Talks on for Green Finance Model with key concessions

Banks are in discussions with the government on a Green Finance Framework that includes a preferential dispensation for key statutory requirements such as cash reserve ratio (CRR), statutory liquidity ratio (SLR), risk-weighted assets and additional tax benefits to promote green lending. These concessions would bring down the capital cost for lending to the sector.

A finance ministry official confirmed that the government is engaged with lenders but said talks are at a preliminary stage. “If these key ratios are lowered for green deposits and lending it will give a boost to green finance,” said a bank executive aware of the development.

CRR – the percentage of deposit banks need to keep with the Reserve Bank of India (RBI) – is at 4.5%. SLR – the minimum percentage of deposits a commercial bank must maintain in liquid cash, gold or other securities – is at 18%.
Risk weights determine the capital to be held by banks against loans. A higher risk weight means a larger capital requirement for the same loan amount. Lower CRR and SLR would lower the cost of funds while a reduction in risk weights would bring down capital needs. CRR deposits do not earn any interest.

“A final decision would be made after consultations with all stakeholders, including the Reserve Bank,” the finance ministry official said, adding that a broader policy will be formulated to promote green finance.

In FY23, the government floated sovereign green bonds for the first time to mobilise resources for green infrastructure and promote green financing, raising ₹16,000 crore in two equal tranches. More green bonds are likely in the second half of the current fiscal.

Bankers argue that a broader policy is required to promote environmental, social and governance (ESG) lending, and the proposed relaxation will free up more capital for such financing.”Another suggestion is to update the Basic Statistical Return (BSR) seven-digit code to include green lending, which will help the government track and promote green lending,” said another banker. This code helps banks keep a clear record of online payments made toward tax dues.

Banks have also been lobbying the government to include loans for electric vehicles and green hydrogen under priority sector lending (PSL). Some foreign banks in India, which have plans to scale up sustainable finance, are especially keen on PSL status for green financing. This will help them achieve mandated PSL targets and align their lending practices in India with global benchmarks.