Solutions for green credit in vietnam

Nội dung text: Solutions for green credit in vietnam

1. SOLUTIONS FOR GREEN CREDIT IN VIETNAM Do Thi Van Trang Faculty of Finance - Banking Academy Abstract This article concentrates on the experiences of green credit development in some countries in the world such as China, Korea, Bangladesh, and Germany. From the difficulties in applying green credit in China, or the successes of applying green credit in Korea, Bangladesh and Germany, this study highlights several recommendations and suggests lessons for Vietnam. Furthermore, based on the reality of economic and social condition, this article has proposed several solutions to develop the green credit in commercial banks in Vietnam. Key words: Green banking and green credit 1. INTRODUCTION Green banking is an issue that is taken into account by a number of financial institutions in recent years. The customer demands and greater environmental awareness have become the driving factors leads to many financial institutions to go green. Many countries have carried out various solutions to make amendment and advocacy for the environment protection and sustainable development policies. Green credit, among those numerous measures, is getting vigorous attention and interest from both the Government and international institutions. Green credit is a strategy to support economy to grow into a green, low-carbon and recycled model through business innovation, manage environmental and social (E&S) risks, improve banks’ own E&S performances, and in doing so, optimize credit structure, improve services and contribute to the transformation of economic growth pattern. The concept of green credit resembles that of sustainable finance in that both concepts highlight the potential of the financial sector to respond to environmental and social challenges of the world through financial instruments. Green credit activities are those that can bring about substantial benefits for economic growth, people’s lives, environment protection as well as sustainable development. Green credit policies are the significant measures in the transition into green growth targets. Green credit products of the banking systems are often used in projects on energy savings, renewable energy and clean technology. These priority sectors are allocated in accordance with green credit policies in different countries. However, most of current funds for the green credit in commercial banks are still based on internationally financed projects/programs. This is due to the lack of confidence and assurance of banks regarding credit risks from these investment projects. In empirical research, there have many previous studies have already looked into green credit in a number of countries. Aizawa and Yang (2010) described a series of green policies that applied by China government, including green tax, green procurement, as well as green policies relevant to the financial sector, namely, green credit, insurance, and security 69
2. policies. As consequently, green credit policy is the most advanced, with three agencies which shared the responsibility for implementation. Zhang, Yang and Bi (2011) examined the implementation of the green credit policy both at the national and provincial levels in China and proved that the green credit policy is not fully implemented in this country. Weiguang and Lihong (2011) showed a problem existed in China's green credit, which was some external obstacles constraint to the implementation of efficiency. These difficulties required generating the environmental risk management system in the commercial banking system. It is shown that there are many researches have paid attention on green banking, especially green credit in recent years. However, to date, no empirical study has focused on green credit development and proposed solutions to implement green credit in Vietnam. Therefore, the aim of this research is to concentrate on studying the experience from other countries in green credit development and applying the experience in Vietnam. Furthermore, based on the reality of economic and social condition in Vietnam, this article has proposed several solutions to develop the green credit in commercial bank in Vietnam. The remainder of this paper proceeds as follows. Section 2 explains experiences of green credit development in some countries in the world. Section 3 demonstrates the green credit development in Vietnam. Section 4 presents solutions to develop green credit in Vietnam. 2. EXPERIENCES OF GREEN CREDIT DEVELOPMENT IN OTHER COUNTRIES IN THE WOLRD 2.1. China On July 12, 2007, State Environment Protection Administration (SEPA), the People's Bank of China, and China Banking Regulatory Commission (CBRC) jointly issued the Opinions on Implementing Environmental Protection Policies and Regulations to Prevent Credit Risks, emphasized credit policies as tools of environmental protection, and to strengthen environmental monitoring and credit management of construction projects and enterprises. This is the basic framework of China's green credit policies. CBRC is responsible for supervision and administration of banks’ green credit operations, and environmental risk management. However, there was no detailed guideline for the Green Credit policy until 2012 when CBRC issued Green Credit Guidelines. This is why this policy was not considered effective and efficient during these 5 years absence of guidelines. The guidelines plan to establish an environmental system, which covers tax, credit and insurance policies to control and treat the environment pollution by use of market forces. Under the policies, enterprises that are punished by environmental protection authorities will not be able to obtain further credit from financial institutions and will also have to repay their borrowed loans. According to Environmental Records of Chinese Banks on listed banks, very few banks made strides towards green credit. One of the reasons is their lack of disclosure of environmental information. Disclosure of environmental information is the basis for the assessment of the banks' performances in implementing environmental policies and fulfilling their environmental and social responsibilities. However, there is no detailed guideline for disclosure of environment information and this is only voluntary. Consequently, banks still participate in environmentally controversial projects, especially overseas projects, and ignore 70
