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Banking & financial institutions &

environmental safeguards

Mayank Datta
I am very grateful to my teacher, Prof. Alok Verma for his able guidance
and support in the compilation of this project. His advice and guidance has
been of great invaluability and importance.

I would also like to thank my parents and friends in helping me gather

material for and research on the topic of my project. Without them, it would
have not been possible to compile this assignment.

Mr. Alok Verma Amity University

Lecturer Uttar Pradesh
ALS Date: 30/09/’10

This is to certify, MAYANK DATTA, bonafide student of Bachelor of Law

(B.A.L.L.B), ALS, AUUP has satisfactorily prepared this project titled as
“Evidentiary Issues in Corruption Cases” under my supervision and
guidance. The present work incorporates the result of his independent study
and research.

The present work is up to the mark and worthy of consideration for the
award of B.A.L.L.B degree. This being submitted to the Amity University
for the degree of Bachelor of Laws in the partial fulfillment of requirement
for the degree.

Mr. Alok Verma


Table of Contents

1. Title page
2. Certificate
3. Acknowledgement
4. Introduction
5. Involvement in Environment Protection
6. Industrial Finance Corporation
7. International Environment Management Standards
8. Small Scale Industries
9. Conclusion
10. Bibliography


The Industrial Revolution heralded an era of prosperity, comforts and other

blessings. On the other hand, it also brought with it a serious threat to the

environment. Since then the rain forests have been decimated, oil spilled by

the tankers, harmful gases spewed into the atmosphere, poisonous fluids into

rivers, lakes and the sea.

Industry has always been and continues to be the prime cause of economic

development all over the world. The need of the hour is to bring awareness

for pollution prevention, waste minimisation, resource recovery, recycling

and waste utilisation in the industry. For example the single most important

step to control global warming can be taken by reducing carbon dioxide

emissions by improving upon energy efficiency. The industry needs to be

encouraged and monitored for conserving energy and using less energy

intensive technologies.

In a mixed economy like India, the Government has to play an important

role by bringing out environmental legislations and encouraging industry to

adopt environment friendly technologies etc., by means of charges,

subsidies, market creation and enforcement incentives. In India, however, in

view of limited public resources both financial and human, lack of

awareness about ecological aspects, inability to derive competitive

advantage by producing eco-friendly products, the role of commercial banks

who are main source of funds for industry assume high importance.

Involvement in Environment Protection

Banks and financial institutions should start taking cognizance of

Environment Impact Assessment (EIA) and Environmental Audits (EA)

in their assessments for funding because -

(a) India's efforts to make the country cleaner and greener were marked by

several landmark decisions like establishment tribunal, a river conservation

plan, increasing people's involvement in ecology and a frontal onslaught on

vehicular and noise pollution. The banks will have to assist the Government

in putting India in the league of the environmental conscious countries of the

Globe in view of their continuing support to social causes in the past too.

(b) The growth of exports may in future depend on the manufacturing of

eco-friendly products and the production process used by the Indian

(c) The success of the local pollution control equipment industry depends

heavily on the increased demand for its products and financial assistance

from the banks.

(d) The existing borrowers of the banks may in future be faced with the new

environmental legislations and banks may find a standard asset converting

into a doubtful asset overnight due to cost of environmental clean up leading

to bankruptcy of the borrowers.

(e) The suggestions of Reserve Bank of India/Government regarding

environmental audits, etc. may become mandatory in future for the banks

and they will have to fall in line with the approach adopted by International

Finance Corporation, Asian Development Bank, etc.

(f) The projects now require EIA and EA as necessary prerequisites for the

financial assistance by World Bank, ADB and IFC.

(g) A survey sponsored by the United Nations Environment Programme

(UNEP) and Salomon-Inc. of New York has shown that the number of

banks dealing with environmental investment and lending is expected to

triple over the next 15 years. The survey indicates that integrating

environmental issues into banking practices is not some kind of corporate

philanthropy but rather good, solid business. In this scenario, banks require

to commit their institutions to protect and preserve the environment and

support the principle of sustainable economic development.

