GREEN BANKING IN INDIA FOR SUSTAINABLE DEVELOPNEMT: A STUDY Dr.

SURESH VADDE Associate Professor Department of Accounting & Finance College of Business & Economics Mekelle University, Mekelle, Ethiopia Email: sureshvadde1@gmail.com

ABSTRACT Environmental protection and awareness, and sustainable, ecological measures have emerged as significant themes of our age and an increasing number of green technologies are also finding their way into the banking branch. Sustainable development can best be achieved by allowing markets to work within an appropriate framework of cost efficient regulations and economic instruments. One of the major economic agents influencing overall industrial activity and economic growth is the financial institutions such as banking sector. In a globalised economy, the industries and firms are vulnerable to stringent environmental policies, severe law suits or consumer boycotts. Since banking sector is one of the major stake holders in the industrial sector, it can find itself faced with credit risk and liability risks. Further, environmental impact might affect the quality of assets and also rate of return of banks in the long-run. Thus the banks should go green and play a pro-active role to take environmental and ecological aspects as part of their lending principle, which would force industries to go for mandated investment for environmental management, use of appropriate technologies and management systems. This paper explores the importance of green banking, green banking products and providing banks in India. Finally it concludes with green banking strategies, green mortgages and initiatives taken by Indian banks.

Key words: sustainable development, globalised economy, banking sector, environment and eco friendly etc...

INTRODUCTION Green banking is like a normal bank, which considers all the social and environmental/ecological factors with an aim to protect the environment and conserve natural resources. It is also called as an ethical bank or a sustainable bank. They are controlled by the same authorities but with an additional agenda toward taking care of the Earth's environment/habitats/resources. The banking sector influences the economic growth and development in terms of both quality and quantity, there by changing the nature of economic growth. Banking sector is one of the major sources of financing investment for commercial projects which is one of the most important economic activities for economic growth. Therefore, banking sector can play a crucial role in promoting environmentally sustainable and socially responsible investment (SRI). Banks may not be the polluters themselves but they will probably have a banking relationship with some companies/investment projects that are polluters or could be in future. Banking sector is generally considered as environmental friendly in terms of emissions and pollutions. Internal environmental impact of the banking sector such as use of energy, paper and water are relatively low and clean. Environmental impact of banks is not physically related to their banking activities but with the customers activities. Therefore, environmental impact of banks external activity is huge though difficult to estimate. Moreover, environment management in the banking business is like risk management. It increases the enterprise value and lowers loss ratio as higher quality loan portfolio results in higher earnings. Thus, encouraging environmentally responsible investments and prudent lending should be one of the responsibilities of the banking sector. Further, those industries which have already become green and those, which are making serious attempts to grow green, should be accorded priority to lending by the banks. This method of finance can be called as Green Banking, an effort by the banks to make the industries grow green and in the process restore the natural environment. This concept of Green Banking will be mutually beneficial to the banks, industries and the economy. Not only Green Banking will ensure the greening of the industries but it will also facilitate in improving the asset quality of the banks in future. Internationally, there is a growing concern about the role of banking and institutional investors for environmentally responsible/socially responsible investment projects3. Banking and other financial institutions are more effective towards achieving this goal for the kind of intermediary role they play in any economy and for their potential reach to the number of
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investors. Environment is no longer the exclusive concern of the government and the direct polluters, but also the other partners and stake- holders in the business like financial institutions such as banking institutions can play a very important role in fostering linkage between economic development and environmental protection. To substantiate, quality of service, the implementation of environmental conservation measures, support to the deprived section of the society, concern about the quality of life and nature are the basic principles that the financial institutions are relying on in their business strategy in recent years. WHY GREEN BANK IS NECESSARY Banks can do much more to help the environment than just promote online banking. A truly green bank can reduce their carbon footprint by building more efficient branches, implementing more energy-efficient operational procedures, offering transportation services for their employees and carefully screening their lending in environment-sensitive industries. Banks can also support eco-friendly groups, offer green lending and raise money for local environment initiatives. Banks that go to these significant lengths to be eco-friendly are a little more difficult to find than the banks that claim to be green by merely offering online services. Banks that offer rate incentives on CDs, money market accounts, online savings accounts and checking accounts for online banking also help the green banking cause by rewarding online banking customers. It take a little bit of an incentive to convert some people away from paper statements and branch banking. IMPORTANCE OF GREEN BANKING Environmental protection and awareness, and sustainable, ecological measures have emerged as significant themes of our age and an increasing number of green technologies are also finding their way into the banking branch. Until recently, environmental concerns were not considered relevant to the business operation of banks and financial institutions. Traditionally, banking sectors concern for environmentally degrading activities of clients is like interfering or meddling in their business affairs. However, now it is being perceived that dealing with environment brings risks to their business. Due to strict environmental disciplines imposed by the competent authorities across the countries, the industries would have to follow certain standards to run their business. In the case of failure, it would lead to closure of the industrys leading to a likelihood of default to the bank.

