Special Feature

Bank Lending and Environmental Protection
- Anurag Khanna, Promoter & CEO, Banknet India

[This paper was earlier published by the Journal of Indian Banker's Association (IBA)]

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 ecofriendly products, the role of commercial banks who are main source of funds for industry assume high importance.

In this paper an effort is made to suggest modified procedure for commercial lending by Indian commercial banks to enable them to safeguard their own interests and also help in promoting environmental protection by the industry.

Case for Bank's Involvement in Environment Protection

Banks should start taking cognizance of Environment Impact Assessment (EIA) and Environmental Audits (EA) in their assessments for funding because -

(a) India's effort this year 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 ecofriendly 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 borrowers.

(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 in 1995 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. As a follow up UNEP will hold a round table conference in Geneva in October 1996 to discuss integration of environmental issues and opportunities into core business activities.

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 Organisation for Standardisation (ISO) in Geneva is the most significant new international environmental management standard, ISO 14000 attempts to set up a framework to prevent and detect violation of environmental laws and regulations for all countries. Under ISO 14000, 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 provides a common international focus for corporate environmental compliance. Final version of ISO-14000 is expected to be issued in mid 1996.

In India, the 1994 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.

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