Banking for sustainable future

Among the multiple global challenges faced in modern times, climate disasters and climate-related lifestyle challenges are among the most critical. These require some decisive action. In addition to governments and businesses, banks can significantly reduce the impact of climate change through climate financing due to their extensive influence on the economy.

The Kyoto Protocol defines climate finance as providing financial support at various levels to tackle climate change challenges. Without waiting for an international funding mechanism to develop, Indian banks can take the lead in addressing this challenge through their lending framework. Climate finance focuses on supporting climate-resilient infrastructure and combining funding with efforts to mitigate climate change. Building resilient infrastructure is crucial for mitigating climate change. India’s coastline faces challenges such as sea erosion and the destruction of fish habitats, which impact fishing communities’ livelihoods. Funding for small fishing harbours, artificial reefs, and seaweed farming can reduce the financial burdens of fishing communities. Such investments will protect fishermen’s livelihoods and marine ecosystems, which are essential for sustainability.

Banks can actively build a sustainable economy when they merge development finance with climate finance. In this context, financial institutions must go beyond traditional environmental impact assessment (EIA) frameworks. They must prioritise funding for solar and wind energy projects. To create a sustainable economy, banks must recognise the need to diversify India’s energy sources. A forward-looking perspective includes myriad solutions, from conventional oil to renewable energy sources like solar, wind, and nuclear power. Banks can create a sustainable energy ecosystem by adopting a multifaceted approach that meets society’s evolving needs. Discussions on revenue generation in sustainable ventures often focus on incorporating solar and wind farms. These ventures can generate significant revenue while preserving the environment. These farms use renewable energy sources, which reduces emissions and creates sustainable business opportunities. The success of these initiatives depends on support from FIs.

The imperative of food security has emerged amid global challenges and black swan events that have exposed the vulnerabilities of the interconnected world. As grain deals crumble amid these difficulties, nations are prioritising food security. Global supply chains were shown to be fragile by the Covid-19 pandemic. The conflict in Ukraine highlights the vulnerability of global food supply networks. In such a scenario, banking can pursue the goal of strengthening food production and self-sufficiency. Banking has significantly impacted agricultural transformation, as seen in historical examples like the support during the Green Revolution, when tube well expansion and high-yielding seed production significantly increased farming productivity. A significant inflexion point in the banking sector’s trajectory is discernible through the adoption of priority sector lending mandates and the establishment of entities like Nabard.

The banking system primarily supports food production by granting loans and credit facilities. Farmers need significant capital for modern equipment, high-quality seeds, and advanced farming techniques. The recent commodity price inflation highlights climate change and the challenges farmers face in crop planning.

Banks should support farmers and cooperatives that embrace technology and organic farming. Supporting third parties involved in market access and storage, such as silo operators and logistics firms, is also crucial. By doing so, banks can effectively expand market reach and mitigate price volatility, benefiting farmers.

Risks of crop failure and loan defaults require careful consideration while formulating lending strategies. Customising loans based on risk profiles will enhance loan portfolio stability. Lenders can mitigate financial risks from adverse weather by adjusting loan amounts based on climate risk levels. Customising loans based on actuarial risk profiles involves assessing various risk factors that could impact borrowers’ repayment capacity. Analysing climate risk at the taluk/district level would help lenders understand potential challenges borrowers may face from adverse weather events and modify the loan amounts. Lenders can adjust loans based on climate risk levels to prevent borrowers from being burdened with unmanageable loan obligations. Previous blanket loan waivers and reimbursement delays must be avoided, and courageous lending practices must be encouraged. Using advanced technology, banks can revolutionise the assessment and granting of loans to farmers with minimal risk. This could prove to be a game-changer for the farm sector. Enabling banks to actively participate in these sectors can address climate change, improve food security, and make agricultural finance profitable benefiting all stakeholders: policymakers, banks, the economy, and the citizens.

(Aranha is professor and chairperson of MBA-BKFS, and Reddy is asst. professor at T A Pai Management Institute (TAPMI), Manipal)