Banks not keen to back emission reduction projects

“If banks’ exposure to CDM projects is classified as priority sector lending then interest rates on such loans could come down. Further, tax incentives will encourage banks to lend to such projects.”

K. Ram Kumar

Mumbai, Sept. 28 In the absence of a national policy and regulator for carbon credits, banks are reluctant to get involved in financing projects taken up by industrial units to bring down carbon/ greenhouse gas emissions, the Indian Banks’ Association said in its report on carbon credits to the Reserve Bank of India.

With climate change and its adverse implications on economies, health, food production, security, etc., proving to be major challenges world over, the association’s observations about the lack of a policy framework on carbon credits hampering banks’ ability to finance industry’s efforts to embrace green technologies are significant.

According to Mr S. Raman, Executive Director, Union Bank of India, banks will be encouraged to lend to clean development mechanism (CDM or carbon emission reduction) projects if there is a documented national policy on carbon credits and a regulator to oversee the functioning of the carbon credit market.

Alluding to the IBA report, Mr Raman said it is important to set up a formal mechanism for trading in certified emission reduction (CER) units or carbon credits. Further, a nodal agency needs to be appointed for the development of the carbon credit market in India.

Tax incentives

“If banks’ exposure to CDM projects is classified as priority sector lending, then interest rates on such loans could come down. Further, tax incentives will encourage banks to lend to such projects,” said Mr Raman.

CERs are issued by the CDM Executive Board to projects achieving carbon emission reduction. One CER equals reduction in one tonne of carbon di-oxide.

Under the Kyoto Protocol, developed and developing countries have agreed to cap greenhouse gas emissions. In turn, these countries have set quotas on emissions by the local industry and other business entities. Companies implementing CDM projects (for reducing greenhouse gases) in developing countries can sell CERs issued to them while businesses that are about to exceed their quotas in developed countries can buy the extra allowances as credits, privately or in the open market.

Banks that have set up carbon credit desks in the last few years include SBI, IDBI Bank and Canara Bank. Though banks have entered into agreements with consultants such as Mitcon Consultancy, Ecosecurities, Cantor CO2e and KfW in the CDM area for providing a one-stop shop CDM solutions for industries, not many projects have been financed by them.

Long-term opportunity

HSBC Global Research, in a report on investment opportunities in climate change in India, observed that climate change presents long-term growth opportunity for investors in India. Mr Charanjit Singh, Analyst, HSBC Bank plc, said the report has zeroed in on three key climate change themes — renewable, low carbon power, energy efficiency which focus on the mitigation potential from curbing carbon emissions with Rs 7.6 lakh crore ($150 billion) expected in investment between 2008 and 2017.