Fostering Economic Growth through Sustainable Finance
and Financial Inclusion

(Speech by Shri Swaminathan J, Deputy Governor at the Conference on
Priority Sector Lending held at College of Agricultural Banking (CAB), Pune on
October 12, 2023)

Shri V G Sekar, Principal, College of Agricultural Banking, Heads of Priority
Sector verticals of banks, Members of faculty from CAB, Ladies and
Gentlemen. Good morning.

1. I thank CAB for inviting me today to discuss a critical topic that lies at
the crossroads of financial institutions' responsibilities and our collective vision
for a better, more sustainable world. I propose to briefly discuss the aspect of
sustainable finance to begin with before coming to the theme of the conclave,
that is Priority Sector Lending, as I believe that there is a strong interplay
between these two.

2. Sustainable finance, often referred to as responsible or green finance, is
a concept that has gained immense traction in recent years. Simply put, it is
funding to businesses and projects that promote not only economic growth but
also environmental protection, social equity, and responsible governance.

3. The importance of sustainable finance cannot be overstated. We are
living in an era where climate change, social inequalities, and governance
issues pose significant threats to the stability of economies and societies.

4. For instance, in India itself we can see some of these risks materialising.
Due to its geographic, environmental and economic characteristics India is
particularly vulnerable to climate change. As per online sources, upto June 30,
2023 alone India experienced extreme weather events on 143 out of 181 days'.
Variability in monsoon patterns coupled with temperature changes impact crop
production and affect food security. Apart from agriculture, even in other
sectors, the economic impact of climate change in India could be substantial.
These risks can no longer be overlooked. From a financial services industry
perspective, sustainable finance is a powerful tool to mitigate these risks, drive
positive change, and ensure long-term prosperity.

' As per downtoearth.org.in, "the country experienced extreme weather events on 143 of the
181 days from January 1 to June 30, 2023, which claimed 651 lives and affected 1 million
hectares (ha) crop area" India's Atlas on Weather Disasters, 1 July 2023,
www.downtoearth.org.in/weather_ disasters _india/india.html (last accessed on October 8,
2023)


5. Even across the globe, we are witnessing a remarkable shift towards
sustainable finance. Governments, regulatory bodies, and _ international
organizations are actively engaged in setting standards, guidelines, and
incentives to encourage sustainable finance practices. Initiatives like the United
Nations Principles for Responsible Banking? and the Task Force on Climate-
related Financial Disclosures (TCFD) are driving change at the global level.

6. Financial institutions worldwide are integrating ESG criteria into their
investment and lending decisions, reflecting the growing recognition that
sustainable businesses tend to be more resilient, profitable, and aligned with
the values of an increasingly conscious consumer base. The global sustainable
finance market is expected to grow from USD 3.6 trillion in 2021 to
USD 23 trillion by 20313, and in India, sustainable finance has gained
significant momentum in recent years as awareness of the need for sustainable
development has grown.

7. It is notable that the G20 New Delhi Leaders' Declaration under India's
Presidency reaffirmed the G20 leaders' commitment to take action to scale up
sustainable finance*. They endorsed the recommendations of the Sustainable
Finance Working Group (SFWG) which covered, among others, the
mechanisms to support the timely and adequate mobilisation of resources for
climate finance while ensuring support for transition activities in line with country
circumstances?.

RBI initiatives

8. On its part, the Reserve Bank of India has been actively promoting the
importance of green and sustainable finance within the banking sector. This
effort has included various forms of guidelines, instructions, and publications
aimed at raising awareness of the opportunities and challenges associated with
sustainable finance.

2 "Principles for Responsible Banking Build New Pathway for Banks to Collectively Accelerate
Action on Universal Financial Inclusion and Health." UN Environment, www.unep.org/news-
and-stories/press-release/principles-responsible-banking-build-new-pathway-banks-
collectively. (Last accessed on October 8, 2023)

3 "The Rise of Investment in Sustainable Finance." Confederation of Indian Industry, April 12,
2023, www.ciiblog.in/sustainable-finance/. (Last accessed on October 8, 2023).

