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Green Banking Article1

Green Banking Article1

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New concept in Banking.
New concept in Banking.

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Published by: Prof Chowdari Prasad on Feb 09, 2012
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01/04/2013

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Discussion Paper Series No. 125/2008
 Draft and not to be quoted without Author’s permission
Green Banking in India
Pravakar SahooBibhu Prasad Nayak
INSTITUTE OF ECONOMIC GROWTHUNIVERSITY OF DELHI ENCLAVENORTH CAMPUS, DELHI – 110 007
 
Fax: + 91-11-27667410Gram: GROWTH – Delhi – 110 007Phones: +91-11-27667101, 27667288, 27667365,WEBSITE: ieg.nic.in and iegindia.org
 
 1 
GREEN BANKING IN INDIA
Pravakar Sahoo* Bibhu Prasad Nayak 
i
 
 Abstract
S
ustainable development can best be achieved by allowing markets to work within anappropriate framework of cost efficient regulations and economic instruments. One of the major economic agents influencing overall industrial activity and economic growth is the financialinstitutions such as banking sector. In a globalised economy, the industries and firms arevulnerable to stringent environmental policies, severe law suits or consumer boycotts. Sincebanking 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 playa 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, useof appropriate technologies and management systems. This paper explores the importance of Green Banking, sites international experiences and highlights important lessons for sustainablebanking and development in India. However, we find that there has not been much initiative inthis regard by the banks and other financial institutions in India though they play an active rolein India’s emerging economy. Therefore, we suggest possible policy measures and initiative to promote green banking in India.
This paper is forthcoming in Indian Economic Journal (IEJ). We thank the anonymous referee of IEJ, Dr. Niranjan Sahoo and Dr. Arup Mitra for their comments on the previous draft. We also thank Dr.Pushpam Kumar and Mr. Ramakanta Subudhi fore the encouragement to write this paper.*Faculty, Reserve Bank of India Unit, Institute of Economic Growth, Delhi University Enclave, Delhi-7. pravakar@iegindia.org. # Research Scholar, Jawaherlal Neheru University, Delhi. However, usualdisclaimer applies.
 
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GREEN BANKING IN INDIA
I. Introduction
Sustainable development has emerged as a new paradigm of development in response tothe current discourse of development that over-exploits natural environment for economicprosperity. The 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 thefinancial institutions such as banking sector. The banking sector influences the economic growthand development in terms of both quality and quantity, there by changing the nature of economicgrowth. Banking sector is one of the major sources of financing investment for commercialprojects 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 sociallyresponsible investment (SRI)
1
. Banks may not be the polluters themselves but they will probablyhave a banking relationship with some companies/investment projects that are polluters or couldbe in future.Banking sector is generally considered as environmental friendly in terms of emissionsand pollutions. Internal environmental impact of the banking sector such as use of energy, paperand water are relatively low and clean. Environmental impact of banks is not physically relatedto their banking activities but with the customer’s activities. Therefore, environmental impact of bank’s external activity is huge though difficult to estimate. Moreover, environment managementin the banking business is like risk management. It increases the enterprise value and lowers lossratio as higher quality loan portfolio results in higher earnings. Thus, encouragingenvironmentally responsible investments and prudent lending should be one of theresponsibilities of the banking sector. Further, those industries which have already become greenand those, which are making serious attempts to grow green, should be accorded priority tolending by the banks. This method of finance can be called as “
Green Banking
”, an effort by the
1
 
Internationally SRI funds are highly demanded for example SRI assets in the U.S. have reached $2.29 trillion in2005 (Starogiannis, 2006)
 

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