A Study of the Impact of Green Banking Practices on Bank’s Environmental Performance: An Indian Perspective

The pursuit of economic excellence and wealth maximisation has put humans on a track to being relentless towards the sole goal of prosperity while imagining activities that are detrimental to society and the environment. While focusing on achieving growth, the role and significance of the environment have been undermined significantly, and this has been surmounted to a greater extent, with newer challenges posing a threat to the global community. These challenges include but are not limited to erratic climate changes leading to flash floods, heat waves, global warming and global boiling in the long run. These adverse effects of climate change are driven by the human activities of rapid urbanisation, deforestation, and over-reliance on fossil fuels, which have been disturbing the natural balance of the environment and pose a threat to humanity. These activities are concerned with releasing high amounts of greenhouse gases, which lead to global warming; this effect of human activities alters the weather patterns over the long term. Such severe implications lead to floods and heat waves, the primary issues that pose significant health and financial risks to the vulnerable population. Understanding the importance of the environment and mitigating such worst-case scenarios, global action has been spurred against it, primarily furthered by the government, enterprises and institutions focusing on being more sustainable [1]. This shift towards sustainability in the development industry, especially the financial sector, has been furthered with the development of indexes like the Global Green Economy Index (GGEI). This index measures and ranks the countries based on their environmental performance, including energy efficiency, renewable energy adoption, carbon emissions and policy development, among other things. These indexes allow the leaders to work progressively towards bolstering the fight towards climate change and fostering sustainable development.

However, the shocks of the climate-induced risks are not felt equally by all economies, and the vulnerability of developing nations like India is different, owing to the absence of adequate measures for climate change and effective institutions to handle such drastic changes. India has a huge potential for economic growth and a similar magnitude of threat from climate change. According to the World Bank, the country has lost around 2.8% of its Gross Domestic Product (GDP) by the year 2050 due to the shifting patterns of precipitation and rising temperatures. The sudden sea level rise attributed to climate change and global warming threatens the country’s vast coastline, which spans over 7500 kilometres. The projections state that the coastline areas and cities of Chennai, Kolkata, and Mumbai are poised to see a rise of 30-80 cm in sea level by the end of the century. This calamity would displace millions of people and thus cause a chain reaction of severe economic losses. Another aspect of the country's vulnerability arises from the dependence on agriculture. India is an agrarian land; thus, this sector employs 58% of the total population while contributing 15% of the GDP. However, the rising issues of climate change, erratic monsoons, increased droughts, and unprecedented weather events are leading to a decline in productivity. According to the economic survey of India 2017-2018, the adverse effects of climate change can impact the sector in a significant manner by reducing income by the range of 15-18%, furthering the economic divide among the masses. India is also touted to be the third largest carbon emitter among its counterparts and heavily relies on fossil fuels to energise 75% of its operations. This leads to the banking sector being heavily invested and sensitised to carbon-intensive industries, which has been highlighted to increase a 5% addition to loan default. Considering all these adverse issues, India has embraced various policies like GB and financing to establish sustainable growth while maintaining economic integrity [2, 3]. GB is defined as those financial activities which promote environmental stability while reducing carbon footprints and supporting eco-friendly initiatives. To further this, the country's central bank, the Reserve Bank of India, has encouraged banks to be more adaptive towards green practices. Even with the help of its Priority Sector Lending (PSL) guidelines, it has mandated that the banks allocate a portion of their lending to renewable energy and sustainability. In addition, specific empirical evidence shows that a change in the country's climate relates directly to credit risk owing to the interdependency of the economic variables. Even the Financial Stability Report by the central bank flags climate risks as potential threats to financial institutions, with the World Bank supporting the numbers by estimating a loss of 2.8% GDP by 2050 due to climatic disruptions. The aspect of climatic disclosure and requirements is still grey in implementations, unlike the EU, which has stringent regulatory requirements. There is an absence of the Green Deposits Framework or any specific guideline which clarifies and mandates the implementation of green credit among the country’s financial institutions. Thus, it is seen that a vast country like India, which is characterised by its vast ecological landscape, needs the support of GB to help fight the adverse effects of climate change.

