Take a drive on any of the highways in Mumbai and its peripherals. The large advertisements on green home loans, mostly by public sector banks, are quite unmissable. If you’d clicked on a pop up on your internet browser while looking for electric cars, you are sure to be followed up with several phone calls from mortgagers trying to sell you a home loan specifically designed to help you build a green home.
A green home is usually denoted as a house built using sustainable raw materials such as red bricks in place of prefabricated structures, wooden widows instead of glass, cement piping instead of plastic and so on.
The number of housing project sold on the basis on having been built entirely on such sustainable promises is on the rise and no wonder then, lenders too are flocking to fund these projects. There’s an equally growing beeline to fund solar panels and rooftops on the retail or domestic side. Lenders are also warming up to fund electric cars and two-wheelers.
On the corporate front, funding green energy projects and battery manufactures is catching up with banks and non-banks. While the trend is growing, there an important question which is yet to be answered convincingly – how does a lender hedge against delinquencies emanating from this category of loans?
This question becomes pertinent especially when in the US the cartel of big banks has decided to discontinue or go slow on green financing. Large banks such as JP Morgan, Citi and Bank of America have turned cautious on the green loans segment. Many are citing reasons of unviability as the trigger for wanting to apply brakes on this space. What’s giving the confidence to Indian lenders.
To begin with, what’s unproven so far in the electric vehicles space is what happens to the vehicle after three years when the car's battery life runs down?
The secondary market for this product is still quite undiscovered and even if one assumes that it could exist at the end of year three, the next question then is what would be the depreciated value of the vehicle. Right now, this is anyone’s guess. If one is to extend this question for an electric two-wheeler instead of an electric car, the gravity of these questions become deeper.
Take the case of solar panel or solar lamps. Lending to these products can be treated as secured loans. But is there a resale value to these products? Not quite, say manufacturers and even if they were to hunt for a willing buyer in the second hand market, the resale value is almost pittance and by the time a buyer is discovered, the asset loses its time value. Then what good does it do to classify such loan assets as ‘secured’?
As a complete aside, it’s equally important to delve into the issue of the success of ESG (environmental, social and governance) framework, whether with respect to ratings and the allied benefits of it. Ratings are yet to gather steam and a project with superior ESG rating doesn’t necessarily promise best cost of funding.
In all, the green financing model is far from being proven even globally. In such circumstances, for Indian lenders to go all out with these loans may be akin to catching the tail-end of euphoria; a mistake that domestic lenders cannot afford. Especially now.
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