The importance of Green Banking is immense for both the banks and economy by avoiding the following risks involved in banking sector. The adoption of green banking strategies will help the bank to deal with these risks involved in their business operation. Green banking strategies involves two components: i) Managing environment risk and ii) Identifying opportunities for innovative environmentally oriented financial products. To manage environmental risk, the banks have to design proper environmental management systems to evaluate the risks involved in the investment projects. The risks can be internalized by introducing differential interest rates and other techniques. Moreover, bank can withdraw itself from financing high-risk projects. The second component of green banking entails creating financial products and services that support commercial development with environmental benefits. This includes investment in renewable energy projects, biodiversity conservation, energy efficiency, investment in cleaner production. Thus, the banking and financial institutions should prepare an environmental risk and liability guidelines on development of protective policies and reporting for each project they Finance or invest. They can also have an environmental assessment requirement for the projects seeking finance. Environmental concerns are integrated into the international trade policy and often act as trade barrier for environmentally sensitive goods (ESGs). So adopting environmentally sustainable Technologies or modes of production is no more considered as a financial burden, rather it brings new business opportunities and higher profit. IMPERATIVES OF GREEN BANKING: Green banking is very important in mitigating the following risks involving the banking sector: Credit Risk: Due to climate change and global warming, there have been direct as well as indirect costs to banks. It has been observed that due to global warming, there have been extreme weather conditions which affect the economic assets financed by the banks, thus leading to high incidence of credit default. Credit risk can also arise indirectly when banks lead to companies whose businesses are adversely affected due to changes in environmental regulation. Legal risk: Banks, like other business entities, face legal risk if they do not comply with relevant environmental regulation. They may also face risk of direct lender liability for cleanup costs or claims for damages in case they actually take possession of pollution causing assets.

Reputation Risk: Due to increasing environmental awareness, banks are more prone to reputation risk, if their direct or indirect actions are viewed as socially and environmentally damaging. Reputation risks emerge from the financing of environmentally objectionable projects. As India has committed to reducing its carbon intensity by 20-25 percent from 2005 levels by 2020, we are working towards developing a low carbon economy. In a low carbon economy, there will be many challenges and opportunities to banks. Green banking will be at the forefront of this drive to harness banking expertise and build the post-carbon economy. The biggest impact of the carbon cut commitment will be on small and medium Enterprise, steel and cement industries which are carbon intensive. In order to avoid credit risk in these loan portfolios as well as to grab new business opportunities, Indian banks must immediately adopt green banking strategies to reduce the carbon footprint of individual banks will not only make them socially responsible corporate citizens but will also help save substantially operational costs. There are lot of opportunities and challenges for Indian banks in adopting Green Banking as a profitable business. GREEN BANKING IN INDIA Indian industry faces the challenges of controlling environmental impact of their business i.e. reducing pollution and emission of their clients. Though government has been trying to address the issue by framing environmental legislations and encouraging industry to follow environmental technologies and practices, public awareness and inability to derive competitive advantage by producing eco-friendly products. Indias is the worlds sixth largest and second fastest growing country in terms of producing green house gases. Delhi, Mumbai and Chennai are the three of the worlds ten most polluted cities. The major polluting industries in India are(a) Primary metal industries namely zinc, copper, steel etc. (b) Paper & pulp (c) pesticides/insecticides (d) Refines (e) Fertilizers (f) Tanneries (g) Sugar
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(h) Textiles (i) chemicals/pharmaceuticals etc. The banking operation and investment by financial institutions should take care of environmental Management of these polluting industries by improving the overall environment, the quality and Conversation of life, level of efficiency in using materials and energy, quality of services and Products. In this context, the role of banking sector, which is on major financing sources to the Industries, assumes high importance. ENVIRONMENTAL REGULATIONS IN INDIA:The environmental regulations in India can be broadly classified into two broad categories: i) Command and control regulations ii) Liability law. The command and control regulations are ex ante regulations that are designed to dissuade environmentally damaging projects. This regulation is implemented by setting industry specific pollution standards, scrutinizing the projects and granting/denying permissions by the concerned authorities like Ministry of Environment and Forest. The liability laws are ex post in nature and are implemented by enforcing authorities through imposing fines, closing down the defaulting industries etc. Once legal framework for the environmental pollution standards are formulated in India, the polluting industries either have to close down or have to make necessary investment to comply with the standard. In this process these industries will lose their competitiveness in the international market, which would directly affect Indian economy and the banking sector. As far as Green Banking in India is concerned, the banking and financial institutions are running behind the schedules compared to global trends. The British business newspaper and Financial Times which together nominated following banks for Sustainable Banking Awards in 2006 for leadership and innovation in integrating social, environmental and corporate governance objectives into their operations did not find a single Indian nationalized bank or major private bank in the list except Yes bank. Banks need to be more careful in India about the environmental aspects of their clients and products because-Future of exports and product market are going to go through strict environmental rules and eco-friendly product will have better market. Increased demand for pollution controls equipments will require more financial assistance from banks.

