Environmental Risk Management Framework for SIDBI Session II

1
Environmental Risk Management Framework for SIDBI
Session II

• May 3, 2006

2
Environment and Social policy

• Small Industries Development Bank of India
  (SIDBI), the apex institute with the
  responsibility of promotion, finance and
  development of Small Scale Industries (SSI) in
  India, strives to promote sustainable development
  for all small and medium enterprises.
• SIDBIs initiatives in the past and future are
  aimed to reduce environmental and social risks by
  promoting
• compliance to applicable Indian environmental and
  labour legislations
• cleaner production methods
• energy and water saving methods
• utilization of appropriate technologies
• no use of child labour and forced labour

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Environment and Social policy

• As the projects financed by SIDBI are small and
  medium, it will ensure the above by
• capacity building of their staff on environmental
  and social risk management procedures and
• regular training and awareness of their staff
• creating awareness for industry borrowers
• strengthening Environment and Social procedures
  by integrating ES consideration in all Phases of
  life cycle.
• updating Environment and Social Management
  Framework at regular intervals

4
SIDBIs ES Requirements

• SMEs financed by SIDBI, are required to comply
  with Indian environmental and labour
  legislations.
• SIDBI monitors the progress of compliance of
  environmental and labour legislations after
  financing during project implementation and
  operational stages.
• SIDBI does not finance production or trade in
  ozone depleting substances (ODS) subject to
  international phase out.
• SIDBI does not finance production or activities
  involving harmful or exploitative form of child
  labor or forced labor
• SIDBI encourages projects based on fly ash
  products
• Loss of Land / source of income/ livelihood,
  impact on community and cultural property
  resources, safeguard of tribal / marginalized and
  vulnerable groups are not applicable for direct
  financing SMEs. However during consortium funding
  of infrastructure projects, the requirements of
  lead member institution cover this issue.

5
SIDBIs ES Requirements

• SIDBI requires that environmental assessment has
  been carried out by the promoter, if the project
  falls under the list of specified industries
  covered under Environment Impact Assessment
  notification, 1994 of MOEF.
• SIDBI will not finance production or trade in
  pesticides/herbicides subject to international
  phase outs or bans as agreed by GOI based on
  Stockholm convention.
• SIDBI in its lending to SMEs will not finance
  the following
• Production or trade in any product or activity
  deemed illegal under Indian laws or regulations
  or international conventions and agreements.
• Production or trade in weapons and munitions.
• Production or trade in alcoholic beverages
  (excluding beer and wine).
• Production or trade in tobacco.
• Gambling, casinos and equivalent enterprises.
• Trade in wildlife or wildlife products regulated
  under CITES.
• Production or trade in radioactive materials.

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SIDBIs ES Requirements

• Production or trade in or use of unbounded
  asbestos fibers.
• Commercial logging operations or the purchase of
  logging equipment for use in primary tropical
  moist forest.
• Production or trade in products containing PCBs.
• Production or trade in pharmaceuticals subject to
  international phase outs or bans.
• Drift net fishing in the marine environment using
  nets in excess of 2.5 km. in length.
• SIDBI requires that for projects involving pest
  management, the promoter has capacity to promote
  and support safe, effective and environmentally
  sound pest management programs.
• Participating banks taking refinance from SIDBI
  under this line of credit, will be required to
  adhere to the above requirements. Environmental
  and Social Indicators would be reflected as a
  part of periodic audit reports, to be carried out
  at regular intervals
• All SIDBIs Credit scoring tools would
  incorporate environmental social parameters.

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SIDBI Project life Cycle
Project Screening
Appraisal
Loan Sanction Disbursement
Monitoring
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SIBDI Project Cycle
Interaction with Client
Screening
Receive loan application form

• AND ASK FOR
• NOC from Pollution Control Boards
• Other relevant documents and legal permissions

• DESK REVIEW AND ASSESSMENT OF THE BORROWER
• SITE INVESTIGATION, IF NECESSARY FOR suitability
  of site access to market implementation as per
  stated designs construction, OM arrangements
  etc.

Appraisal
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Project Life Cycle
Appraisal
Loan Appraisal report tabled to review to credit
committee.
Loan Approval (Y/N)
Issue Letter of Intent
Sanction Disbursement
Finalize loan agreement
Loan disbursement

• Project Monitoring
• Project completion report
• Site visits and Quarterly progress reports
  for compliance to disbursement condition
• External Audits
• Enforce Loan Recovery Mechanism if required.

