IIM Study: Highlights Green Lending As A Catalyst For Strengthening Indian Banks’ Portfolios

Expanding lending to non-carbon-intensive sectors can significantly enhance the stability and core strength of Indian banks’ loan portfolios, according to a study by the Indian Institute of Management (IIM) Lucknow Faculty Research.

The study highlights that banks with a higher share of green loans tend to experience improved financial stability in the long run, emphasizing the strategic importance of sustainable lending in India’s banking landscape.

Published in Finance Research Letters, a leading academic journal, the study points out critical gaps in global green lending frameworks, particularly in developing economies like India. A lack of clear guidelines for classifying and promoting green assets has resulted in most Indian banks continuing to rely on lending to carbon-intensive industries.

Bridging the Gap in Green Loan Taxonomy

To address this issue, the IIM Lucknow study proposes a framework for identifying non-carbon-intensive sectors and assessing their impact on loan portfolio quality. For the first time, it ranks Indian banks based on the sustainability of their credit portfolios, offering valuable insights to help shape future lending strategies.

By prioritizing green lending, Indian banks can reduce default risks, align with global sustainability goals, and contribute to long-term economic resilience. The study underscores that transitioning to a low-carbon economy requires banks to adopt sustainable credit allocation strategies while balancing financial stability.

Insights for Banks and Policymakers

“Our research aims to standardize green loan classification and demonstrate that reaching a critical mass of green asset lending is crucial for optimizing credit portfolios. This insight can help senior bank management recognize green loans as a strategic opportunity for sustained lending growth. Additionally, our findings may assist regulators in designing policy incentives that support banks in this transition. An optimized credit portfolio will ultimately enhance the competitiveness of India’s banking sector,” the authors stated.

The study was co-authored by Vikas Srivastava, ONGC Chair Professor; Sowmya Subramaniam, Associate Professor of Finance and Accounting; and Vidya Mahadevan, Research Scholar at IIM Lucknow.

The Impact of Green Lending on Portfolio Quality

The research establishes a non-linear, inverted U-shaped relationship between non-carbon-intensive lending and non-performing loans (NPLs). While the benefits of green lending may not be immediately visible at lower levels, reaching a critical threshold significantly enhances banks’ overall credit quality.

The Need for Regulatory Support and a Standardized Green Taxonomy

Despite international efforts to define green investments, India lacks a robust regulatory framework and standardized taxonomy to guide sustainable lending practices. The study proposes a structured classification system to categorize industries based on carbon intensity, assisting banks in making informed credit decisions.

Given the financial sector’s high exposure to carbon-intensive industries and the growing risks posed by climate change, Indian banks must actively diversify their lending portfolios. While green lending offers a pathway to financial sustainability, the absence of regulatory incentives may hinder widespread adoption. This underscores the need for policy measures to support sustainable finance initiatives.

By providing a data-driven approach to integrating green finance into mainstream banking, the IIM Lucknow study offers a roadmap for ensuring that Indian banks remain financially robust while contributing to a more sustainable economy.