Expanding Green Lending Can Strengthen Indian Banks’ Financial Stability: IIM Lucknow Study

New Delhi, Feb 21 (KNN) A recent study by the Indian Institute of Management (IIM) Lucknow highlights the strategic benefits of expanding non-carbon-intensive lending for Indian banks.

Published in Finance Research Letters, the study reveals that banks with a higher proportion of green loans experience long-term improvements in financial stability, positioning sustainable lending as a core strength for India’s banking sector.

Despite global efforts to promote green finance, Indian banks continue to lean heavily on carbon-intensive industries, primarily due to the absence of a clear taxonomy to identify and encourage green assets.

The IIM Lucknow research addresses this gap by proposing a structured framework to identify non-carbon-intensive sectors and assess their impact on loan portfolio quality.

For the first time, the study ranks Indian banks based on the sustainability of their credit portfolios, offering valuable insights to guide future lending strategies.

By prioritising non-carbon-intensive loans, banks can reduce default risks, align with global sustainability goals, and strengthen economic resilience.

“Our research shows that a critical mass of green asset lending is essential for an optimized credit portfolio,” said the authors, Vikas Srivastava, ONGC Chair Professor; Sowmya Subramaniam, Associate Professor of Finance and Accounting; and Vidya Mahadevan, Research Scholar at IIM Lucknow.

“This insight can help banks' leadership focus on sustainable lending as a strategic growth opportunity, while also guiding regulators to introduce supportive policy incentives.”

The study identifies a non-linear, inverted U-shaped relationship between non-carbon-intensive lending and non-performing loans (NPLs), indicating that significant credit quality improvements occur once a critical threshold of green lending is reached.

However, the research underscores the urgent need for standardized green taxonomy and regulatory support in India. Without clear guidelines and incentives, banks may hesitate to fully embrace sustainable lending, despite its long-term benefits.

As climate risks grow and banks remain exposed to carbon-intensive sectors, diversifying credit portfolios toward greener assets is both a financial and environmental imperative.

The IIM Lucknow study offers a data-driven roadmap for integrating green finance into mainstream banking, helping Indian banks achieve financial stability while supporting a sustainable future.

(KNN Bureau)