Greater proportion of green loans (loans that are given for sustainable, environmentally friendly purposes aimed at reducing CO2 emissions, or purposes contributing to the green transition) can improve the core loan portfolio of Indian banks, this was revealed based on a study conducted by the Indian Institute of Management Lucknow Faculty Research. The study shows that the expansion of non-carbon intensive lending can improve the core of loan portfolios of Indian banks. The study provides compelling evidence that the banks that have greater proportion of green loans, experience long-term improvements in financial stability that adds to the strategic importance of sustainable lending in the Indian banking system.
The study was conducted by Prof Vikas Srivastava, ONGC Chair Professor, Prof Sowmya Subramaniam, Associate Professor, Finance and Accounting, and Vidya Mahadevan, research scholar at IIM Lucknow. The study found that despite global initiatives to create uniform frameworks for green lending, there are significant gaps in providing incentives, particularly in developing economies such as India. It noted that most of the Indian banks are heavily dependent on lending to carbon-intensive industries as there is no clear taxonomy to identify and promote green assets in the country.
The study has tried to address this gap by designing a framework to identify non-carbon-intensive sectors and assessing their impact on the quality of the bank’s loan portfolio. Interestingly this is for the first time that the study has ranked Indian banks based on the sustainability of their credit portfolios, with a specific focus on non-carbon-intensive loans. This evaluation provides valuable insights for shaping future credit allocation strategies, helping banks balance financial stability with sustainable growth.
It also observed that Indian banks can act as catalysts in creating a low-carbon economy. By increasing lending to non-carbon-intensive sectors, banks can reduce default risks, align with global sustainability goals, and contribute to long-term economic resilience.
In a combined statement the researchers from IIM Lucknow have said that their attempt at standardisation of green loan taxonomy and finding that a critical mass of green asset lending is required for an optimised credit portfolio is a critical insight that can help the top management of banks to focus on this asset class as an opportunity to build sustained lending competences across their credit teams. “Our findings may help regulators to perhaps come out with appropriate regulatory nudges for bank. An optimised bank credit portfolio will go a long way to improve the competitiveness of Indian banking sector,” the authors remarked in a joint statement.
The research has emphasised that green lending by Indian banks will improve the quality of their loan protfolio. The research defines a non-linear, inverted U-shaped relationship between non-carbon-intensive lending and Non-Performing Loans (NPLs). While the benefits may not be immediately apparent at lower levels of green lending, once a critical threshold is reached, the overall credit quality of banks improves significantly.
The study also notes that there is a need for a standardised green taxonomy and regulatory support. The study observes that despite global efforts to define green investments, India lacks a robust regulatory framework and green taxonomy parameters to guide banks in sustainable lending practices. The study proposes a structured classification framework to categorise economic sectors based on their carbon intensity, facilitating banks with appropriate types of credit interventions.
The study further notes that considering the high exposure to risks due to climate change and carbon-intensive industries, Indian banks must proactively modify and diversify the credit portfolios. While non-carbon-intensive lending offers a strategic opportunity to ensure sustainability, without any regulatory push, banks are suspected to face hurdles in adopting green lending practices. This highlights the urgent need for policy interventions to achieve sustainable finance. Broadly the study has provided a data-driven framework for integrating green finance into mainstream banking operations, ensuring that Indian banks remain financially strong while contributing to a more sustainable future.
As per the study, the overall lending portfolio for Indian banks saw that around 35.94 per cent of their total loans were to non-carbon intensive sectors in 2022 whereas the carbon intensive sectors dominated the loan portfolio with 64.06 per cent of loans disbursed to them by Indian banks.
