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Banking & financial institutions &

environmental safeguards

Mayank Datta
I am very grateful to my teacher, SHIPRA DUBEY MAM for his able
guidance and support in the compilation of this project. His advice and
guidance has been of great invaluability and importance.
I would also like to thank my parents and friends in helping me gather
material for and research on the topic of my project. Without them, it would
have not been possible to compile this assignment.


Table of Contents

1. Title page
2. Acknowledgement
3. Introduction
4. Involvement in Environment Protection
5. Industrial Finance Corporation
6. International Environment Management Standards
7. Small Scale Industries
8. Conclusion
9. Bibliography


The Industrial Revolution heralded an era of prosperity, comforts and other blessings. On

the other hand, it also brought with it a serious threat to the environment. Since then the
rain forests have been decimated, oil spilled by the tankers, harmful gases spewed into

the atmosphere, poisonous fluids into rivers, lakes and the sea. Industry has always been

and continues to be the prime cause of economic development all over the world. The

need of the hour is to bring awareness for pollution prevention, waste minimisation,

resource recovery, recycling and waste utilisation in the industry. For example the single

most important step to control global warming can be taken by reducing carbon dioxide

emissions by improving upon energy efficiency. The industry needs to be encouraged and

monitored for conserving energy and using less energy intensive technologies. In a mixed

economy like India, the Government has to play an important role by bringing out

environmental legislations and encouraging industry to adopt environment friendly

technologies etc., by means of charges, subsidies, market creation and enforcement

incentives. In India, however, in view of limited public resources both financial and

human, lack of awareness about ecological aspects, inability to derive competitive

advantage by producing eco-friendly products, the role of commercial banks who are

main source of funds for industry assume high importance.

Involvement in Environment Protection

Banks and financial institutions should start taking cognizance of Environment Impact

Assessment (EIA) and Environmental Audits (EA) in their assessments for funding
because -

(a) India's efforts to make the country cleaner and greener were marked by several

landmark decisions like establishment tribunal, a river conservation plan, increasing

people's involvement in ecology and a frontal onslaught on vehicular and noise pollution.

The banks will have to assist the Government in putting India in the league of the

environmental conscious countries of the Globe in view of their continuing support to

social causes in the past too.

(b) The growth of exports may in future depend on the manufacturing of eco-friendly

products and the production process used by the Indian industry.

(c) The success of the local pollution control equipment industry depends heavily on the

increased demand for its products and financial assistance from the banks.

(d) The existing borrowers of the banks may in future be faced with the new

environmental legislations and banks may find a standard asset converting into a doubtful

asset overnight due to cost of environmental clean up leading to bankruptcy of the


(e) The suggestions of Reserve Bank of India/Government regarding environmental

audits, etc. may become mandatory in future for the banks and they will have to fall in

line with the approach adopted by International Finance Corporation, Asian Development

Bank, etc.

(f) The projects now require EIA and EA as necessary prerequisites for the financial

assistance by World Bank, ADB and IFC.

(g) A survey sponsored by the United Nations Environment Programme (UNEP) and

Salomon-Inc. of New York has shown that the number of banks dealing with

environmental investment and lending is expected to triple over the next 15 years. The

survey indicates that integrating environmental issues into banking practices is not some

kind of corporate philanthropy but rather good, solid business. In this scenario, banks

require to commit their institutions to protect and preserve the environment and support

the principle of sustainable economic development.

Industrial Finance Corporation

IFC's Environment Unit (EU) was established in 1991. EU is the focal point for IFC's

environmental activities. If required technical assistance from outside consultants is also

taken. Environmental assessment even precedes financial and technical appraisal. Each

project is subjected to detailed environmental review. The review covers environmental

issues, socio-economic concerns, resettlement issues, occupational health and safety,

major hazard analysis, etc. At the time of Initial Project Review (IPR), the projects are

classified into three broad categories on basis of their impact on the environment. The

draft of Environmental Impact Assessment (EIA) is analysed in the very beginning and

the same is shared with the local affected groups. The environmental performance of

projects is monitored by the EU. IFC disburses funds only after plans are in place in

accordance with the World Bank and host country requirements on the environmental

issues. The environmental impacts are evaluated after the projected completion and in

case of non-compliance, the project sponsor is required to take appropriate action.