4 G20 (2023), paragraph 25 of G20 New Delhi Leaders' Declaration, G20. Available at:
https://www.g20.org/content/dam/gtwenty/gtwenty_new/document/G20-New-Delhi-Leaders-
Declaration.pdf (last accessed on October 8, 2023).

5 Third G20 Finance Ministers and Central Bank Governors Meeting,
http://www.g20.utoronto.ca/2023/230718-finance.html.

9. As early as December 2007, RBI advised® banks to establish Board-
approved plans of action to support sustainable development, emphasizing the
central role of financial institutions in this endeavour.

10. More recently, in May 2021, RBI took a significant step by establishing
the 'Sustainable Finance Group' (SFG) within its Department of Regulation.
This specialized unit was created to proactively address climate change-related
financial risks and lead regulatory initiatives in the realms of sustainable finance
and climate risk. The SFG has been actively collaborating with international
standard-setting bodies, central banks, other financial sector regulators, and
the Government of India to tackle issues related to sustainable finance and
climate risk.

11. In July 2022, the RBI released a discussion paper on climate risk and
sustainable finance, furthering its commitment to driving this critical agenda
forward. It was followed in April 2023, by a framework for the acceptance of
green deposits. These interest-bearing fixed deposits in Indian rupees are
specifically earmarked to fund green finance initiatives, which encompass
projects focused on climate risk mitigation, climate adaptation/resilience, and
related objectives. This initiative aims to nurture and enhance the green finance
ecosystem in the country, marking a significant step toward a more sustainable
and environmentally conscious financial sector in India.

Priority Sector Lending and Financial Inclusion

12. Let me now come to the area of your specialisation i.e., Priority Sector
Lending which is a significant component of financial inclusion in India. Priority
Sector Lending plays a pivotal role in ensuring that marginalized and
underserved sections of the population have access to formal financial
services.

13. Priority Sector Lending has evolved significantly over the years,
transforming into a crucial aspect of credit flow from the banking system.
Originating in the 1960s, Priority Sector Lending was conceived as a tool to
direct credit toward key sectors that had been overlooked by institutional
lending, aligning with broader economic and social goals. The composition of
priority sectors and their associated targets has evolved in response to
changing economic landscapes and national priorities. Initially, it encompassed
agriculture and small-scale industries, but over time, it expanded to include
areas such as MSMEs, education, renewable energy, and more, while also
applying to a broader range of banks. The guidelines for Priority Sector Lending

6 RBI circular DBOD. No.Dir. BC. 58/13.27.00/2007- 08 dated December 20, 2007, on
Corporate Social Responsibility, Sustainable Development and Financial Reporting.
https://rbi.org.in/Scripts/NotificationUser.aspx?ld=3987&Mode=0

were last updated in September 2020', introducing various adjustments,
including credit for loans to start-ups, raised targets for small and marginal
farmers and weaker sections, and harmonizing instructions for different types
of banks.

14. On their part, banks too have made considerable progress in meeting
Priority Sector Lending targets, with an achievement rate of 44.7 per cent as of
March 31, 2023. However, credit gaps persist in sectors like MSMEs, women
entrepreneurs, and agriculture, underscoring the continued importance of
Priority Sector Lending.

Priority Sector Lending and Sustainable Finance

15. I How does Priority Sector Lending connect with Sustainable Finance? It
needs to be appreciated that sustainable finance and financial inclusion are not
distinct or distant areas. On the contrary, they are interrelated and can reinforce
each other in several ways. They share common objectives of improving
people's lives and fostering economic development. Sustainable finance aims
to address environmental and social challenges, while financial inclusion seeks
to empower individuals and communities economically. Further, financial
inclusion can enhance the resilience of vulnerable populations to environmental
and climate risks by providing access to insurance products and savings
mechanisms.

16. The Priority Sector Lending guidelines specify eight categories of priority
sectors viz., (i) Agriculture; (ii) MSME; (iii) Export Credit; (iv) Education; (v)
Housing; (vi) Social Infrastructure; (vii) Renewable Energy; and (viii) Others. A
careful evaluation of the Priority Sector Lending categories reveals that there
are elements of sustainability in nearly all these categories.

