M Rajeshwar Rao, Deputy Governor, Reserve Bank Of India

The Reserve Bank of India (RBI) has a responsibility to promote sustainable economic growth, which includes the transition to a low-carbon economy, RBI Deputy Governor M Rajeshwar Rao said. And banks, he added, can play an essential role by developing new financial products that incentivise green projects.

Rao, who was speaking at the Thrissur Management Association, said an emerging area of focus was to make finance available for transitioning to a low-carbon economy.

“All of us are now cognisant of the global challenge that climate change poses to our planet and its impact, which is reverberating across the world,” he said. “If we fail to take timely action, the consequences will be irreversible.”

The Indian government, he added, has already committed to reduce the total projected carbon emissions till 2030 by one billion tonnes; reduce carbon intensity of the economy by more than 45 per cent by 2030; and achieve net-zero emissions by 2070.

Rao also said that in a developing country like India, regulators have a tough task to keep pace with technological innovations. “Regulating such a dynamic financial sector can be very aptly described as, ‘Just when we thought we knew all the answers, someone changed the questions’,” Rao said.

“But it is our firm belief that for the customers to enjoy the fruits of financial innovation, it has to be sustainable and within the realm of a sound regulatory framework,” he said. “Keeping this in mind, we have followed a nuanced and consultative approach with an aim to responsible innovation, while nudging the industry to adopt sustainable business practices.”

On digital lending

Banks are now tying up with fintechs for their technological prowess to provide better products and better serve their customers. In the post-pandemic world, while digital lending has picked up enormously in various ways, it has also given rise to a host of business conduct issues, Rao said.

“This poses a regulatory dilemma as the regulator then needs to play a balancing act in weighing the benefits brought in by innovative business models on one side and emerging business conduct and regulatory concerns on the other side,” he said. “An attempt has been made by the Reserve Bank to address this issue through issuing principle-based guidelines on digital lending.”

On banking for all & MSME lending

Rao also emphasised that although “banking for all” has been made a reality, there still exists a huge gap in the availability and utilisation of financial services by urban and rural India.

“Financial inclusion needs to be redefined by developing bespoke products and services that are best suited to different strata of the society, depending upon their income level,” Rao said. “This shall include innovative solutions that make it easier for people to not only access basic but also use a variety of financial services.”

Towards this end and to enable easy, adequate, and customised credit, the RBI has made provisions for differentiated banking licence, he said. “These are niche banks, which can help plug the gap in meeting specialised needs for banking products and services across a wider and diverse spectrum.”

The deputy governor also asked Indian lenders to focus on the delivery of credit to micro, small and medium enterprises (MSMEs) because there has been this consistent gap between demand and supply of credit to MSMEs. The sector contributes around 30 per cent to India’s GDP, 45 per cent to its manufacturing output, and 48 per cent to exports. This has to be seen as an area of opportunity by the banks and other financial institutions, Rao said.

He added that credit decisions, which are informed by the availability of financial as well as alternative data, can revolutionise credit markets. The RBI has introduced the account aggregator framework in this regard and it is expected that the AA framework would accelerate the development of alternative lending models such as cash flow-based lending and marketplace lending or what is popularly known as peer-to-peer lending, he said. This would enable small businesses, including street vendors who may not have traditional collateral, to secure a loan.

“As a central bank, we also have a responsibility to promote sustainable economic growth, which includes transition to a low-carbon economy,” Rao said, adding, “Banks can play an essential role in financing the transition to a low-carbon economy by channelising finance to sustainable and green projects as well as by developing new financial products that incentivise green initiatives.”

The RBI has come out with a discussion paper on climate risk and sustainable finance, wherein it has said that to scale up lending for green finance, the central bank will seek to encourage lenders to set a board-approved voluntary funding target to increase green funding.