GREEN BANKING STRATEGIES: Indian Banks can adopt green banking as a business model for sustainable banking by launching some of the following strategies: Carbon credit business: Under the Kyoto protocol, clean development Mechanism (CDM) provides for co-operation between annexure 1 and non annexure-1 (developing) countries. The operational mechanism of CDMs involves an investment by a legal entity from an annexure-1 country into a project in non-annexure-1 country, which results in emission reduction. These emission reductions have to be certified by an appropriate authority and these certified Emission Reductions (CERs) which are commonly known as carbon credits can be used to meet the commitments of annexure-1 countries under the Kyoto protocol. These carbon credits are traded in the markets. CDM projects are those projects that contribute to credible and sustained reduction in GHG emissions. Indian banks can involve themselves in carbon credit business, wherein they can provide all the services in the area of CDMs and carbon credits including services of identification and funding of CDM projects, advisory services for registration of CDM projects and commercialization of CERs under different structures to meet the requirements of its customers, acting as an intermediary for buying CERs on behalf of end-users or carbon funds, financing against CERs and CERs receivables, and other related banking services. As India has huge potential for carbon credit business, Indian banks can set up dedicated carbon credit cells to capture a major share of this carbon credit business. Green Banking Financial Products: Indian banks should develop innovative green banking financial products which can directly or indirectly help in the reduction of carbon emissions. These banks can introduce a Green Fund to provide climate conscious customers the option of investing in environmental friendly projects. Banks can also introduce green bank loans with financial concessions for environmental friendly products and projects. Besides introducing specific green banking products, banks can incorporate an Environmental Impact Assessment (EIA) in their project appraisal while financing any project to measure the nature and magnitude of environmental impact as well as suggest environmental risk mitigation measures. Banks can also conduct environmental audits of the financed projects. Banks need to redesign their credit products to assist SMEs to adopt quality and conform to environmental standards. Banks should also include green guidelines in their credit policies to raise the green loan portfolio.

Green Mortgages Banks such as Citigroup Inc., Bank of America, and JP Morgan Chase &Company are just a few of the mortgage lenders offering special discounts on mortgages used to build or update buildings and homes to be more green. One of the reasons for the push for green mortgages is that green building and rebuilding tends to incorporate more energy-efficient materials and building plans. There are two types of green mortgages: the Energy Improvement Mortgage its like a second mortgage that is to be used to upgrade a home or building to energy efficient by installing energy saving items such as solar panels and improved insulation - and the Energy Efficient Mortgages for the construction of new energy efficient homes and buildings. There are many states getting in on the green mortgage by offering subsidized green mortgages so that more home-owners and business owners can green-up their buildings. In addition to helping save the environment by using less energy, these mortgages offer many advantages to consumers by reducing monies spent on high utility bills and on high costs of obtaining a mortgage. The Residential Energy Services Network reported on a recent study showing that the market value of a home increases $20 for every $1 decrease in energy costs. Carbon Footprint Reduction: Carbon foot-print is a measure of the impact of our activities on the environment. It relates to the amount of GHG we are producing in day-to-day business while burning fossil fuels for electricity, heating, transportation, etc. Banks can reduce their carbon footprints by adopting the following measures: Paper-less Banking: As banks have computerized their branches, there is ample scope for doing paperless or less-paper banking. Mostly PSBs use huge quantities of paper for office correspondence, audit reporting, recording public transactions, etc. These banks can switch over to electronic correspondence and reporting. Banks should encourage their customers also to switch over to electronic transactions and popularise e-statements. Energy Consciousness: Developing energy- consciousness, adopting effective office time management and automation solutions and using compact fluorescent lighting ( CFL) can help banks save energy consumption considerably. Banks can conduct energy audits in all their offices for effective energy management. They can also switch over to renewable energy ( solar, wind, etc.) to manage their offices and ATMs.

