Government banks to implement new filtering system for corporate loans

Public sector banks are set to make a significant change in the process of lending to companies. Environmental, Social, and Governance (ESG) parameters will now be included in the credit risk assessment process of companies. It will now be mandatory to consider these aspects while providing credit.

According to a report by The Economic Times, a total of seven public sector banks, including State Bank of India (SBI), are leading this important initiative. The main objective of this new method is to make the credit appraisal process more robust and modern. Banks will now consider not only the financial position but also the environmental and social responsibilities of companies.

As part of this process, banks are preparing a Climate Risk Framework for their credit workflow. Through this framework, banks will be able to understand what impact a particular company's business may have on the climate and what the level of that risk is. Along with this, banks are adopting standardized methods for calculating emissions so that pollution or carbon emissions caused by companies can be accurately measured.

All these developments and improvements are being overseen by the EASE 9.0 reform agenda. The aim of this agenda is to modernize government-owned lenders or banks. Through this new system, banks will be able to determine more accurately which companies are safe to lend to and which companies may pose financial risks in the future due to environmental or social reasons.

The use of ESG parameters in the new method will provide banks with a deeper understanding of companies' business models. Under Environment, it will be seen whether the company complies with environmental regulations; under Social, how the company treats its employees and society will be examined; and under Governance, the company's management and transparency will be inspected. All these aspects will now become decisive factors while granting loans.

This step taken by public sector banks is considered a major move to bring transparency and accountability to the Indian banking sector. This approach of modernization is likely to reduce risk in the banks' portfolios because they will now check not only profitability but also long-term stability and sustainability. This new system will make the loan process more organized and in accordance with global standards.

Public sector banks (PSBs) play a vital role in India's economy. They provide credit to various sectors of the country and assist in the implementation of government policies. These banks have long been functioning as the foundation of the country's economic development and have been adapting to technology and new regulations over time.