RBI green focus may change way of financing
The Reserve Bank of India (RBI) has started acceding priority to discussions around green finance and climate issues in its policy discussions, and this could be a meaningful stepping stone towards how Indian companies raise funds for their projects.
As the world suffers from unseasonal rains and cyclones, and sporadic wildfires lasting days, reducing assets worth billions to ashes, extreme weather events have become a crucial component in policymaking. European Central Bank, for example, has an official climate road map planned.
Central banks and Supervisors Network for Greening of the Financial System (NGFS) and the Basel Committee on Banking Supervision’s Task Force on Climate-related Financial Risks (TFCR), are two important platforms, through which central banks coordinate between themselves on climate agenda.
RBI being a Basel Committee member was already part of TFCR. However, it is a late signatory in the 83-member NGFS. The Reserve Bank joined NGFS only in late April this year, four years after the NGFS was floated.
“The RBI expects to benefit from the membership of NGFS by learning from member central banks and regulators and contributing to the global efforts on green finance and the broader context of environmentally sustainable development,” deputy governor M Rajeshwar Rao said in a recent speech.
Unlike other major central banks, India doesn’t have a green standard, or regulations around how to price sustainable project funding, yet. Green finance is part of the priority sector, but only for specific loans up to ~16 crore. There are no hard rules that banks must insist on a green and sustainable certificate before loosening their purse string. This may change rapidly as India becomes a part of NGFS.
Green finance in India
Banks in India are committing to green targets, and investors are benefiting from a low cost of borrowing in international markets on their sustainable projects. Axis Bank recently committed ~30,000 crore towards sustainable lending till 2026. Housing Development Finance Corporation, India’s largest mortgage lender, accepts “green and sustainable” deposits. Various other banks are putting out sustainability reports, spelling out their commitment to the environment.
In a recent global survey, Standard Chartered found sustainable investment is on the rise, and especially Indian investors have a higher interest in it than the global average of 82 per cent.
Companies too are finding out that green finance is a lot less cheap, and perhaps the only easily available financing for projects in international markets. The cumulative amount of green bonds raised so far is about $16-17 billion, of which just about 14-15 per cent is in rupees, estimated Sandeep Bhattacharya, India Projects Manager, Climate Bonds Initiative.
Not one-size-fits-all
There are influential voices in support of and against green finance. Former RBI governor Raghuram Rajan last month said it is not the job of a central bank to talk about green finance. “Asking the central bank to say you should buy only green bonds, not brown bonds, etc., is asking the central bank to impose its views on something which is primarily a fiscal matter,” Rajan told the Reuters Global Markets Forum on August 26.
Rajan was critical of such “politically driven unlegislated areas such as ‘green' investments”, as a central bank has a lot of other things to remain busy with, for example preserving the financial stability of these green investments and other threats such as cryptocurrencies and cyber security.
On the other hand, writing for Business Standard on September 8, Rajan’s successor in RBI Urjit Patel exhorted the central banks to embrace climate risk calculations in their policymaking. Citing how ignoring insipient signs of stress lead to the global financial crisis, Patel wrote, “disregarding obvious hazards can be large, multi-dimensional and durable.”
“If sustainability is a defining characteristic of potential output, then it has to incorporate climate considerations,” the former RBI Governor and the present chairman of the National Institute of Public Finance and Policy (NIPFP) wrote. “Climate change is a damaging permanent shock to potential output,” he said, and not considering it in central bank policy functions "will lead to suboptimal policy choices.”
Other former central bankers did not want to chime in with their opinion. A former RBI official said there was no straight answer to the climate finance issue, as it is “not a one-size-fits-all”.
What RBI can do
ASKING THE CENTRAL BANK TO SAY YOU SHOULD BUY ONLY GREEN BONDS, NOT BROWN BONDS, ETC., IS ASKING THE CENTRAL BANK TO IMPOSE ITS VIEWS ON SOMETHING WHICH IS PRIMARILY
A FISCAL MATTER” RAGHURAM RAJAN FORMER RBI GOVERNOR
IF SUSTAINABILITY IS A DEFINING CHARACTERISTIC OF POTENTIAL OUTPUT, THEN IT HAS TO INCORPORATE CLIMATE CONSIDERATIONS... CLIMATE CHANGE IS A DAMAGING PERMANENT SHOCK TO POTENTIAL OUTPUT AND (NOT CONSIDERING IT IN CENTRAL BANK POLICY FUNCTIONS) WILL LEAD TO SUBOPTIMAL POLICY CHOICES”
URJIT PATEL CHAIRMAN, NIFP; RBI EX-GOVERNOR
Some of the issues on the Reserve Bank’s agenda were spelt out by deputy governor Rao in his speech. He outlined the future agenda as integrating climate-related risks into financial stability monitoring, building in-house capacity and generating awareness of climaterelated risks among regulated entities, etc.
A former chairman of State Bank of India (SBI) pointed out that banks have been working on climate finance issues much before the RBI entered the space. SBI was the first bank in the country to publish a sustainability report, and change its offices, wherever possible, international green norms compliant.
RBI can make those practices mandatory now.
“To begin with, RBI can tell institutions to start tracking their carbon footprints, and make disclosures on those,” said the former SBI executive.
“Extreme events can cause severe disruptions to the economy and have a fiscal and monetary cost. The policies can be chalked in a way that banks understand the risk and underwrite the projects accordingly. The RBI can help with the methodology,” said the banker.
Besides, the RBI can discourage lending to polluting industries. But even without a regulation, there has been a subtle shift away from coal.
“Renewable power is getting cheaper than traditional sources. Industries are slowly moving away from coal, as it is also riskier,” said Bhattacharya of Climate Bonds.
“It will not be possible to suddenly tell banks to stop lending to polluting industries, but a road map can be laid where the share of green projects can be increased in stages,” he said.