3. criticism from society. This research suggests a compulsory regulation to financial institutions on disclosure of environmental information. Another research in 2014 by an international environmental NGO, E3G (Third Generation Environmentalism), reported that financial innovation can be led by financial institution championing green finance. The report suggested creating a platform for Low Carbon Finance and Investment between the Government, financial institutions and regulatory authorities on green banking pathway, with more integrated thinking and policy dialogue. Public finance alone in China has not always satisfied investment need, so the report recommended that China should try new financing models such as public-private- partnership (PPP) together with a thorough financial reform to support a larger impact. Due to emphasis on environment policies, China surpassed many developed countries to become the world’s largest green investment country (IFC, 2011). Nevertheless, only one financial institution is the member of Equator Principles and 6 joined UNEP FI (updated until August 2014), a very small number for a large country like China. 2.2. Korea Korea is proved successful in promoting green credit, but their experience is quite different from other countries. Besides banks that practice green operations, there is a government non-profit credit guarantee institution founded in 1989, called Korea Technology Finance Corporation (KOTEC). This institution acts as a credit guarantee system to solve the problem of lack of financial resources due to banks' prevalent collateral-based lending practice. It enables businesses with competitive and environmental friendly technology, innovation and other knowledge-based business contents at all growth stages. The mission of KOTEC is to take a lead in converting Korean economy to be creative and innovative. KOTEC is the only financial institution to assess and grant “green” license to businesses. Until 2013, 65% of green businesses have received support from KOTEC. From 2011 to 2013, KOTEC granted guarantee for green investment of up to US$9.24 billion. Each firm who received the green license can apply for the guarantee of up to US$6.49 million. Firms who received excellent green license can obtain special support from KOTEC, such as an increase in guarantee amount on number of green-tech experts, age of experts, support for R&D expenses and copyright registration fee. 2.3. Bangladesh Bangladesh is a country with the same level of economic development to Vietnam’s. Bangladesh Bank, the central bank of Bangladesh, requires commercial banks to comply with Environment Conservation Act to control environmental pollution before obtaining finance for projects. Bangladesh Bank later also issued a Guideline on Corporate Social Responsibility (CSR). It also published annual review of CSR practices by scheduled banks to keep track of country’s green credit. However, all the guidelines have no directions to quantify environmental risk in credit risk management. Banks, nevertheless, under many policies and guided by the central bank, offer a wide range of green credit products, such as solar home system, solar irrigation pumping station, bio-gas plant, effluent treatment plant, green credit card, efficient waste management, etc. BRAC, a Bangladeshi bank, even was 71
4. awarded Best Sustainable Bank in Emerging Markets of the year 2010 by IFC, and is a founder member of Global Alliance for Banking on Values (GABV) – a network of the world's leading sustainable banks. Despite recent good results on green credit promotion, only one bank is the signatory of the Equator Principles. In order to better follow the guidelines, there is an urgent need to quantify all the environmental risk assessment in lending. 2.4. Germany In the transition into a green economy, green banking plays a crucial role in providing fund for green activities of the private sector because the banking system is such a blood vessel of the whole economy. Germany is a country that has been successfully implementing its green credit policies. However, there is not a green banking strategy. Actually, the demand for green banking has increased after the financial crisis, because green banking, especially green banks were not severely affected by the financial crisis. Almost every bank in Germany offers green investment products, but only four green banks have fully integrated sustainability into their business models, including GLS, UmweltBank, Triodos and EthikBank. These are the small and medium sized banks, possibly commercial banks, savings banks or cooperative banks. The operating target of these banks is to mobilize funds from their members and depositors who have good awareness and willingness to achieve low depositing interest rate with aim to invest in meaningful and environment protection social activities. Meanwhile, borrowers will have to obtain high lending interest rate because their environment protection products will be sold at very high price in the market. Especially, customers are willing to buy these expensive products as long as they can assure those products come from green investment companies. Investment sectors are clean energy, renewable energy, energy savings, environment protection, organic production, and housing for the poor, education and support for the disables. 3. THE GREEN CREDIT DEVELOPMENT IN VIETNAM 3.1. Orientations and general legal framework for green credit development in Vietnam The social economic development strategy 2011-2020 was adopted by Resolution in the IX National Congress. The strategy emphasizes that "Economic growth must be harmoniously combined with cultural development, progress and social justice implementation, to constantly improve the quality of life of the people. Social economic development must always respect, protect and improve environmental quality, actively respond to climate change. Moreover, National Strategy for Green Growth 2011- 2020 period and a vision to 2050, issued together with Decision 1393/2012/QD-TTg of the Prime Minister dated 09/25/2012, with the objective of green growth, towards the economy of low-carbon, natural capital wealth become mainstream in sustainable economic growth; reducing emissions and increasing absorption of greenhouse gases have gradually become mandatory and crucial targets in social economic development. The identified objectives are: (i) restructuring and improvement of economic institutions towards greening existing industries and encouraging the development of economic sectors using energy efficiency and natural resources with high added value; (ii) increasingly widespread research and application of advanced technology to 72