In simpler terms, GB is a financial system that amalgamates economic, social, and ecological considerations into banks' operations and policies. This approach towards banking operations prioritises sustainability and minimises environmental degradation while catering to boosted economic growth. GB, on the whole, is aimed towards directing the capital flow into projects and initiatives that are more environmentally focused, like renewable energy, sustainable agriculture, and waste management. GB emphasises climate protection by encouraging banks to reduce their carbon footprint while adopting more efficient technologies, using paperless banking, and financing green projects [4]. Therefore, the goal is to merge and align financial activities with the environment while maintaining the ecological balance. GB is crucial for economic growth as it ensures that the banks' resources are allocated to projects that help the environment and make the economy more resilient and reliable [5-7]. GB plays a significant role in furthering the Sustainable Development Goals (SDGs) laid by the United Nations. GB is directly aligned with the goals of clean and affordable energy (SDG 7), climate action (SDG 13), sustainable cities and communities (SDG 11), and responsible consumption and production (SDG 12). With a focus on investments in these areas, GB allows the banks to drive economic progress towards a more balanced society, and thus, its importance cannot be overstated.

Various studies have been conducted to understand the area of GB regarding its development, goals, and specific scenarios for its implementation. The areas of its adoption and its performance in terms of sustainability and stability have been extensively researched. Still, most were based on scenarios that were different from the Indian perspective and problems. In India's context, few studies related to banking performances, GB practices, and financial growth have been accommodated in this area.

The secondary data of banks in the element of GB is unavailable while looking at the case of India. As such, the study aims to fill these gaps by identifying the current prevailing practices of GB in India and gauging its empirical impact on the financial aspect as well as the performance of banks environmentally. The study's primary objective includes the analysis of how GB practices are helping the environmental performance of banks in India while also understanding the linkages of green finance in this relationship. The study is comprehensive in studying the relationship between both consumer-related policies and employee-related policies in green finance and GB. To make the study feasible, it draws from the literature to understand the prevalent GB practices. It uses a semi-structured survey-based SEM to determine the empirical nature of the relation. The link between the various GB practices and financial and environmental performance are all captured and discussed.

The study has been structured as follows: Section 2 delves into understanding the topic of GB with relevant literature and the various GB practices currently undertaken by the Indian banking sector. Section 3 covers the tools and methods supporting the study, such as the SEM, data collection, and sampling. Sections 4 provides an analysis of the results and Sections 4 provides discussions on them. The last section covers the policy implications for the country and ends the talks with a presentation of future directions and limitations.

This section explores the development of the empirical study and the various processes of data collection, sampling, and analysis techniques used. The section highlights the survey design, the constructs of structural modelling, and the empirical relation between the various variables.

3.1 Survey design

The study uses an elaborate survey design to model the relationship between GB practices, green finance and the environmental progress of banks. The survey has been designed to maintain the highest standards of anonymity and ethical standards with the people and to obtain informed consent from the participants. To ensure the anonymity and integrity of the participants, their information does not in any particular manner highlight their name but includes information like age, gender, qualifications, and job title to profile the sustainability of the responses. The survey was meticulously designed in sections, each denoting a particular hypothetical substance derived from the literature review. The sections are Green Banking Employees (GBE), Green Banking Operations (GBO), Green Banking Customers (GBC), GBP, and GF as well as Environmental Performance (EP). These subsections were gauged based on three sub-questions, which comprehensively described the bank's perspective. To make the answers unbiased and unadulterated, the survey was based on a Likert scale with the answers ranging from “Strongly Agree” and moving down to “Strongly Disagree.” All these were on a relative 5-pointer scale. Detailed information about the survey design regarding the various sub-questions can be found in Table 1.

Table 1. Survey design

3.2 Sampling and data collection

The data for the study was collected by amalgamating various public and private sector banks in the region, concentrated around the NCR of India. The region comprises the cities of Noida, Delhi, Gurugram, and Greater Noida, as the region is the central zone of India, consisting of the country’s capital and an established image of the economic hub. The number of banks included in the survey was close to 35, and various branches of banks were covered. Prominent names of these banks include the SBI, the ICICI Bank, Yes Bank, IndusInd Bank, Citi Bank, and Union Bank of India, among others. To ensure that the survey was anonymised, the names of the banks have not been included in the survey information and have not been taken into cognisance for evaluation. These banks have been the pioneers of economic growth and have contributed substantially to the various aspects of GB. As such, these were chosen to determine the effects of these on GF and the environmental performance of banks. The sampling method employed in the study was a purposive sampling technique to eliminate data redundancy and make it more reliable. To ensure that the sample size was adequate to achieve a 95% condolence level and adhere to the minimum limit of 385 responses, the study chose to circulate 450 samples across the region. The survey was conducted in February and March 2024. Out of the total circulation, the response rate was 91%, with 411 responses recovered. The survey was based on a five-point Likert Scale, making it easier to record the employees' responses.

