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Some banks have started appointing environmental specialists and social experts to appraise proposals before sanctioning big-ticket loans. The move is aimed at reducing the scope of delinquencies arising from the lack of environmental clearances or employee unrest.
Sometimes, projects get stuck over environmental clearance or because of union unrest due to unhealthy work environment, bankers explain. In such scenarios, banks’ loans are at risk. So, lenders are seeking help from specialists to evaluate large loan proposals. This is being done in addition to the routine loan appraisal process, where lenders assess commercial viability of projects, cash flow expectations, etc.
“YES Bank has an environmental and social policy (ESP), which draws from the Equator Principles, IFC (International Finance Corporation) guidelines and other international best practices, and provides a 360-degree risk-mitigation framework. It covers impacts related to natural habitat, including air, water, land, flora, fauna and biodiversity. The policy also covers negative impact on environment due to project financing — such as pollution, land water/ground water depletion, deforestation and habitat destruction,” Namita Vikas, senior president & country head for responsible banking at YES Bank, told Business Standard.
She added the bank had been training professionals on environmental and social risks to help them in decision-making after evaluating projects on ESG (environmental, social and governance) parameters. “There is a large gap in the existing level of sensitisation among bankers on these parameters... This (training professionals) is just a starting point and such trainings could become part of risk-assessment courses for BFSI (banking, financial services and insurance), and management institutions,” Vikas said.
Rival Axis Bank is planning to soon introduce ESG audit to appraise loan proposals. “A proposal has been given to the board. The bank will start asking for ESG certificates while appraising loan proposals,” a person familiar with the development said.
However, this practice so far remains limited to only a few banks. Bankers claim borrowers are often inclined to seek loans from banks that do not demand ESG audit. The Indian Banks’ Association (IBA) is working towards creating a unified code for lenders, to create a level playing field and ensure balance between growth and sustainability.
“Some of these things need to start in the form of self-regulation. That is where IBA comes in; that is the best way forward. For projects that need environmental clearance, there is an in-built clause in the loan proposal. Every bank will put in its sanction that environmental clearance must be there. But, sometimes, problems remain in spite of clearances being there. So, some banks do not want to rely on certificates given by government officials. It is a good move by industry,” said a deputy governor with the Reserve Bank of India (RBI) who did not wish to be named.