5. more efficiently use natural resources, reducing the intensity of greenhouse gas emissions, contributing to an effective response to Climate Change; (iii) improve people's lives, build up environment friendly lifestyle through job creation from the industries, agriculture, green services, investing in natural capital, and green infrastructure development. National Action Plan for Green Growth 2014-2020 period issued with decision 403/2014 / QD-TTg dated 03/20/2014, with 66 actions, including 04 main topics, 12 groups of activities and Action 66 specific tasks. In particular, the State Bank of Vietnam is assigned to perform the action number 37 "institutional improvement and capacity building for credit financial operations of commercial banks toward green growth targets period 2013 -2020" with the following contents: (i) review, adjust and complete the credit and financial institutions in line with the green growth objectives; (ii) organize training to enhance capacity of commercial banks and financial institutions in green credit and financing activities; (iii) Construction and development of banking and financial services to support enterprises in implementing green growth. In accordance with the National Action Plan for Green Growth State Bank of Vietnam (SBV) has issued relevant policies in support for green credit development. - In management and orientation of the credit flows of fund: SBV has issued Directive 03/CT-NHNN dated 03/24/2015 on promoting green growth and social environmental risk management in credit granting activities; accordingly, requiring the whole banking system to focus on providing credit for the environment friendly business and production activities, thus contributing to support enterprises to implement green growth. In addition, Directive 03 requires credit institutions to review and implement social and environment risk management when evaluating their borrowers. To enhance green credit activities, on August 06, 2015, SBV has issued Decision No. 1552 / QD-TTg to issue the Action Plan of the banking sector to implement the National Strategy for green Growth. This Decision is to implement a comprehensive system solution with an aim to ensure the banking system can effectively serve green growth objectives and sustainable development that the main beneficiaries are enterprises investing in green fields. - Managing the general interest rate policy to support enterprises, especially those in priority sectors that apply high technology and supporting technology, reduce lending costs to keep business and oprduction stability and development. Currently, lending interest rate has dramatically decreased and maintained at reasonable level; short-term lending interest rate in VND reach 6-7% per annum applied for priority sectors, and medium-long term lending interest rate reach 9-10% per annum. Lending interest rate has reduced and account for approximately 40% for the half end of year 2011, lower than in period 2005 to 2006. - Effectively development of special credit programs that contributory implementing Green Growth Strategy, such as: + Submitting to Government to issue Decree No. 55/2015/ND - CP replacing Decree 41/2010/ND - CP on Credit policies for Development of Agriculture and Rural Areas with many new policies (secure loans, risk processing mechanism ) to promote investments and lending to agricultural and rural areas; and to support the restructuring process in agriculture 73
6. sector towards higher added value and sustainable development . + Issuing Circular No 13/2014/TT-NHNN guides deployment of lending activities to help reduce losses in agricuture under Decision No. 68/2013/QĐ-TTg of Prime Minister. Accordingly, organizations and individuals who borrow to purchase machines and equipment in order to reduce losses in agriculture will be supported 100 % interest in the first 2 years , 50 % interest in the 3rd year; just be charge with interest rate of development investment credit to encourage people to invest in projects, manufactures of machines and equipment for production, harvesting and processing to enhance the value, reduce losses in agricultural production. + In order to encourage large-scale, high-tech applied production associate models in agriculture, SBV has cooperated with the Ministry of Agriculture and Rural Development, Ministry of Science and Technology to issue Decision No. 1050/QD -NHNN approval the lending pilot program for development of agriculture in accordance with Resolution 14/NQ – CP 05/3/2014 of the Government. Businesses who participate in the program would benefit some special credit mechanism such as a lower interest rate of 1%-1,5%/year compared with market interest rate, banks may consider to provide loans without collateral based on controlling the cash flow in case the borrowers has not enough collateral. In 2014, SBV also made adjustments to reduce pilot lending rates by 0.5 %/year (short -term: 6.5%/year, medium: 9.5%/year; long-term: 10%/year). + Deploying the lending program for replanting coffee trees in the Central Highlands provinces in period of 2014 - 2020 with two methods: replanting and grafting coffee improvement. The loan term is 8 years (est.); grace period is applied for principal and interst; interest rate is consistent with the production cycle and repayment capacity of the customers. The program would create conditions for sustainable development of Central Highland coffee trees, contributing to implement the restructuring scheme in agricultural sector . + Issuing Circular No. 06/2009/TT-NHNN dated 9/4/2009, the Circular No. 28/2014/TT-NHNN dated 01/10/2014 to deploy lending program for afforestation, whereby, poor families will be supported 50% interest rate by State when borrow from the state commercial banks for afforestation. + Supporting and facilitating Vietnam Bank For Social Policies to implement effectively credit programs for the poor, poor approximation, middle income and credit programs for clean water, sanitation and environment in rural area; programs for supporting poor families to build houses against storm, flood in the central of Vietnam; and some loan programs for forestry development. In conclusion, the above operations show that banking sector has gradually towards funding for sectors that enhance high-tech applications in production and business activities , enhance the added value of Vietnam strengthest fields, reducing cost for 01 units of the product; thereby, contributing to the process of economic restructuring towards efficient use of natural resources, environmental protection, reducing poverty, improving the quality of life and create engines for economy growth towards sustainability . 