The International Financial Services Centres Authority (IFSCA) on 2nd March 2022 has notified the draft Guidance framework on Sustainable and Sustainability linked lending by financial institutions to encourage the IFSC Banking Units (IBU) and Finance Companies/Finance Units (FC/FUs) (undertaking lending activities from IFSCs) to internally develop a comprehensive Board approved policy on green/social/sustainable/sustainability linked lending.
The guidance intends to provide a broad framework for adoption of principles aligned with the existing international standards viz. Green/Social Loan Principles developed by Loan Market Association (LMA), Bond Principles developed by International Capital Markets Association (ICMA), Climate Bond Standards by Climate Bonds Initiative and any other similar recognized standards.
IFSCA proposes to direct the IBUs and FC/FUs (undertaking lending activities from IFSCs) registered with it to develop a Board approved policy on sustainable lending within a time period of 9 months from the date of issuance of the final framework. Further, such entities shall have at least 10 per cent of their loan assets in the form of lending to green/social/sustainable/sustainability-linked sectors/facilities, from the financial year beginning April 2023 /calendar year beginning January 2023. In case, if the IBU or FC/FU is unable to meet the above targets, it shall report to the Authority explaining reasons for non-compliance of the same.
The core components of such policy on lending shall cover aspects such as:
- Borrower assessment process,
- Assessing the use of proceeds and appropriately describing it in the legal documentation of the loan facility,
- Process to be adopted for project evaluation and selection, management of proceeds,
- Reporting mechanism,
- Monitoring either internally or through external reviewer, and;
- De-classification of lending facilities.