17. I Several significant changes and expansions have occurred in India's
Priority Sector Lending policies to promote key sectors and address important
societal needs. For instance, in April 2015, 'Renewable Energy' was introduced
as a distinct category under Priority Sector Lending to bolster the generation
and use of renewable energy sources like solar, wind, and more. Loans up to
15 crore were allocated to borrowers for purposes such as solar-based power
generators, micro-hydel plants, and non-conventional energy-based public
utilities. Considering the limited credit uptake in the renewable energy sector,
the loan limit under this category was subsequently increased to %30 crore.
Individual households were eligible for loans of up to 10 lakh per borrower.

18. Similarly, Priority Sector Lending was expanded to support the
agriculture sector, a critical contributor to the country's growth and employment.

7 RBI circular FIDD.CO.Plan.BC.5/04.09.01/2020-21 dated September 4, 2020, on Master
Directions - Priority Sector Lending (PSL) - Targets and Classification

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B
0909.PDF

4

Loans to farmers for the installation of stand-alone solar agriculture pumps,
solarization of grid-connected agriculture pumps, and solar power plants on
barren/fallow land or agriculture land owned by farmers were included without
any specific cap, further promoting sustainable agricultural practices.

19. In the MSME sector, an essential driver of economic and social
development, there are no credit caps for priority sector classification. This
includes loans to MSMEs engaged in activities like water supply, waste
management, and electric power generation using renewable sources.

20. Priority Sector Lending recognizes the importance of social
infrastructure in enhancing the quality of life and indirectly contributing to
economic development. Loans up to 5 crore per borrower for initiatives like
setting up schools, drinking water facilities, sanitation facilities, and household-
level water improvements are eligible for Priority Sector Lending classification.
Loans up to 10 crore per borrower for building healthcare facilities, including
those under 'Ayushman Bharat,' in Tier II to Tier VI centres are also included in
this category.

21. - Thus, the Priority Sector Lending guidelines in India have evolved into a
dynamic and responsive framework that reflects the nation's commitment to
progress, sustainability, and inclusivity. Over the years, these guidelines have
adapted to the changing economic landscape and emerging national priorities,
ensuring that financial institutions play a crucial role in promoting inclusive
growth.

Conclusion

22. Banks, as key players in the financial sector, bear an inalienable
responsibility in advancing the agenda of inclusive growth, which is
fundamental to the country's economic and social development. Therefore, as
senior executives of banks, your role is pivotal in shaping the financial
landscape of the nation. It is not merely about adhering to regulatory
requirements but about embracing the spirit behind the Priority Sector Lending
framework. It is about recognizing the imperative of reaching out to the
underserved and marginalized sections of society, empowering MSMEs,
bolstering renewable energy initiatives, and facilitating access to education and
healthcare.

23. Proactive efforts are required in translating sustainability principles into
action. Therefore, I would request you to go beyond mere compliance and to
imbue your organization's lending policies and practices with the essence of
the sustainable finance. It also involves fostering a culture of financial inclusion,
where every loan and financial service extended contributes to the greater good
of the nation. It means devising innovative financial products and services that
cater to the unique needs of various priority sectors, be it agriculture, renewable

energy, MSMEs, or social infrastructure. It entails understanding that your
bank's actions can have a transformative impact on the lives and livelihoods of
millions of individuals and communities across India.

24. I would like to end with a quote from Chanakya, which I believe is very
apt for the occasion:

Tot foes frat HAM: Let Te:I Sq: We aero TAT T Tere F II

(Jal Bindu Nipaten Kramasha Puyate Ghatha. Sa hetu sarva vidyana
dharmasya cha dhansya cha.)

"Small drops of water, when they come together, fill up a pot. Similarly,
knowledge, good deeds or wealth, add up gradually."

25. Just like the small drops of water coalescing, I believe, collectively, we
have the power to chart a course toward a more prosperous, equitable, and
sustainable future for all. We can contribute to a society where financial
inclusion is a reality, where economic opportunities are accessible to all, and
where sustainability is not just a goal but a way of life.

26. With this I wish this conference all success. Thank you.

KKK