Lenders seek better terms to increase green and sustainable financing

According to current norms, for Rs 10,000 crore of loans, banks have to ensure Rs 4,000 crore of priority sector lending target

Lenders are seeking better terms, including revision in priority-sector lending (PSL) norms and a leeway in reserve requirements, for increasing green and sustainable financing.

“It is time to give incentives for green finance. The Reserve Bank of India (RBI) has allowed up to Rs 30 crore for green energy projects like wind and solar as PSL,” said S Rana, deputy managing director (small and medium enterprises), State Bank of India (SBI), on the sidelines of a conference on financial inclusion organised by the Indian Merchants Chamber (IMC).

According to current norms, for loans of Rs 10,000 crore, banks have to ensure Rs 4,000 crore of PSL. Not meeting this target has a cost. Lenders have spoken about taking another look at norms (with the regulator) for encouraging financing for sustainability and green projects, he added.

In February 2024, while launching the green-deposit scheme, SBI, the country’s largest lender, requested the RBI for a lower cash reserve ratio (CRR) on green deposits raised from customers.

Banks have to maintain a CRR of 4.5 per cent on deposits, with no exception for green deposits. Also, they have to invest 18 per cent of net demand and time liabilities in government bonds for maintaining the statutory liquidity ratio (SLR).

The other proposal of SBI was making CRR reduction part of the overall policy for all banks, Chairman Dinesh Khara had said in February.

M Narendra, co-chairman, financial services committee, IMC, said it was time to revisit PSL norms to include funding green projects – getting in new areas as well as increasing limits. At present renewable energy projects of up to Rs 30 crore get PSL status.

Kadambelil Paul Thomas, managing director and chief executive, ESAF Small Finance Bank, said most lenders were doing such funding on a small scale without any incentive. A fresh look at present norms like PSL rules and incentives is necessary to increase funding, given the requirements in the system in India, he said.

According to the RBI’s Report on Currency and Finance (RCF) FY23, India will need an additional annual investment of at least 2.5 per cent of gross domestic product (GDP) for green financing till 2030.

This is to bridge the infrastructure gap for climate-change goals.

Apart from the requirements of higher banking capital, a successful green transition plan would entail large investment in socio-economic infrastructure.

These estimates do not explicitly take into account any investment required for mitigation and adaptation due to climate change. So, funding requirements are likely to be higher.

The gap between infrastructure now and the level of infrastructure that could have been achieved in the absence of climate events is about 5.2 per cent of GDP, the report said.

PRESENT RULES

> Currently, lenders have to ensure Rs 4,000 crore of PSL target for Rs 10,000 crore of loans
 

> Not meeting the target attracts costs
 

> Banks have to maintain a CRR of 4.5% on total deposits with no distinction provided for green deposits 
 

> In February, SBI had requested RBI for a lower CRR on green deposits 
 

> India will need additional annual investment of at least 2.5% of GDP for green financing till 2030, according to an RBI report