Fighting climate change with insufficient Green Finance is like fighting a war without arms and ammunitions. We are bound to lose the war even before its being fought. Green Finance will not only help to increase the probability of success in our war against climate change but also will act as a powerful driver.
There is no doubt that greening our buildings should be at the heart of our fight against climate change. The operation and construction of building is considered to be one of the largest factors responsible for greenhouse gas emissions and therefore constructing a building with energy efficiency or low carbon emission is one of the best ways to increase our probability of success in our fight against climate change. However, existence of energy efficient mortgaging system is a pre-requisite for the creation of energy efficient assets. Therefore, new market standards need to be set out to pave the way for banks to act now to mainstream the energy efficient mortgage market, not only de-risking their mortgage portfolios but also playing a key role in securing the future of the planet.
It should also be noted that the benefits of improving our building stock stretch far beyond meeting climate goals – it results in increased comfort and wellbeing, lower energy bills and more investment for local economies. At the same time the risks of not taking action are equally stark and long term, such as rising operating costs, the devaluation of inefficient buildings in an increasingly carbon-conscious society which is likely to evolve in the coming years and non-compliance with ever more stringent legislation threaten banks and borrowers.
Though India has been able to remain at the top end of the table in terms of growth in green certified buildings in recent years, energy efficient buildings in the country account for just a fraction of the total structures thus indicating the long way we have to cover in the coming years. To speed up the process of greening the sector, mortgage financing need to play a very important role – both in the demand as well as supply side. On the demand side, lending sector is fairly organised with both Scheduled Commercial Banks (SCBs) as well as Non-Banking Financial Corporations (NBFCs) such as Housing Finance Corporations (HFCs) serving the sector. Interestingly, the percentage of the market share for HFCs is growing vis-à-vis the SCBs.
On the other hand, funding of real estate sector on the supply side has not been so well organised. In the past four years, while banks had slowed lending to the residential segment, NBFC lending increased by 4-5 times. After the IL&FS crisis, lending to the residential segment has been reduced by NBFCs, which led to an increase in cash flow stress of real estate companies.
Thus, in the last six months or so, NBFC funding to realty firms has gone down drastically. This in turn may affect the growth prospects of the sector in the coming months. Thus, the government has an uphill task of reviving the funding of the realty sector and also promoting the green mortgage funding. Banks and NBFCs need to be encouraged to lend to green assets and initially government can even think of incentivising by proving funds at slightly lower rates than the market rates.
There is a need for setting out a new market standard and a clear pathway for banks to follow to begin addressing the problem of poor performing buildings in their mortgage portfolios. In doing so, they will help to create a more sustainable property sector for future generations.
The mutual benefits for banks and borrowers mean energy efficient mortgages have the potential to revolutionise the standard of millions of buildings – but only if they become a mainstream offering; available from every bank, for every borrower.