Economics · ESG & Sustainable Banking
A nationalized bank is considering a loan proposal from a large MSME that manufactures plastic components for the automotive industry. The company wants to shift its production line to 'Biodegradable Polymers' to comply with the government's ban on single-use plastics and to meet the ESG requirements of its international buyers. The project requires a capital expenditure of 50 Crore INR, but the current 'Internal Rate of Return (IRR)' of the green project is 2% lower than the company's traditional business. The bank's credit committee is debating whether to approve the loan under its new 'Green Credit' policy. The committee must weigh the 'Transition Risk' of the company becoming obsolete if it doesn't shift, against the slightly lower 'Debt Service Coverage Ratio (DSCR)' of the new project.
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The bank should only approve the loan if the company promises to plant ten thousand trees on the bank's premises every year for the next decade.
- 2The bank should advise the company to continue with traditional plastics and pay the government fines, as fines are a manageable operational cost.
- 3The bank should approve the loan because the 'Transition Risk' of the company (losing its license or buyers) outweighs the risk of a slightly lower DSCR, ensuring the long-term viability of the borrower.✓
- 4The bank should reject the loan because the IRR is lower than the traditional business, as banks should never sacrifice short-term profit for environmental goals.
Correct answer
The bank should approve the loan because the 'Transition Risk' of the company (losing its license or buyers) outweighs the risk of a slightly lower DSCR, ensuring the long-term viability of the borrower.
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