3.2. Activities of Vietnam banks involved in green growth and sustainable development 74
7. 3.2.1. Environmental - social risks management in credit granting activites of Vietnam banks The banking sector has evaluated and perceived that environmental and social risks issues in banking activities are more and more pronounced effects; its negative effects to banking general operations and particularly credit operations have become increasingly serious, directly impact on the quality of credit operations . The projects, production and business which become inefficient, suferred losses and being damaged caused by environmental – social risks are increasing. The environmental, social problems arising from production and business activities of enterprises may drive them to face with risks and losses related to the finance, as well as liability and creditability. The consequences of environment and social mismanagement are interruption of business and production activities, which directly affect operating results, incresing operationg costs due to fines, lossing market share due to “boycott” of customers, therefore, reducing the market value of corporate assets. In addition, businesses may also be prosecuted for liability if environment and society are seriously affected. All these issues would primarily directly affect the heath of enterprises; hence, also adversely impact the financial institutions who are creditors of the businesses. Consequently, non performings loans will arise and the prestige of credit institutions will be impaired. In recent years, some Vietnam banks have taken into account environmental and social issues in process of reviewing, assessing and evaluating when grant credit to customers when participated in projects which are in conjunction between some multilateral agencies like World Bank, IFC, or other development banks or foreign governments and some funds or banks in Vietnam. However, green projects represent a small niche business for banks. Mostly, Vietnam banks are not really interested in such issues, some focus mainly on profit targets meanwhile ignore or underestimate the role of environmental and social management in banking activities, especially in credit granting activities. In a survey made by IFC and SBV in 2012 in 54 credit institutions who account for nearly 80% assets of the market, 89% of banks have no idea of any guidelines on environment risk assessment in financial industry. Meanwhile, 93% suggest that there should be guidelines on this issue. There is no Vietnamese bank, which is the member of Equator Principles or even UNEP FI. At present, only three commercial banks have guidelines of environment impact assessment in lending, including Vietinbank, Techcombank and Sacombank. While Vietinbank and Techcombank adopt IFC guidelines, Sacombank build their own guidelines. All those issues drive banking system to face with various risks that negatively affect to market share, penetrate opportunities to new market and ability to access domestic and international capital markets. Banks that mismanage environmental and social risks may face with legal disputes, therefore, face with problems in recoverability of bank capital. Furthermore, banks fame and reputation also suffer from lawsuits related to projects that have serious impact on citizen’s lives. 3.2.3. Facts, restrictions and barriers of implementing green credit in Vietnam 75
8. - Implement Green Credit in Vietnam may lead to reduce national competitiveness in the short term due to the changing of traditional sectors which have been causing negative impacts on the environment (such as the exploitation of fossil energies, the production method of the traditional villages, ). - Green projects typically require great investment with high production costs and long payback period than the same products, therefore, may limit the competitiveness of enterprises without support of governments, financial institutions and the society. - It is difficult for financial organizations to identify, evaluate, select and plan for green credit portfolio because without basic standard or criteria of specific green industries or sectors. - Awareness and capacity of enterprises, human resources and banks in green project investment is limited. - Deployment and implementation legal framework for green credit in Vietnam are not strong enough to force banks and financial institutions to pay attention on environmental and social risks when granting credit. - For credit institutions: + Green credit has not been granted systematically; + Awareness and interest in green credit have been unclear and incomplete; + Green credit products are not diversified; most of them have developed according to the needs of international organizations as environmental impact assessment for a particular project that they sponsor. The environmental risk assessment of credit institutions is heterogeneous. Professional units of environmental and social risk management in credit granting have not formed in banks. In addition, human resources for social and environmental risk assessment in credit sectors are limited not only in number but also in experience and qualifications. + The financial resources for green credit is limited and this is the great hinder for the banks and financial organizations. They themselves are very difficult to supply the green credit products to the market (e.g. with preferential interest rates) without preferential funds from the central bank or donors. - Requires close collaboration between relevant ministries in creating a sustainable life cycle for green investments, or alternatively a combination of policies (monetary, interest rate, price, market, tax, land, ) that organizations and individuals can invest in green projects or industries/ sectors and they can cover costs and make a profit, thereby creating sustainable cash flow - a key factor in boosting the supply of green credit. 