The gross non-performing assets (GNPA) ratio of industries such as cement, metals, paper, petroleum and textiles may be sensitive to green energy transition, and their impact on overall banking system need to be monitored closely, according to an article in the Reserve Bank of India’s latest monthly bulletin.
The article assessed that three sectors with direct exposure to fossil fuels — electricity, chemicals, and automobiles — account for around 24 per cent of credit to overall industrial sector, but only 10 per cent of total outstanding non-retail bank credit, which implies a limited spillover to the banking system.
Several other industries such as cement, basic metals, paper, textiles, wood, rubber & plastic, IT & telecom, beverage & tobacco, leather, food manufacturing & processing, however, indirectly use fossil fuels and therefore any transition to green energy can have implications for their income and consequently their interest coverage ratio (ICR).
“Transition to a net-zero carbon emission target will entail adjustment in the production processes of industries that are directly or indirectly exposed to excessive use of fossil fuel.
“Concomitantly, due to the exposure of Indian banks to these industries, there can be spillover effects on them,” said RBI officials Saurabh Ghosh, Siddhartha Nath, Abhinav Narayanan and Satadru Das, in the article.
‘Increasing challenge’
India is planning to reduce the carbon emission intensity of its economy by 45 per cent by 2030 from 2005 levels, and achieve net zero emission by 2070.
The authors said, “One could expect an increasing challenge of adhering to emission norms for industries, vehicles and fossil-fuel energy production units in the future.
“The banking sector in India, being the dominant source of finance for these sectors, is likely to be exposed to certain transitional costs.”
Direct exposure: Not alarming
The direct exposure of the banking sector to the three fossil fuel-based industries may not be alarming, considering that the combined share of electricity generation, chemical products and automobile in total bank credit is around 10 per cent for public sector banks and around 9 per cent for the private sector banks, per the assessment of the officials.
The exposure of the banking sector has so far been very limited to alternative sources of energy. At the all-India level, only about 8 per cent of the bank credit deployed in the electricity industry is towards the non-conventional energy production.
The share of non-conventional energy in utility sector credit is higher for the private sector banks (14.8 per cent), it is only 5.2 per cent in public sector banks.
In India, 62.2 per cent of the total electricity generated is sourced from fossil fuel (the rest from renewable/ non-fossil sources).
Bank credit: Indirect impact
The sectors which have high input intensities of fossil fuel through indirect exposure are cement, basic metals, paper products, and textiles.
“We assume that because of a transition to green energy and shifts in input mix, there could be some pressure on input costs in these sectors in the short-term,” the authors said.
Depending on the market structures and pricing power, this increase in cost could be transferred to the end-users or could be borne by the firms, they added.
“In the second scenario, the EBITA (earnings before interest, taxes, and amortization) of the representative firm could take a hit leading to worsening of loan serviceability.
“This, in turn, could lead to an increase in GNPA ratio of such sectors...On the whole, there is a need to closely monitor all such industries that have low ICR, high GNPA ratio and high energy input intensity to prevent spillover to the broader banking sector,” the article said.