far advanced they are in their sustainability framework. This is because among the parameters that we consider are to ensure that the key performance indicators are core to the business and commitments in the framework are adhered to in the SLL’s as well.

Which sectors are contributing to the demand?

We are seeing demand for SLLs across sectors. At Bank of America, we have executed deals in sectors like pharmaceuticals, power and EPC (engineering, procurement, and construction). There are similar conversations happening in the industrials, telecom, and infrastructure space. I think most corporates want to deliver the message that they are committed to sustainability goals, and SLLs are a great way to convey that message to the investor community.

Are pricing incentivising corporates to opt for SLLs?

Not exactly. I don’t think pricing benefits are powering this trend. The pricing advantage is about 5 basis points per annum. So, what is in it for the corporate? It is the investor sentiment towards that company. With a positive sentiment, a corporate will be able to attract investors, who are looking to invest in companies that are conforming to certain standards and are willing to take on an additional cost burden if they don’t deliver. It also opens up their access to many funds that have specific pockets that are reserved for this kind of facility.

Are you also helping corporates build their sustainability frameworks?

Yes, many of our clients are in the process of establishing their sustainability framework and we are helping them develop it. Sustainability framework is a document that not only talks about a company’s overall commitment but also provides timelines that are very often ratified by external agencies. Once such a framework is created then a company can leverage it to transition some of their existing loans to SLLs.

Credit growth is witnessing a recovery. Is it powered by private capex? 

Private capex cycle has started, but only selectively. There are a few sectors, like telecom and infrastructure, where companies are expanding and taking forward their capex requirements. Indian corporates have deleveraged their balance sheets over the past few years and have surplus cash. There is no immediate urgency for them to raise additional capital unless they are planning some sort of transformational capex. For short-term, regular capex, they are proceeding with INR borrowings, which is relatively cheaper than foreign currency options. I believe that the private capex cycle will gain traction post elections next year. 

 The ‘India Rising’ story is gaining acceptance among global investors. Do you agree?

Definitely. The macro resilience, infrastructure creation, and geopolitical factors are contributing to India’s rise, prompting many to consider this as India’s decade. There is optimism, not just from foreign institutional investors but also from foreign direct investment perspective.

The government’s focus on infrastructure development is clearly visible as subsidies have halved, and the money has been repurposed to build infrastructure. Transport and social infrastructure capacity additions in 10 years (FY15-25) is likely to be greater than previous 60 years (FY1955-2015). On digital infrastructure, India has emerged as the global leader in next-generation real-time payments infrastructure. UPI has processed over 83 billion transactions ($170 billion) in FY23. The production-linked incentive (PLI) scheme implemented within the mobile manufacturing sector has received a great response from global firms and looks set to capture a sizable part of the global supply chains of companies like Apple and Samsung.

The government has followed this up with PLI schemes of $37 billion in 16 other sectors like semi-conductors, drones, IT hardware, pharma, steel, autos, textiles, white goods, solar PV, batteries, etc. keeping in mind the potential for India to develop a competitive edge over time. India is a perfect fit for MNCs looking to strategically diversify their operations.