4. Solutions to develop green credit in Vietnam 4.1. Recommendations - lessons learned from other countries to Vietnam The lessons learned from the Green Credit Policy of China are very useful for Vietnam. One of the greatest difficulties of implementing green credit policy in China, but Vietnam may consider is the lack of a reliable evaluation system for the polluting trades and 76
9. sectors as a basis for banks to classify the project, especially as many polluting industries is also expected to produce high profits for many locals. If Vietnam banking sector goes down this path, this will also probably the biggest challenge, and may become a reason for banks to delay and evade credit reductions for polluting industry, which affects livelihoods but brings more profits for businesses and banks. At the same time, the introduction of the regulations and detailed guidelines on green credit policy is very important for enterprises and banks to operate. This also requires close coordination between relevant ministries to expedite the complex administrative procedures. That causes a significant impact on the promulgation of policies in order to improve the legal framework for promoting green credit operations in Vietnam. From the experience of South Korea, Vietnam may consider to establish a governmental credit guarantee institution. This institution will support banks and financial organizations, who of lack of funds, to grant credit for enterprises, which use friendly environmental technologies. Furthermore, one needs to draw lessons for Vietnam is to have the involvement of senior political system to solve the problems related to the transition and institutional reforms, as well as the proactive intervention of the Government for legal and institutional framework of green credit growth. Government intervention can maximize the power and influence of the market on green credit growth, as well as an incentive system to encourage the involvement of the private sector. The harmonious and efficient combination from the top down and bottom up of the political system is the key for the success of green credit growth strategy. Comprehensive solution from above will provide the vision and clarify the medium to long-term target of credit growth in green. This may consult and cooperate, persuade stakeholders and promote effectively the coordination in the banking system and businesses. The active engagement of the community from the ground up creates a sustainable platform for growth of green credit. Therefore, policies should include the participation of community, increase the sense of community about green credit growth as well as offer measures to change the behavior of the community. Raising green credit communication is very necessary in locals and rural areas across the country. The next step is to mobilize global cooperation when the backing of senior political system, the participation of the Government and the community have been available. Lessons from Germany: Enterprises who invest in green technology mostly meet advantages, because products with the green label favored by consumers despite high prices. Therefore, raising awareness of consumers about using environmentally friendly products, and boycotting products that are not clean or polluting to environment is crucial. On the other hand, the support of the government could help enterprises reduce green production costs. The second success lesson from Germany is the transparency of information, when banks expose their loan portfolio. Meanwhile, former opposite lesson of China, there is no requirement of disclosing information, so banks hide their loans for business that caused environmental pollution and ignored public opinion. Therefore, it is necessary for Vietnam to set up rules that banks are required to report information on the environmental performance of its loan to the relevant authorities and the public. 77
10. In addition, Vietnam also considers experience from developing countries such as Bangladesh, under which central banks will play an important role in the promulgation of policies and guidelines to support businesses develop green credit products. For example, solar energy research: solar housing system, water-pumping stations for irrigation used solar energy. Vietnam is an agriculture country so this model will be very effective; Green credit card, efficient waste management. 4.2. Capital mobilization Experience in countries around the world shows that, for the project, the government can supply only 30% of the capital for green growth projects, the remaining comes from equity capital of the business, or raising on the stock market, especially from banking channels. Worldwide, green credit has become a very common strategy. This strategy helps financial organizations protect their credit portfolios from business risks and seek new business opportunities with environmentally friendly. In addition, the problems of green growth, environmental risk and climate change management is not the scope of a nation and no country can solve all of these problems themselves. Therefore, Vietnam should call for the support of policy advice, financial resources, technical assistance from various partners abroad, financial institutions such as the International Monetary, ADB, and IMF for operations with green credit growth target of banking system. Regarding financing: + In Vietnam, the biggest barrier for businesses is high investment capital for technology innovation. Most of Vietnam enterprises face difficulty in access to credit resources due to insufficient collateral. This discourages technological innovation to enhance production efficiency and reduce environmental impact. A solution can be offered is the