Using Mass Transportation System: PSBs can become fuel efficient organization by providing common transport for group of officials posted at one office. Green Buildings: The Indian banking industry uses more than one lakh premises for their offices and residential houses throughout the country. These banks should develop and use green buildings for their office and employee accommodation. These measures will not only help banks reduce their carbon footprint but also save the operational costs considerably. Social Responsibility Services: As part of the green banking strategies, Indian banks can initiate various social responsibility services such as tree plantation camps, maintenance of parks, pollution check-up camps, etc. INITIATIVE TAKEN BY INDIAN BANKS: SBI has become the first bank in the country to venture into generation of green power by installing windmills for captive use. As part of its green banking initiative, has installed 10 windmills with an aggregate capacity of 15 MW in the states of Tamil Nadu, Maharashtra and Gujarat. It has planned to install an additional 20 MW capacity of windmills in Gujarat soon and touch 100 MW power generation through windmills within five years, windmills are set up with a definite objective of reducing the dependence on the polluting thermal power and not on purely economic or business considerations. At present, the bank consumes 100 MW of power per year. So, SBI will try to be energy neutral and reduce its carbon footprints. The total cost of installation of a windmill of 1.5 MW is around Rs 10 crore. The operation cost is close to zero and it is expect to recover the initial investment in four years. "Our mission is to make all Indian banks go green and we are already discussing with 25 banks," said Suzlon CMD Tulsi R Tanti. He said, "Suzlon, which currently holds 55% market share in the country is now more focused on wind power development. Of the 11,000 MW installed wind energy in India, 6,000 MW has been installed by Suzlon. "There is 45,000 MW wind power potentiality in the country and we will target that market here," Mr Tanti added. Mr Bhatt ( Chairman Of SBI) said, the bank will also support the green initiatives of its clients and will offer them finance on priority and at concessionary rates of interest. Towards that end, the bank has launched a loan product called Carbon Credit Plus to finance the future CER receivables of CDM projects.

Earlier, Mr Bhatt referred to the upward bias in interest rates in the coming months as the manufacturing sector activities are picking up. He said the credit growth will be much better than the 18% registered last fiscal and it might even touch 23% as against RBI expectation of around 20% this year. According to him, retail and agriculture sectors will pick up in the second quarter, while the third quarter will see huge build up in infrastructure front and increase in capex and working capital. "The industry is working at 80% capacity now, which is close to its peak of 85% and so the credit growth will be fairly good this year," he added. FUTURE OUTLOOK: The model that the bank uses is different from other banks. Will the model itself be a limiting factor on the ambitious growth and development plans of the bank? Will the day-to- day business of being a bank dominate over the desire to be an instrument of social change? How does the future look for SBI Bank now that other banks are also increasingly positioning themselves as players in the sustainable economy sector? Can the bank still continue to fulfill its mandate to strive for social objectives? Peter Blom is convinced it can. According to him, many other banks entering the sustainability space also invest billions in companies that dont in any way contribute to a better world. And there are issues of transparency too. He believes that the bank can profit from economies of scale. As of now, SBI continues with its strong belief that it is the individual who can bring about real change in the society and hopes to remain a platform for people who want to make a difference in the world. CONCLUSION In a rapidly changing market economy where globalization of markets has intensified the competition, the industries and firms are vulnerable to stringent public policies, severe law suits or consumer boycotts. This would affect the banks and financial institutions to recover their return from investment. Thus, the banks should play a pro-active role to take environmental and ecological aspects as part of their lending principle which would force industries to go for mandated investment for environmental management, use of appropriate technologies and management systems. As Green Bank has rapidly expanded its operations, the challenge for its leadership has been on managing this growth successfully and prudently. Through strategic partnerships Green Bank seeks out advice and insight from outside experts to gain fresh ideas on

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new product development, marketing and business solutions to overcome the inevitable problems of rapid growth and to reach deeper into its customer base in an increasingly competitive market.

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