While 2020 will be written down in history, 2018-19 was a special year for the Indian economy too- GDP was at its lowest in 7 years at 4.5% and unemployment rate reached 6.1%, the worst in 45 years. Several sectors such as real estate, aviation, automobile and construction sectors suffered a constant decline in demand. Similarly, the banking and financial services sectors witnessed serious crisis due to rising NPAs & bad loans and squeezing credit limits.
Not responding much to this crisis, the government focussed its attention towards the 5 trillion economy goal - India’s Corporate Tax Rate was slashed to 22%, 10 public sector banks were merged into one entity, PSU General Insurance Companies were merged into single insurance entity, Rs 1,76,051 crore were transferred by the RBI as its Surplus to the Central Government, and 33 Central Public Sector Enterprises were decided to be disinvested by the government. These steps seem to be more friendly towards the businesses, focussing more on the ‘Profit’ aspect of the triple bottom line, and missing out on People and Planet. Such steps are bound to have an impact on the economy and all the linked stakeholders across the value chain of businesses, including employees as well as local communities.
Since no development is possible without a sound financial system supporting it, the spotlight is now on aligning the financial system with sustainable development. Banks are custodians of large sums of money, and by choosing to fund projects that are environmentally and socially sustainable, they can have a positive impact not only on the people and the planet, but also increase their profits in the long run. The pandemic has further strengthened the argument on the need for more sustainable investments, with ESG funds proving to be more resilient than other funds. Such resilient performance despite unruly markets gives us a hint about why investors are convinced about ESG funds.There is a need for financial institutions to understand and absorb this change and to be more innovative and sensitive in their approach, especially in their lending practices to corporates.
For the same, however, it is equally important to have a facilitating environment, that can be demonstrated by the policies set forth by regulators. However, the steps being taken by Indian regulators in the recent past look more regressive and hold less transparency and accountability. The financial sector is in turmoil, and rather than using long terms and sustainable approaches, short term techniques such as mergers are being used to bail out financial institutions. Even though such mergers increase the profits of the final entity, they also add up the bad loans and debts. It is high time now that Indian regulators acknowledge the use of ESG standards by financial institutions. Even though some global standards and initiatives, such as the UN Principles on Responsible Investing and UN Global Compact, would be a good starting point, having guidelines contextualised according to economy and needs are much needed.
This assessment can serve as a baseline that enables the Indian banking sector to prepare itself for facing and addressing challenges of sustainability. It also provides an opportunity for Indian banks to assume the leader’s role in transforming the Indian banking sector to set a benchmark for sustainable, responsible and fair finance. Fair Finance Guide International (FFGI), an international civil society network active in 11 countries, seeks to strengthen banks’ and other financial institutions’ commitment to social, environmental and human rights standards. For this assessment, the Fair Finance India coalition selected a sample of eight Indian banks (public and private). The banks are: Bank of India, Federal Bank, HDFC Bank, IDFC First Bank (previously called IDFC Bank), Indian Overseas Bank, Punjab National Bank, State Bank of India and Yes Bank.
The assessment was based on 10 FFGI themes under three categories– Environment – Nature and Climate Change; Social – Labour Rights, Human Rights, Gender Equality, Financial Inclusion and Arms; Governance – Transparency and Accountability, Corruption and Tax. The trend has been very similar to that of last year. Assessed banks have scored highest on the themes of Financial Inclusion followed by Corruption, and Transparency and Accountability. They have scored very poorly in the Environment theme, which includes Climate Change and Nature. They have also scored low on some themes in the Social category especially Gender Equality, Human Rights, Labour Rights and Arms.
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