international monetary financial institutions (such as WB, ADB, IMF) may provide credits with preferential interest rates for commercial banks to lend to businesses which invest in green and environmentally friendly projects, such as the projects on energy saving, environmental resources, organic agriculture, transportation projects With this method, the commercial banks will be subject to credit risk if enterprises do not implement successfully their green projects. + Call for the support of international monetary financial institutions to set up sponsor funds to share risks with commercial banks in lending activities in the field of green and friendly environment. Accordingly, the international financial institutions will act as underwriters and will share part of loans that banks cannot recover from the business or person who invest in green projects (the ultimate goal of these projects is protecting the environment). Especially, the combination of bank capital with international funds and state funds will be the leverage to encourage the participation of private capital. This is an effective solution that Vietnam should target to reduce the public debt burden and ensure sustainable development. The establishment of the Green Credit Trust Fund (GCTF), a typical example as an effective financial solution, which guarantees 50% loans of small and medium enterprises, can help enterprises more secure investment during installation of new technology to replace the current outdated. Established since 2007, GCTF has implemented numerous projects 78
11. successfully, including such as: project chain design plastic injection machines with advanced servo motors help reduce CO2 emissions to 50% and energy savings; Project installation DAF recovery system to reuse water and pulp in the paper industry reduce the amount of clean water in production to 70%. Both two types of technological change are receiving 25% compensation level. About technical assistant: + First, international organizations based on their experience can assist the commercial banks in Vietnam to develop green credit products suited to the characteristics of each bank to develop loan products encompassing 'green', i.e. the loan package of energy saving, renewable energy lending, manufacturing environmentally-friendly products; green industry; green agriculture; pollution treatment and environmental protection + The second is to support banks to develop their capacity d of environmental and social risk management. This is an urgent and important solutions in the process of implementing green credit growth strategies because most bank staff do not have enough understand about the concepts and issues related to the development of green credit in Viet Nam. Therefore, building capacity for the staff about this relatively new problem, especially customer services and credit assessment areas should implement in the first phase of the deployment process plan on green credit growth. Recently, the international financial institution of the World Bank Group (IFC) has also helped Vietnam build assessment tools for constructions which use efficiently resources called EDGE with the goal of helping investors reduce consumption of energy and water, while reducing emissions of greenhouse gases. Accordingly, the bank can use this tool to evaluate the work of the investors when assess loan conditions. In addition, commercial banks may refuse to cooperate with customers who are not committed to compliance or inability to comply with environmental and social regulations. 4.3. Design and implement a pilot project of green credit programme 4.3.1. Targets - Send a message about the responsibility of banking sector for environmental protection; - Orient and creat “behaviors” for banks and financial institutions to to build business strategy consistent with national strategy about environment protection - Create premise and practical basis for the development of green credit program in a systematic way. 4.3.2. Main content of the program a) Scale and objective of the program - This program addresses on creating credit funds for concessional lending to households and enterprises that invest in the green production schemes and projects - Objective: 79
12. + Households and enterprises (priority for SMEs that meet the current criteria of Government supporting for SMEs) invest in production projects, business plans of the green fields. + Selecting 04 commercial banks to conduct pilot lending: • Bank for Agriculture and Rural Development of Vietnam (Agribank) is a bank specialized in matching green field project (organic farming). • Bank for Investment and Development of Vietnam (BIDV) is a bank, which manage and make loans for the Rural Financial Project funded by WB. The project has to meet environmental and social standards of WB for disbursement purpose. • Saigon Commercial Joint Stock Bank (Sacombank): is a pioneer bank in applying environmental and social risk management and social environment during their operation, as well as in credit activities. Sacombank has built the detailed criteria in combining environmental protection and credit operations; environmental assessment requirements for all loans reviewed and classified, preferential credits for energy-efficient and emission- reducing projects, manufacturing and application equipment, environmental products). • Bank for Foreign Trade of Vietnam (Vietcombank) is one of the banks participating actively lending program SME Finance Project III of JICA. b) Green field in this program: (i) New Energy and Renewable Energy: Vietnam has huge potential for renewable energy sources distributed widely across the country, with a number of sources: Firstly, the variety solar source with the average sun radiation 5kWh/m2/day distributed across the country. Secondly, the geographical position of Vietnam with over 3,400km of coastline help Vietnam has great potential of wind energy is estimated at 500-1000 kWh/m2/year. Thirdly, a nation that agriculture plays an important role in the national economy, contributing around 20% of GDP, generating food supplies for domestic consumption and create foreign currency revenues from export of agricultural, forestry and fishery products. With the other advantages from this field, agricultural waste (such as straw, chaff, animal dung, mud, bagasse, coconut shells, coffee pulp, corncob, etc.) is becoming a new challenge in environmental protection and new rural construction in Vietnam. However, it is also a potential resource and raw material for biogas production. Biogas production from agricultural waste has outstanding advantages as not conflicting with food problems, no extra land, reduce environmental problems, and generate more extra revenue and develop a green, clean and civilized rural. In addition, with over 50% living in rural areas to help this sector has abundant labor force, including economic households, farms, cooperatives and small and medium enterprises are the type mainstream economists in the agricultural sector. However, investment in agriculture, rural areas and farmers remains low, in 3 years, the total investment for this area 80