International Environment Management Standards

IFC's environmental review procedures are based on World Bank Environmental

Guidelines published in 1988. They include some industry specific standards and some

pollutants specific standards, but they do not cover all industries or all the pollutants.

Another source is US Export - Import Bank (EXIM Bank), which has released its

environmental review procedures to ensure that the exports it supports financially are

environmentally sound. British Standards Institute recently released British Standard

7750, a comprehensive framework for corporate environmental compliance programs.

ISO-14000 series developed by International Organization for Standardisation (ISO)

in Geneva is the most significant new international environmental management standard,

ISO 14000 series attempts to set up a framework to prevent and detect violation of

environmental laws and regulations for all countries. Under ISO 14000 series, a company

is required to establish, implementing and maintain an ongoing, comprehensive system of

policies, procedures and practices to identify and comply with its environmental

requirements. In short ISO-14000 series provides a common international focus for

corporate environmental compliance.

In India, the Notification on environmental procedures and guidelines by Ministry of

Environment and Forests is an important source of information. Handbook for EIA of

development projects brought out by Centre for Environmental Science and Engineering,

IIT Bombay is an easy, rapid and ready reference for the user agencies.

Suggested Modified Procedure for Commercial Banks

The procedure of lending process for the banks, broadly will involve :-
(1) Assessment of risk.

(2) Environmental audit.

(3) Assessment and analysis of credit requirement.

(4) Documentation, security and pricing.

(5) Loan management and follow up.

(1) Assessment of risk

Conventional credit risk assessment in banks takes into consideration financial risks;

industry risks and management risks. Fourth parameter of environmental risk will have to

be incorporated. The rating on point scale is given on the basis of potential impact on the

environment of the technology used type of industry, resettlement issues, occupational

health and safety, major hazards, pollution control efforts, etc. However, the company

will be required to achieve minimum rating under environmental risk to become eligible

for consideration for the loan. Industries with significant environmental impacts, e.g.,

petrochemical, thermal power, mining, etc., will need to have a detailed EIA of the


The environmental risk assessment should also be implemented for the existing large loan

portfolio for safeguarding banks' interest from potential environment impact problems. To

make the risk assessment realistic, the report of site visit will be analysed. Site inspection

report should include review of past and present use of site, the nature of the

neighbourhood, the company's production process, status of discharge permits, locations

and conditions of storage tanks, wells, etc.

Following is the list of polluting industries notified by Ministry of Environment and

Forests and needs to be given special attention by the banks and financial institutions:

*Primary metallurgical producing industries, viz., zinc lead, copper, aluminum and steel

* Paper, pulp and newsprint

* pesticide/insecticides

* Refineries

* Fertilizers

* Paints

* Dyes

* Leather tanning

* Rayon

* Sodium/Potassium Cyanide

* Basic drugs

* Storage Batteries (lead acid type)

* Acids/alkalies

* Plastics

* Rubber - synthetic

* Cement

* Asbestos

* Fermentation industry

* Electroplating industry
(2) Environmental Audit

The nature of industry, site, process and magnitude of loan shall decide the type of

environmental audit to be undertaken. In absence of expertise in the banks, an

independent consultant can undertake the audit, the cost to be borne by the borrowers.

Environmental audits will identify past practice, evaluate current regulatory compliance

and identify future problem areas.

Environmental audits can also review a company's capital requirements and the cost

impact of environmental compliance on the company's balance sheet and cash/fund flow.

The cost effect on the project in case of dealing with hazardous materials, clean up, etc.,

has to be incorporated in the audit.

Industries/companies with high environmental risk rating may be required to submit

yearly EA, progress reports and time table on environmental compliance and

minimisation of toxic waste through modification of company's industrial processes and

waste disposal practice.

