The impact of green lending on banking performance: Evidence from SME credit portfolios in the BRIC

Abstract

The evolution of green financing is essential for emerging markets to facilitate sustainable development. The banking channels can provide the necessary funds that can foster the transition to eco-friendly business processes. This role is more critical in the case of SMEs who face funding constraints but can play a significant role to achieve net zero emissions. The literature on the relationship between sustainable bank financing and SMEs is non-existent and in this paper, we attempt to fill this gap. We employ a comprehensive dataset of commercial banks in the BRIC for eleven years. Our results show a positive relationship between green SME lending and net interest margin. We also observe a negative relationship between sustainable lending to small firms and the default risk of the banks. These findings demonstrate that if banks expand their sustainable SME lending, they are likely to get bottom-line support from improvement in net interest margin and a reduction in default risk. These observations suggest that there are financial incentives for the banks to extend sustainable credit to SMEs and commercial banks can contribute to sustainability goals by tapping these opportunities.