wl-6860-Are Greens Healthy for Banks’ Balance Sheets?

There is an urgent need to channelise lending towards green sectors to mitigate the impact of climate change. From the policy formulation angle, however, nudging banks towards higher green lending would be erroneous, unless such loans are commercially viable. A comprehensive understanding of the impact of green credit on financial sector health is, therefore, essential for policy design. This paper analyses the relationship between green lending by banks and their asset quality as well as profitability. Leveraging a novel supervisory dataset of 33 Indian banks from March 2015 to December 2022, the paper finds that banks’ green lending share and their non-performing assets (NPA) ratio are negatively related. On the other hand, banks’ green lending share and their profitability are positively related. Further, the paper investigates if there is a regime change in the relationship between green lending share and financial health of banks. Results suggest that the positive association between higher green credit and return on assets is achieved only beyond the minimum threshold of green credit share of 14.8 per cent. In the case of NPA ratio, the negative relationship is evident only if the green credit share is higher than 38.4 per cent.