Industrial Finance Corporation

IFC's Environment Unit (EU) was established in 1991. EU is the focal point

for IFC's environmental activities. If required technical assistance from

outside consultants is also taken. Environmental assessment even precedes

financial and technical appraisal. Each project is subjected to detailed

environmental review. The review covers environmental issues, socio-

economic concerns, resettlement issues, occupational health and safety,

major hazard analysis, etc. At the time of Initial Project Review (IPR), the

projects are classified into three broad categories on basis of their impact on

the environment. The draft of Environmental Impact Assessment (EIA) is

analysed in the very beginning and the same is shared with the local affected

groups. The environmental performance of projects is monitored by the EU.

IFC disburses funds only after plans are in place in accordance with the
World Bank and host country requirements on the environmental issues. The

environmental impacts are evaluated after the projected completion and in

case of non-compliance, the project sponsor is required to take appropriate


International Environment Management Standards

IFC's environmental review procedures are based on World Bank

Environmental Guidelines published in 1988. They include some industry

specific standards and some pollutants specific standards, but they do not

cover all industries or all the pollutants. Another source is US Export -

Import Bank (EXIM Bank), which has released its environmental review

procedures to ensure that the exports it supports financially are

environmentally sound. British Standards Institute recently released British

Standard 7750, a comprehensive framework for corporate environmental

compliance programs.

ISO-14000 series developed by International Organization for

Standardisation (ISO) in Geneva is the most significant new international

environmental management standard, ISO 14000 series attempts to set up a

framework to prevent and detect violation of environmental laws and

regulations for all countries. Under ISO 14000 series, a company is required

to establish, implementing and maintain an ongoing, comprehensive system

of policies, procedures and practices to identify and comply with its

environmental requirements. In short ISO-14000 series provides a common

international focus for corporate environmental compliance.

In India, the Notification on environmental procedures and guidelines by

Ministry of Environment and Forests is an important source of information.

Handbook for EIA of development projects brought out by Centre for

Environmental Science and Engineering, IIT Bombay is an easy, rapid and

ready reference for the user agencies.

Suggested Modified Procedure for Commercial Banks

The procedure of lending process for the banks, broadly will involve :-

(1) Assessment of risk.

(2) Environmental audit.

(3) Assessment and analysis of credit requirement.

(4) Documentation, security and pricing.

(5) Loan management and follow up.

(1) Assessment of risk

Conventional credit risk assessment in banks takes into consideration

financial risks; industry risks and management risks. Fourth parameter of

environmental risk will have to be incorporated. The rating on point scale is

given on the basis of potential impact on the environment of the technology

used type of industry, resettlement issues, occupational health and safety,

major hazards, pollution control efforts, etc. However, the company will be

required to achieve minimum rating under environmental risk to become

eligible for consideration for the loan. Industries with significant

environmental impacts, e.g., petrochemical, thermal power, mining, etc., will

need to have a detailed EIA of the project.

The environmental risk assessment should also be implemented for the

existing large loan portfolio for safeguarding banks' interest from potential

environment impact problems. To make the risk assessment realistic, the

report of site visit will be analysed. Site inspection report should include

review of past and present use of site, the nature of the neighbourhood, the

company's production process, status of discharge permits, locations and

conditions of storage tanks, wells, etc.

Following is the list of polluting industries notified by Ministry of

Environment and Forests and needs to be given special attention by the

banks and financial institutions:

*Primary metallurgical producing industries, viz., zinc lead, copper,

aluminum and steel

* Paper, pulp and newsprint

* pesticide/insecticides

* Refineries

* Fertilizers

* Paints

* Dyes
* Leather tanning

* Rayon

* Sodium/Potassium Cyanide

* Basic drugs

* Storage Batteries (lead acid type)

* Acids/alkalies

* Plastics

* Rubber - synthetic

* Cement

* Asbestos

* Fermentation industry

* Electroplating industry

(2) Environmental Audit

The nature of industry, site, process and magnitude of loan shall decide the

type of environmental audit to be undertaken. In absence of expertise in the

banks, an independent consultant can undertake the audit, the cost to be

borne by the borrowers.

Environmental audits will identify past practice, evaluate current regulatory

compliance and identify future problem areas.

Environmental audits can also review a company's capital requirements and

the cost impact of environmental compliance on the company's balance sheet

and cash/fund flow. The cost effect on the project in case of dealing with

hazardous materials, clean up, etc., has to be incorporated in the audit.

