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)]
(1)
Assessment of risk
Conventional
credit risk assessment in banks takes into consideration financial risks;
industry risks and management risks. Fourth parameter of environmental
risk will have to be incorporated. The rating on point scale be given on
the basis of potential impact on the environment of the technology used
type of industry, resettlement issues, occupational health and safety,
major hazards, pollution control efforts, etc. However, the company will
be required to achieve minimum rating under environmental risk to become
eligible for consideration for the loan. Industries with significant
environmental impacts, e.g., petrochemical, thermal power, mining, etc.,
will need to have a detailed EIA of the project.
The
environmental risk assessment should also be implemented for the existing
large loan portfolio for safeguarding banks' interest from potential
environment impact problems. To make the risk assessment realistic, the
report of site visit will be analysed. Site inspection report should
include review of past and present use of site, the nature of the
neighborhood, the company's production process, status of discharge
permits, locations and conditions of storage tanks, wells, etc.
Following
is the list of polluting industries notified by Ministry of Environment
and Forests and needs to be given special attention by the banks:
*Primary
metallurgical producing industries, viz., zinc lead, copper, aluminum and
steel
*
Paper, pulp and newsprint
*
pesticide/insecticides
*
Refineries
*
fertilisers
*
Paints
*
Dyes
*
Leather tanning
*
Rayon
*
Sodium/Potassium Cyanide
*
Basic drugs
*
Storage Batteries (lead acid type)
*
Acids/alkalies
*
Plastics
*
Rubber - synthetic
*
Cement
*
Asbestos
*
Fermentation industry
*
Electroplating industry
(2)
Environmental Audit
The
nature of industry, site, process and magnitude of loan shall decide the
type of environmental audit to be undertaken. In absence of expertise in
the banks, an independent consultant can undertake the audit, the cost to
be borne by the borrowers.
Environmental
audits will identify past practice, evaluate current regulatory compliance
and identify future problem areas.
Environmental
audits can also review a company's capital requirements and the cost
impact of environmental compliance on the company's balance sheet and
cash/fund flow. The cost effect on the project in case of dealing with
hazardous materials, clean up, etc., has to be incorporated in the audit.
Industries/companies
with high environmental risk rating may be required to submit yearly EA,
progress reports and time table on environmental compliance and
minimisation of toxic waste through modification of company's industrial
processes and waste disposal practice.
(3)
Assessment and Analysis of Credit Requirement
Lending
and credit officers need to have a good knowledge about environmental
matters, legislations, etc. to properly analyse the information gathered
by on site inspection and EA. Every bank should incorporate the topics of
environmental risk assessment, related legislations, analysis of EA and
EIA of the project, pricing for environmental compliance in their regular
credit training programmes. Further, on lines of IFC's Environmental Units
(EU), every bank should establish an Environmental Cell (EC) as part of
their already established consultancy cells at the level of zonal
offices/head offices. EC will become the focal point for environment
related activity and will provide the required expertise whenever needed
Credit
officers will have to incorporate the estimate of cost for dealing with
environmental issues in working of the credit requirement of the
borrowers. They will have to provide a summary of the information given by
onsite inspection. EA, risk assessment, etc., and give their conclusion
and recommendations to assist the decision making in the matter.
(4)
Documentation Security and Pricing
(i)
Documents
Terms and conditions can be incorporated into loan documents
to minimise banker's risk from past, present and future environmental
liability.
(a)
"Loan covenants" can be included that the borrower will comply
with all central, state and local environment laws; remedy any present or
future contamination; immediately notify the bank if they receive any
notice of potential environmental violations or enforcement proceeding.
(b)
"Arrangement letter" should specify that charges will be borne
by borrower for EIA or EA; submission of yearly environment reports;
progress reports; insurance, etc.
(c)
"Indemnity" from borrowers indemnifying banker from the costs or
damages resulting from hazardous waste clean up; damages due to storage,
disposal of materials; cost and expenses resulting from the repairs, etc.
(d)
"Undertaking" from the borrowers that all conditions relating to
any known environmental problems have been disclosed; no previous
environment liability, etc., is pending.
(ii)
Collateral
The
borrower may be asked for additional collateral security against future
impairment of the primary collateral and personal guarantees of
directors/partners, etc. Further, a provision for a loan
"reserve" dedicated to environmental compliance can be agreed
upon.
(iii)
Costing
All
this is going to increase the cost for the bank. The credit rating
exercise, which decides the interest rates can incorporate environmental
aspect with provision of negative marks based on the risk assessment. This
may slightly downgrade the rating and thus, increase the interest earning
for the bank.
(5)
Loan Management and Follow up
The
environmental aspect to be given due importance at the time of annual
review/renewal exercise on the basis of reports of EA, fresh reassessment
of risk factors, etc. The Reserve Bank of India inspections as well as
in-house inspections/audit to check on this aspect too.
Small
Scale Industries
The
framework outlined above can be implemented in case of large corporate
borrowers. The SSI sector is not in a position to bear the additional
expenses on account of environment audit, etc. However, the approach has
to change and the banks should incorporate some parameters in the
assessment of proposals of SSI to promote pollution control. The appraisal
to necessarily incorporate comments on -
Environmental
pollution status of industry.
Clearance
from the appropriate authorities.
Steps
undertaken or proposed for disposal of solid, liquid and gaseous wastes, etc.
Banks
shall discourage financing of polluting industries or industries, which
are functioning in residential areas. In case of small scale industries
located in approved industrial estates, setting up of Common Effluent Treatment Plant (CETP) should be financed by the banks at reasonable pricing.
Conclusion
Banks
are profit making organisations. If they are to be actively involved in
assisting the environment protection efforts, they also need certain
incentives for the same. One incentive can be to classify the lending of
banks to manufacture and purchase of pollution control equipments; R&D
activities for pollution control, environment consultancy services under
the priority sector lending.
With
the liberalisation process there is a spurt in industrial activity and
inflow of capital. Attempts need to be made to mitigate the adverse
effects on the environment and society. Due to their effective say in the
industrial sector, banks can play a major role in the promotion of
environment protection efforts.
Thus, by liberally financing the activities encouraging pollution control and restricting flow of finance to Industries which are using polluting technologies and by assisting and monitoring the pollution control by Industries,
banks can play a very important role in fostering a linkagebetween economic development and environmental protection.
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