13. by approximately 52% of total development investment capital from the state budget and bonds Government but only 55% meet 60% demand. Moreover, over 50% citizens living in rural areas create abundant labor force for this sector, in which economic households, farms, cooperatives, and SMEs are the main factor in agriculture area. However, investment in agriculture, rural areas and farmers remains low, the total investment for this area approximately 52% of total development investment capital from the state budget and government bonds but only meet 55%-60% demand. Therefore, this program selected the new energy and renewable energy (new energy, renewable energy production and consumption, production and consumption that using new energy, renewable energy) for pilot lending. (ii) Recycling of waste Recycling and reuse of waste resources is one important solution to save natural resources, environmental protection that has been implemented in many countries around the world but waste recycling still has not really developed in Vietnam. The number of garbage is recycled in Vietnam not only few in quantities but also the recycling facility are mostly small in scale and backward technology. The amount of waste concentrated mainly in the big cities like Ho Chi Minh, Hanoi and so on. Plastic and nylon waste accounted at high proportion of domestic solid waste (less than food scraps), mainly from supermarkets, commercial centers and office areas. Moreover, these waste is taken time to decompose in soil, lead to degradation, urban aesthetic, clogging drains, According to the Center for applied research and training plastics (Vinaplast), Vietnam has over 2,000 enterprise that produce and consume in the field of plastic, and Ho Chi Minh City takes into account of 70%. Based on the current average plastic consumption, economic growth, and rapid population growth, plastic waste is consumed in Ho Chi Minh City about 400,000 tones/year in the year 2020. This shows the market share for plastic recycling industry in Ho Chi Minh City is very large. Therefore, this program selects waste recycling sector (waste recycling investment, waste production and consumption) for pilot lending. (iii) Organic Agriculture Under the impact of urbanization process, agricultural land area in Vietnam is decreasing. The rapid increase in environmental pollution is caused by using more and more chemical fertilizers and pesticides, disease, weed, etc. which affect on the value of annual agricultural production. Based on this situation, the development of clean agriculture, high- tech agriculture (organic agriculture) would be the right direction for sustainable agricultural development. Organic agriculture has known long time ago in Vietnam but it has only been interested in and studied in recent year, especially the problem of unsafe food increase to alarming level. Thus, organic farming is still small, fragmented and slowly development. According to the Organic Agriculture Association Vietnam, there is 21,000ha organic agriculture in the whole nation in 2010. After two years, the organic agriculture area increased by 2.400ha, up to 23.400ha, it only takes into accounted about 0.2% of agricultural area. 81
14. On December 2006, the Ministry of Agriculture and Rural Development of Vietnam (MARD) has issued a set of National Standards for the production and processing of organic products in Vietnam (10TCN 602-2006). Based on this situation, the program selects organic agriculture (investment in organic agricultural production and consumption) for pilot lending. c) Timeline for pilot program application: 03 years (2015-2017) - Conditions for participation in the program: + Households, enterprises investing in green fields of the program have feasibility projects that are appraisal by creditors. + The plan, project is in accordance with the regulations, planning of green fields that are selected. - Lending principles: Follow current guidelines of the current commercial bank when providing credit to customers. - Loan duration: short, medium and long-term (preferably medium and long-term upon customers’ demand). - Interest rate: The interest rate is designed with preferential loans to ensure that the project, production plans in the green field are financed with lower lending rates than normal of each term. This activity aims to help reduce input costs, create incentives for the project owner. 4.4. Solutions on strengthening and developing awareness of green credit Green Credit program is completely new credit activity not only for banks, financial institutions, but also for the state bank. Therefore, the issue of training and communication is one of the most important solutions in raising awareness of the banking staff; contribute to the success of the implementation of green credit program of VN. Firstly, green credit is not an easy concept to grasp; hence, SBV is planning to undertake dedicated communication activities to ensure that there is a clear and common understanding of what the concept covers, and how it translates concretely in banks and financial organizations. The increased awareness of green credit has to be done synchronously from, state bank, commercial banks and enterprises. - Increase awareness in commercial banking system Raising awareness of the role and capacity of the banking sector in providing credit to the green economy sector through organizing of training courses, enhance the capacity for credit institutions and individuals participate on formulating and implementing policies and mechanisms for green credit program. A green credit training and communication strategy suggests the following activities: (i) a series of workshops to raise awareness at all levels of banks and financial organizations and what benefits that they will experience if they grant green credit, both from SBV as well as from other ministry (such as tax reduction); (ii) a 82