(3) Assessment and Analysis of Credit Requirement

Lending and credit officers need to have a good knowledge about environmental matters,

legislations, etc. to properly analyze the information gathered by on site inspection and

EA. Every bank should incorporate the topics of environmental risk assessment, related

legislations, analysis of EA and EIA of the project, pricing for environmental compliance

in their regular credit training programmes. Further, on lines of IFC's Environmental

Units (EU), every bank should establish an Environmental Cell (EC) as part of their

already established consultancy cells at the level of zonal offices/head offices. EC will
become the focal point for environment related activity and will provide the required

expertise whenever needed. Credit officers will have to incorporate the estimate of cost

for dealing with environmental issues in working of the credit requirement of the

borrowers. They will have to provide a summary of the information given by onsite

inspection. EA, risk assessment, etc., and give their conclusion and recommendations to

assist the decision making in the matter.

(4) Documentation Security and Pricing

(i) Documents

Terms and conditions can be incorporated into loan documents to minimise banker's risk

from past, present and future environmental liability.

(a) "Loan covenants" can be included that the borrower will comply with all central, state

and local environment laws; remedy any present or future contamination; immediately

notify the bank if they receive any notice of potential environmental violations or

enforcement proceeding.

(b) "Arrangement letter" should specify that charges will be borne by borrower for EIA or

EA; submission of yearly environment reports; progress reports; insurance, etc.

(c) "Indemnity" from borrowers indemnifying banker from the costs or damages resulting

from hazardous waste clean up; damages due to storage, disposal of materials; cost and

expenses resulting from the repairs, etc.

(d) "Undertaking" from the borrowers that all conditions relating to any known

environmental problems have been disclosed; no previous environment liability, etc., is


(ii) Collateral

The borrower may be asked for additional collateral security against future impairment of

the primary collateral and personal guarantees of directors/partners, etc. Further, a

provision for a loan "reserve" dedicated to environmental compliance can be agreed


(iii) Costing

All this is going to increase the cost for the bank. The credit rating exercise, which

decides the interest rates, can incorporate environmental aspect with provision of

negative marks based on the risk assessment. This may slightly downgrade the rating and

thus, increase the interest earning for the bank.

(5) Loan Management and Follow up

The environmental aspect to be given due importance at the time of annual

review/renewal exercise on the basis of reports of EA, fresh reassessment of risk factors,

etc. The Reserve Bank of India inspections as well as in-house inspections/audit to check

on this aspect too.

Small Scale Industries

The framework outlined above can be implemented in case of large corporate borrowers.

The SSI sector is not in a position to bear the additional expenses on account of

environment audit, etc. However, the approach has to change and the banks should

incorporate some parameters in the assessment of proposals of SSI to promote pollution

control. The appraisal to necessarily incorporate comments on -

Environmental pollution status of industry.

Clearance from the appropriate authorities.

Steps undertaken or proposed for disposal of solid, liquid and gaseous wastes, etc.

Banks shall discourage financing of polluting industries or industries, which are

functioning in residential areas. In case of small scale industries located in approved

industrial estates, setting up of Common Effluent Treatment Plant (CETP) should be

financed by the banks at reasonable pricing.


Banks are profit making organisations. If they are to be actively involved in assisting the

environment protection efforts, they also need certain incentives for the same. One

incentive can be to classify the lending of banks to manufacture and purchase of pollution
control equipments; R&D activities for pollution control, environment consultancy

services under the priority sector lending.

With the liberalisation process there is a spurt in industrial activity and inflow of capital.

Attempts need to be made to mitigate the adverse effects on the environment and society.

Due to their effective say in the industrial sector, banks can play a major role in the

promotion of environment protection efforts.

Thus, by liberally financing the activities encouraging pollution control and restricting

flow of finance to Industries which are using polluting technologies and by assisting and

monitoring the pollution control by Industries, banks can play a very important role in

fostering a linkage between economic development and environmental protection.


The project has been compiled after gathering useful information from the following