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The Impact of Green Credit on Bank Asset Quality: Does Green Lending Reduce Non-Performing Loan Ratios?

Author(s)

Yiran Wang

Affiliation(s)

School of Economics and Management, Beijing Jiaotong University, Beijing, China

Abstract

Green credit has emerged as a key policy instrument aligning banking capital allocation with environmental transition. This paper examines whether green lending improves bank asset quality by reducing non-performing loan (NPL) ratios, analyzing the theoretical channels, empirical evidence, and institutional conditions underlying this relationship. Four mechanisms are identified: enhanced environmental risk screening during credit appraisal, portfolio reallocation away from pollution-intensive sectors, selection of higher-quality borrowers meeting stricter disclosure standards, and improved internal risk governance catalyzed by green lending implementation. The analysis of existing empirical studies reveals that green credit generally contributes to lower NPL ratios, but the effect is conditional rather than automatic. Green lending improves asset quality most effectively when it operates as genuine risk governance, with banks embedding long-term transition risk into loan assessment. However, where green classification is vague, political pressure outweighs commercial discipline, or banks lack project-monitoring capacity, green credit may rename risk rather than reduce it. The paper concludes that green credit tends to lower NPL ratios only when environmental criteria are translated into substantive credit discipline, supported by clear taxonomy, robust disclosure, and strong bank-level monitoring capacity.

Keywords

Green Credit; Bank Asset Quality; Non-Performing Loans; Green Lending; Credit Risk; Sustainable Finance

References

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