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“Banks have requested relaxed norms on RWA (risk-weighted assets) for sustainability-linked loans as well as some dispensation on maintenance of CRR (cash reserve ratio) for sums disbursed as such loans,” a source aware of the developments said to ET. “There is an ongoing discussion on green financing models and how best banks can adapt to these models,” the source said.
In a sustainability-linked loan, the interest rate charged on the loan is connected to a company’s execution of sustainability benchmarks. If benchmarks are met, the interest rates are met, thus incentivizing corporate borrowers to meet sustainability targets. These benchmarks are broadly linked to environmental, social and governance norms.
An email sent to the RBI seeking comment on the matter did not receive a response by the time of publication. A government official said discussions are on with all stakeholders including the RBI on different aspects of ESG lending. “Already, there are proposals on including lending towards EVs, solar panels and green hydrogen in the priority sector,” he said, requesting anonymity.
RWA implies bank capital that must be set aside in accordance with risks emanating from exposures. The CRR is a regulatory reserve ratio which mandates banks to set aside a certain portion of cash with the RBI. The CRR is currently at 4.50% of banks’ net demand and time liabilities, a proxy for deposits. Green financing has increasingly featured on the radar of the RBI and the government, which is committed to significant shifts to renewable energy. Large foreign banks have played a key role in structuring sustainability-linked loans for large corporations in India.
In July 2023, Bank of America had structured a portion of a $150 million loan to L&T in accordance with sustainability-linked targets, ET had reported.
In its Report of the Survey on Climate Risk and Sustainable Finance published in July 2022, the RBI said that “although banks have begun taking steps in the area of climate risk and sustainable finance, there remains a need for concerted effort and further action in this regard.”
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