Net-zero shift may have less impact on banking, says RBI study

The transition to the net-zero emission target will entail limited spill-over impact on Indian banking because three sectors with direct exposure to fossil fuels — electricity, auto, and chemical — form only 10 per cent of non-retail credit, according to a study by the Reserve Bank of India (RBI).
 

But several other industries indirectly use fossil fuels and therefore, any transition to green energy can have implications for their income and consequently their interest coverage ratio (ICR). Therefore, the gross non-performing assets (GNPA) ratio of such industries may be sensitive to green energy transition and thus, the impact on the overall banking system needs to be monitored closely, it said.
 

The study — Green Transition Risks to Indian Banks (March 2022) — stated the shift shall entail adjustment in production processes of industries that are directly or indirectly exposed to excessive use of fossil fuel.
 

India made five pledges at the global climate meeting in Glasgow in October 2021 for taking steps towards controlling emissions. These included net-zero emission by 2070 and achieving a non-fossil fuel energy capacity of 500 GW by 2030. Other pledges were to meet 50 per cent of energy requirements from renewable sources, reduce total projected carbon emissions by 1 billion tonnes, and cut the carbon intensity of the economy to less than 45 per cent.
 

The RBI study pointed out sectors like cement production have large exposure to fossil fuel but their credit shares are small. So, large vulnerabilities are not expected to emerge in the banking sector from disruptions, if any, in the sectors that are highly exposed to fossil fuels.
 

As for funding green energy, it said the exposure of the banking sector has, so far, been limited to alternative sources of energy.

At the all-India level, only about 8 per cent of the bank credit deployed in the electricity industry is towards non-conventional energy production. The ratio varies from 17 per cent in Punjab to 0.1 per cent in Odisha.
 

Although the share of non-conventional energy in utility sector credit is higher for private sector banks (14.8 per cent), it is only 5.2 per cent in public sector banks, it added.