Indian banks with a higher proportion of green loans demonstrate stronger financial stability in the long run, according to research by the Indian Institute of Management (IIM) Lucknow. The study, published in the Finance Research Letters journal, highlights that expanding non-carbon-intensive lending can enhance the core of bank loan portfolios and contribute to economic resilience.
Key Findings on Sustainable Lending
The research underscores the strategic significance of sustainable lending in the Indian banking sector. Green loans, which finance projects with a positive environmental impact, can help banks reduce default risks and improve overall financial stability. The findings suggest that shifting towards non-carbon-intensive lending not only aligns with global sustainability goals but also strengthens a bank’s credit portfolio.
Vikas Srivastava, ONGC Chair Professor at IIM Lucknow, noted that while international frameworks exist to standardise green lending, India lacks clear guidelines to incentivise such practices.
“Most Indian banks are heavily dependent on lending to carbon-intensive industries as there is no clear taxonomy to identify and promote green assets. Our study addresses this gap by designing a framework to identify non-carbon-intensive sectors and assessing their impact on the quality of the bank’s loan portfolio,” Srivastava said.
Ranking Banks on Sustainability
For the first time, the study has ranked Indian banks based on the sustainability of their credit portfolios, focusing on non-carbon-intensive loans. This assessment provides insights that can help financial institutions balance financial stability with sustainable growth.
According to Sowmya Subramaniam, Associate Professor of Finance and Accounting at IIM Lucknow, the research offers critical insights for top bank management.
“Our attempt at standardising green loan taxonomy and finding that a critical mass of green asset lending is required for an optimised credit portfolio can help banks build sustained lending competence across their credit teams,” Subramaniam said.
The study also highlights that Indian banks can play a crucial role in transitioning to a low-carbon economy. By increasing lending to sustainable sectors, banks can mitigate risks associated with climate change and carbon-intensive industries.
Need for Policy Interventions
Despite the benefits of green loans, researchers caution that without regulatory support, banks may struggle to adopt these practices effectively. Vidya Mahadevan, a research scholar at IIM Lucknow, stressed the need for policy interventions to facilitate sustainable finance.
“While non-carbon-intensive lending offers a strategic opportunity for banks to ensure sustainability, the regulatory push is necessary to overcome hurdles in adopting green lending practices. Our study provides a data-driven framework for integrating green finance into mainstream banking operations,” Mahadevan said.
The researchers emphasised that Indian regulators could introduce policy measures to encourage banks to diversify credit portfolios. Such steps would not only improve the competitiveness of the banking sector but also ensure financial stability in the face of environmental risks.
Future Implications for Indian Banks
The findings suggest that Indian banks must proactively adapt to global sustainability trends by expanding green loan portfolios. This transition can help financial institutions maintain stability while contributing to a more sustainable economy. The study offers a roadmap for banks to integrate green finance into their lending strategies, ensuring long-term economic resilience.
As climate risks continue to impact financial systems worldwide, the research highlights the potential of green loans as a tool for both risk management and economic transformation. With the right regulatory support and strategic credit allocation, Indian banks can strengthen their financial position while advancing sustainability objectives.
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