Indian banks that prioritize green loans in their credit portfolios experience long-term financial stability, according to a study by the Indian Institute of Management (IIM) Lucknow. Published in Finance Research Letters, the research highlights how non-carbon-intensive lending can improve loan quality and reduce default risks in India’s banking sector.
The Strategic Shift Toward Green Lending
Green loans are financing options specifically designated for environmentally sustainable projects. While global efforts to establish uniform green lending frameworks are underway, developing economies like India still face gaps in incentives and classifications, according to Vikas Srivastava, ONGC Chair Professor, IIM Lucknow.
“Most Indian banks still depend heavily on carbon-intensive industries due to the absence of a standardized taxonomy for green assets. Our study addresses this gap by developing a framework to identify non-carbon-intensive sectors and assessing their impact on loan portfolios,” Srivastava stated.
For the first time, Indian banks have been ranked based on the sustainability of their credit portfolios, offering insights into how financial institutions can balance financial security with sustainability objectives.
The Long-Term Benefits of Green Loans
By increasing exposure to non-carbon-intensive sectors, banks can:
- Reduce credit default risks, improving financial health.
- Align with global sustainability goals and contribute to economic resilience.
- Enhance competitiveness in an evolving financial landscape.
According to Sowmya Subramaniam, Associate Professor of Finance and Accounting at IIM Lucknow, building a critical mass of green asset lending is key to optimizing credit portfolios. She emphasizes that this shift presents a strategic opportunity for Indian banks to strengthen lending capabilities while meeting sustainability goals.
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Policy and Regulatory Push Needed
Despite the advantages, regulatory support is essential to drive widespread adoption of green lending in India. Without structured incentives, banks may struggle to fully integrate sustainable finance into their operations.
“Our study provides a data-driven framework to help banks align financial strength with sustainability, ensuring long-term economic stability,” said Vidya Mahadevan, Research Scholar at IIM Lucknow.
With the high exposure of Indian banks to climate risks and carbon-intensive industries, the research highlights an urgent need for policy interventions to facilitate the transition to a low-carbon economy. As the financial sector evolves, green lending could emerge as a pivotal strategy for ensuring both stability and sustainability in Indian banking.
