New Delhi: Banks have argued that loans for green hydrogen and electric cars should be included in the priority sector lending category.

An executive with knowledge of the situation stated that "several lenders made these ideas during various one-on-one encounters with the Reserve Bank."

According to banks, adding these loans to a list of priority lending will fill funding shortfalls in these industries and assist lenders reach their lending goals for priority industries.

Another executive with knowledge of the situation added, Expanding the PSL category would also assist lenders satisfy their criteria, which they are unable to accomplish at the moment and are compelled to obtain priority sector lending certificates. Banks are required to give priority sectors 40% of their adjusted net bank credit.

The Indian Banks' Association (IBA) established a committee last month to look into various facets of sustainable lending and finance with an emphasis on Environmental, Societal, and Governance (ESG) challenges.

Sunil Mehta, the chief executive of the IBA, told ET that the banking organisation will review the committee's recommendations and, in light of those findings, will formally inform the regulator.

"Regarding green funding and ESG-related challenges, there are several recommendations. A committee made up of both Indian and international lenders has been formed to assess all the problems and provide solutions," He continued by saying that the IBA is anticipated to contribute to capacity building by the banking regulator as well.

Currently, financing to eight sectors is accepted as eligible under priority sector loans, including agriculture, micro and small medium-sized businesses, export credit, housing, education, renewable energy, and social infrastructure.

The need of considering "green washing" issues while defining sustainable finance is emphasised by experts.

Vivek Iyer, national leader, financial services-risk, Grant Thornton Bharat, stated that investing in a company that falsely advertises that it uses recycled materials might lead to money under sustainable financing being misdirected.