Monitoring
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Environmental Risk Management Plan for SIDBI

• Prepared for direct finance projects of SIDBI
• Application is limited to SME projects
• ES Risk management steps have been integrated
  with existing project life cycle.

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SIDBIs Existing Project Life Cycle
Proposed ES Risk Management Initiatives
Interactions with Client
Check against Exclusionary list
Receive loan application form
Categorize Project

• AND ASK FOR
• NOC from Pollution Control Boards
• Other relevant documents and legal permissions.

Risk Category
Handover, Loan application form
Borrowers Environmental guide ES
Questionnaire
E-I E-II (Green field non-industrial areas
E-II (others) E-III
Checklist for legal requirements
Ask For NOC ES Questionnaire EIA report (if
applicable)
E-I, E-II (Greenfield Non industrial area)

• DESK REVIEW AND ASSESSMENT OF,
• Creditworthiness of Borrower
• Financial Rate of Return
• Financial Structure
• Project/ Borrower/ Other Risks
• SITE INVESTIGATION, IF NECESSARY FOR
• Suitability of Site
• Availability of Inputs
• Access to Market
• Technical and Engineering Designs

No Objection Certificate (NOC)
E-II (Others) E-III

• Complete ES Appraisal summary report (For E-I
  E-II)
• Desk review of ES documents
• Site visit(s) to confirm details provided by
  client, and identify site-specific risk issues
  (if any).

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SIDBIs Existing Project Life Cycle
Proposed ES Risk Management Initiatives
Loan Appraisal report tabled to review to credit
committee.
Interaction with client on ES requirements and
Pre-commitment conditions (if any)
Loan Approval (Y/N)
Issue Letter of Intent

• Finalise Loan agreement Security formalities
• For E-I, E-II
• Pre-disbursement conditions (NOC for E-I, E-II
  EAs for E-I,)
• Conditions of sanction (covenants for social
  issues pollution control)

Finalize loan agreement
Loan disbursement

• Project Monitoring
• Project completion report
• Site visits and Quarterly progress reports
  for compliance to disbursement condition
• External Audits
• Enforce Loan Recovery Mechanism if required.

• Project Monitoring (as part of site visit format
  for E-I, E-II)
• Legal provisions
• Implementation commitments
• Condition of on-going operations

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EMF Project Screening

• Check with exclusionary criteria
• Environmental and Social Risk classification
• The objective is to identify projects with
  significant environmental and social issues
• Developed to facilitate early categorisation of
  the projects into pre-defined ES risk bands.
• Will be carried out by Credit Officer
• Will form the basis for determining ES risk
  management measures required
• The classification corresponds to Indian
  environmental legislations, World Banks
  Environment and social safeguard policies and
  international best practices / guidelines.
• Based on RED, ORANGE and GREEN Category of
  project (MoEF)

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ES Risk Classification

• Three environmental risk categories have been
  developed for classification of projects,
• E-I Industries with high pollution potential.
• E-II Industries associated with significant
  pollution, but to a lesser extent than E-I
  industries.
• E-II Greenfield
• E-II in Non Industrial Area
• E-III Industries not likely to contaminate
  environment or have an acceptable levels
  of discharge.
• These categories to be updated corresponding to
  change in regulations

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E-I Category Projects

• Auto ancillary units involving metal surface
  treatment and electroplating of vehicle parts
• Chemical manufacturing (organic inorganic)
• Cosmetic products involving use of aerosols.
• Cement Plant
• Dye Dye intermediates.
• Foundry.
• Paint varnishes
• Pesticides / insecticides
• Pharmaceuticals
• Rolling pickling units
• Tanneries
• Textile (Dying printing units only)
• Projects involving rehabilitation and relocation
  of indigenous people.

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E-II Category Projects

• Dairy dairy products
• Edible Oil Vanaspati
• Glass Ceramics
• Meat fish processing / Slaughter house.
• Rice mil / Dal mill / flour mill Rubber (type
  manufacturing / re-trading units)
• Stone crushers.
• Health care establishments
• Paper paper board
• Plastic molding
• Refractory
• Wood wood products.