Industries/companies with high environmental risk rating may be required to

submit yearly EA, progress reports and time table on environmental

compliance and minimisation of toxic waste through modification of

company's industrial processes and waste disposal practice.

(3) Assessment and Analysis of Credit Requirement

Lending and credit officers need to have a good knowledge about

environmental matters, legislations, etc. to properly analyze the information

gathered by on site inspection and EA. Every bank should incorporate the

topics of environmental risk assessment, related legislations, analysis of EA

and EIA of the project, pricing for environmental compliance in their regular
credit training programmes. Further, on lines of IFC's Environmental Units

(EU), every bank should establish an Environmental Cell (EC) as part of

their already established consultancy cells at the level of zonal offices/head

offices. EC will become the focal point for environment related activity and

will provide the required expertise whenever needed. Credit officers will

have to incorporate the estimate of cost for dealing with environmental

issues in working of the credit requirement of the borrowers. They will have

to provide a summary of the information given by onsite inspection. EA, risk

assessment, etc., and give their conclusion and recommendations to assist

the decision making in the matter.

(4) Documentation Security and Pricing

(i) Documents

Terms and conditions can be incorporated into loan documents to minimise

banker's risk from past, present and future environmental liability.

(a) "Loan covenants" can be included that the borrower will comply with all

central, state and local environment laws; remedy any present or future
contamination; immediately notify the bank if they receive any notice of

potential environmental violations or enforcement proceeding.

(b) "Arrangement letter" should specify that charges will be borne by

borrower for EIA or EA; submission of yearly environment reports; progress

reports; insurance, etc.

(c) "Indemnity" from borrowers indemnifying banker from the costs or

damages resulting from hazardous waste clean up; damages due to storage,

disposal of materials; cost and expenses resulting from the repairs, etc.

(d) "Undertaking" from the borrowers that all conditions relating to any

known environmental problems have been disclosed; no previous

environment liability, etc., is pending.

(ii) Collateral

The borrower may be asked for additional collateral security against future

impairment of the primary collateral and personal guarantees of

directors/partners, etc. Further, a provision for a loan "reserve" dedicated to

environmental compliance can be agreed upon.

(iii) Costing

All this is going to increase the cost for the bank. The credit rating exercise,

which decides the interest rates, can incorporate environmental aspect with

provision of negative marks based on the risk assessment. This may slightly

downgrade the rating and thus, increase the interest earning for the bank.

(5) Loan Management and Follow up

The environmental aspect to be given due importance at the time of annual

review/renewal exercise on the basis of reports of EA, fresh reassessment of

risk factors, etc. The Reserve Bank of India inspections as well as in-house

inspections/audit to check on this aspect too.

Small Scale Industries

The framework outlined above can be implemented in case of large

corporate borrowers. The SSI sector is not in a position to bear the additional
expenses on account of environment audit, etc. However, the approach has

to change and the banks should incorporate some parameters in the

assessment of proposals of SSI to promote pollution control. The appraisal

to necessarily incorporate comments on -

Environmental pollution status of industry.

Clearance from the appropriate authorities.

Steps undertaken or proposed for disposal of solid, liquid and gaseous

wastes, etc.

Banks shall discourage financing of polluting industries or industries, which

are functioning in residential areas. In case of small scale industries located

in approved industrial estates, setting up of Common Effluent Treatment

Plant (CETP) should be financed by the banks at reasonable pricing.


Banks are profit making organisations. If they are to be actively involved in

assisting the environment protection efforts, they also need certain

incentives for the same. One incentive can be to classify the lending of

banks to manufacture and purchase of pollution control equipments; R&D

activities for pollution control, environment consultancy services under the

priority sector lending.

With the liberalisation process there is a spurt in industrial activity and

inflow of capital. Attempts need to be made to mitigate the adverse effects

on the environment and society. Due to their effective say in the industrial

sector, banks can play a major role in the promotion of environment

protection efforts.

Thus, by liberally financing the activities encouraging pollution control and

restricting flow of finance to Industries which are using polluting

technologies and by assisting and monitoring the pollution control by

Industries, banks can play a very important role in fostering a linkage

between economic development and environmental protection.


The project has been compiled after gathering useful information from the
following sources:
1. legal-dictionary.thefreedictionary.com
2. www.worldbank.com
3. www.ecosystemmarketplace.com