3.3 Rationale for SEM

The study uses SEM as the primary method because it allows for modelling complex relationships between variables. It caters to unobserved variables with the help of latent constructs and helps better understand the underlying mediating effects of the various defined variables. Compared to traditional methods, it was chosen because it estimates both the direct and indirect relationships between the variables, helping to understand the variable interactions better. In this study, other approaches, such as panel analysis, were discarded as the data under consideration is primarily involved in a cross-sectional fashion and not a time series fashion. Thus, adhering to every aspect of the data and the need of the study, it was highlighted that SEM is the best-suited method for the same.

3.4 Data analysis strategy

The data analysis of the survey was based on three paradigms, one being the exploratory factor analysis (EFA), which provided the descriptive statistics of the model, the discriminant analysis and the confirmatory factor analysis (CFA), where the various strategies like the Cronbach alpha as well as fit indices of the modelling were tested and finally the SEM. The role played by the EFA includes preprocessing the data and providing insights into the reliability of the survey stats to screen and ensure that the data is fit for further processing; the EFA also includes reliability tests like factor loadings. The study followed this by exploring the discriminant validity analysis of the various constructs. The next step, which was followed by the study, was the CFA, mainly with respect to the various indices to compare the reliability of the findings. The primary analysis is then done with SEM modelling, which includes the definition of the latent constructs of the various inputs, such as GBP, GBO, GBC, and GBE, as well as the mathematical relation between the variables. A structural model of the various hypotheses and the variables can be found in Figure 1, which denotes the conceptual model.

1.png

The various hypotheses that have been the basis of the study show particular significance in India's banking sector. The relationship between GF and GB practices related to employees suggests that the workforce is increasingly important regarding environmental consciousness. The employee training initiatives focused on sustainability help to collaborate with hypothesis H1 while aligning it with the various literature studies. In terms of the role played by operational initiatives of the bank with respect to green finance, it is seen that Indian banks are more focused on adopting practices like paperless working and energy-efficient technologies, thus improving their continuation of GF. Overall, the banks promote a culture of sustainability and environmental consciousness while catering to their operations more effectively. These prove that the hypothesis H2 is significant and in line with previous studies. The other pillar of GF is policy-related regulations and practices. Implementing and formulating such green practices-related policies contribute not only to banks pledging more towards sustainability but also their effectiveness in promoting green tracks. The various policy shifts, such as green loans, attract more companies investing in sustainability, thus increasing green finance for banks. This shows that Hypothesis H3 is in line with the studies. In terms of the consumer aspect, the study highlights the significance of the relationship where consumer products like online and digital banking, green loans, and products attract more consumers, thus compelling banks to participate more in green finance. Showing that hypothesis H4 is significant and corroborates theoretical evidence. While all the relations to green finance have a mediation effect on the larger environmental performance of a bank, it must be noted that hypothesis H5 shows how the positive impact of GF promotes the performance of banks. The various other factors, like employees, denoted by H6; operations, denoted by H7; policy, denoted by H8; and consumers, denoted by H9, are all significant in terms of a bank's performance. This can be understood by the fact that when employees are more adept in terms of environmental sensitisation training, they enhance the working of the banks in a sustainable manner, thus contributing to their environmental goals. The presence of environment-friendly operations, like rainwater harvesting, energy efficiency, and solar panels, shows how the operational effectiveness of banks produces better outcomes in terms of the environment and the performance of the banks as a whole. These operational and employee-related changes are only driven by policy changes and thus support the presence of green policy changes that enhance the environmental performance of the banks. With many Indian banks, it has been seen that they provide incentives to consumers around green loans and deposits, thus increasing consumer engagement in that sector and driving the overall environmental performance of the banks. Comparing practices across emerging economies is helpful in contextualising India’s GB evolution. For instance, Bangladesh Bank mandates a minimum quota for green finance, showing a more coercive institutional approach [35]. In contrast, the Reserve Bank of India (RBI) promotes green lending through incentive-based mechanisms such as PSL but does not mandate it. Similarly, Indonesia’s OJK has developed ESG regulatory frameworks and launched green bond guidelines to mobilise sustainable finance [36]. These comparisons highlight the spectrum of regulatory engagement in promoting GB and underscore India’s opportunity to adopt hybrid strategies that combine soft incentives with enforceable standards. However, it must be highlighted that the study's findings have several implications for India, including the integration of better green practices in Indian banks on a larger scale, which provides a significant focus for their employee training. The formulation of policies that are more centric towards a green economy and green development would help banks improve their infrastructure. There is also a need to create awareness of green building and energy-efficient methods to be induced in the banking system's workings. All this requires the firm hand of the RBI to support it with the help of proper regulations and policies. These could include providing incentives for GF, laying down proper guidelines, and promoting public awareness among the masses. These steps would allow the banking infrastructure to align with GB and position India as the leader in sustainable change while providing long-term economic growth.