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E-III Category Projects

• Agro products
• Cement / concrete products
• Electronic electrical industry
• Hotel resorts
• Leather Products (without leather treatment).
• Service sector industries
• Garments apparel manufacturing ( not including
  dying printing operations )

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Borrowers Environmental Guidelines

• Borrowers Guidelines to be used to aid borrower
  in filling Annexure to Loan Application Form.
  This contains
• SIDBI ES Policy
• Procedural Flow for Borrowers
• SIDBI ES Criteria
• ES Risk Classification
• Documentation Requirement
• Assistance in filling Questionnaire

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Screening - Procedural Requirements

• Environment Social Questionnaire (Annex to LA
  form) for
• E-I
• E-II Greenfield
• E-II In Non-Industrial Area
• Other E-II category if,
• Using outdated technology
• Releasing effluent to surface water body
• Having high density population in vicinity
• EIA Report (If applicable)
• NOC / Consent to Establish / Operate
• Other applicable legal approvals (refer Sectoral
  database).
• ES Risk Classification to be based on facility
  and not on the business entity

• Environment Social Questionnaire (Annex to LA
  form) for
• E-I
• E-II Greenfield
• E-II In Non-Industrial Area
• Other E-II category if,
• Using outdated technology
• Releasing effluent to surface water body
• Having high density population in vicinity
• EIA Report (If applicable)
• NOC / Consent to Establish / Operate
• Other applicable legal approvals (refer Sectoral
  database).
• ES Risk Classification to be based on facility
  and not on the business entity

To be aggressively followed up
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Project Appraisal Procedural Requirements

• Documentation Completed during Screening are
  reviewed
• EIA / EMP ( Where applicable)
• Env Social Questionnaire
• NOC and other legal approval
• The review is cross checked from Sectoral
  database
• Conditions stipulated in NOC should be carefully
  revived and ensure that they are addressed in the
  project design.
• Based on above, a decision would be taken on
  whether or not to proceed with the proposal
• If Yes, Prepare E S Appraisal Report.

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Project Appraisal- Key Consideration

• Thorough review of legal compliance on the ES
  aspects. CO should be aware of reqts under
  national as well as state level regulations.
• Cost of proposed environmental infrastructure
  tied up with financial overlays.
• Possibly evaluate use of cleaner technologies in
  the project (Info provided in Sectoral database).
• ? Review storage systems for hazardous
  substances, and emergency management systems to
  handle leakages/ explosions/ fires etc.
• ? Review contamination risks where the project
  site is being taken as security for the loan.

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Project Appraisal- Key Consideration

• Expansion/ modernization projects - review
  existing operations for ES risk aspects, since
  those could result in closure/ suspension of
  operations for the entire facility.
• Due diligence exercise is desirable for
• expansion/ modernization projects of existing
  facilities involving the use of hazardous
  substances, and
• a new client relationship being established for
  SIDBI,
• Where the unit is supplying services or products
  to large MNCs, CO should be aware of the
  facilitys ability to meet buyers ES
  requirements.

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Loan Sanction / Disbursement

• If loan approved -
• Requisite terms and conditions covering E S risk
  aspects should be included in LoI, Loan
  Agreement.
• CO to ensure compliance with loan conditions.

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Loan Sanction / Disbursement

• Loan conditions (suggested)
• For all E-I and E-II projects, NOCs should be
  available prior to disbursement.
• For Greenfield E-I and E-II projects, EIA (where
  applicable) should completed and copy of EMP made
  available prior to LoI (preferably for E-I), else
  pre-disbursement
• Other applicable legal permits should also be
  available pre-disbursement
• Where hazardous wastes being generated and
  disposed off through external agencies, copy of
  contractual arrangements should be made
  available.
• Where risk of disaster, could obtain management
  confirmation regarding safeguards provided.

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Loan Sanction / Disbursement
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Project Monitoring

• For E-I and E-II projects - site visit reports
  and quarterly progress reports by the CO would
  incorporate ES risk aspects as per format
  provided

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Project Monitoring

• For Greenfield E-I E-II and wherever involving
  Haz. Substances/ Waste -
• On completion of implementation phase, a due
  diligence exercise to confirm installation of
  requisite pollution control/ treatment facilities
  as stated in project design documents.
• In Operational phase, a periodic audit to
  identify any potential ES risks that may be
  emerging, thereby enabling the CO to initiate
  necessary follow up action

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