15. series of different short training courses on green credit for seniors, line managers and credit officers. Mobilize resources from international financial institutions, bilateral and multilateral donors to organize training courses with the aim of raising awareness and financial capability of credit institution that fund for green project. Enhancing financial capacity focuses on developing the modern banking services, using high-techechnology, technology that friendly with environment toward to green growth such as developing morden forms and tools of payment, applying modernization hi-tech, eco-friendly technologies in order to encourage non-cash payments, reducing the circulation of paper money in the market; plan and select some pilot areas applied modern means of payment but easy to use and suitable for conditions in rural areas. Organize communication and raising awareness for public employees and officials in banking system about the role and objectives of the National Strategy for Green Growth; increase awareness in energy efficiency, energy saving, natural resource saving and environmental protection in daily life and state procurement organizing; active in environmental protection campain. - Increase enterprises’ awareness Organizing communication to raise awareness for enterprises about the roles and objectives of the National Strategy for Green Growth; preferential policies for enterprises investing in green technology in order to produce green products meet the market demand. Organizing workshops on issues of benefits for enterprises when invests in green technology. This create favorable conditions for enterprises not only in saving costs, , but also gain productive output with of high quality and competitive price. 4.5. Coordinate with relevant ministries Green Growth Strategy requires develop and remain in a long term. Thus, it requires a synchronized coordination among the ministries concerned. In particular, SBV is one of important link in the creation of capital and monitor effectively the fund for green credit projects. - The Ministry of Planning and Investment as the main point for green growth coordinate with relevant ministries and agencies to complete the set of criteria for green growth project assessment. Base on this standard, credit institution review and statistic the proportion of green investment, as well as built up the objectives for green credit proportion in portfolio investment and plans to expand green investments in the medium and green. - Ministry of Natural Resources and Environment as orientation entity in sustainable environmental protection, guide to complete the set of standard to identify priority projects for adaptation to climate change; building up a set of indicators in evaluating the effectiveness of processes and procedures; evaluating, approving and monitoring projects to adapt with climate change. Based on this set, the credit institutions design assessment process, classify risks, improve the efficiency of green credit projects. Simultaneously, MONRE also create set of indicators to help commercial bank assess the effectiveness of green investment projects. 83
16. Thus, commercial banks also aimed to the sustainability assessment in green credit protects in middle and long-term. - Ministry of Finance coordinates with the Ministry of Natural Resources and Environment, Ministry of Industry and Trade and the Ministry, other Ministries to submit a preferential tax policies for inputs such as enterprise invests in green technology, technology that using fuel friendly with environment and fuel inputs from recycled or bio-fuel. Besides, Ministry of Finance maintains stabilize output prices for green investment projects in order to encourage enterprises to technological innovation, increase investment in green projects. - Ministry of Natural Resources and Environment in coordination with the SME Association, Association of consumer protection, and other means of media to disseminating and fostering knowledge and encourage enterprises and consumers towards a production system that use environmentally friendly material, such as organizing campaigns and seminars to promote to citizens and enterprises. This article has highlighted some definitions that concerned on green economy, green banking and green credit. Furthermore, this study has taken into account the experiences of green credit development in some countries in over the world, for instant, China, Korea, Bangladesh, and Germany. Based on the difficulties in applying green credit in China, or the successes of green credit in other countries like Korea, Bangladesh and Germany, this study has emphasized several recommendations for Vietnam. Firstly, Vietnam have to consider about the reliable evaluation system for the polluting trades and sectors as a basis for banks to classify the project, especially as many polluting industries is also expected to produce high profits for many locals. Secondly, the communication about the regulations and detailed guidelines on green credit policy is very important for enterprises and banks to operate. Thirdly, establishing a governmental credit guarantee institution to support banks and financial organizations, which of lack of funds, to grant credit for enterprises, which use friendly environmental technologies. Finally, setting up rules that banks are required to report information on the environmental performance of its loan to the relevant authorities and the public should be considered in Vietnam banking system. REFERENCE Aizawa, M., & Yang, C. (2010). Green credit, green stimulus, green revolution? China’s mobilization of banks for environmental cleanup. The Journal of Environment & Development, 19(2), 119-144. Bahl, S. (2012). Green banking-The new strategic imperative. Asian Journal of Research in Business Economics and Management, 2(2), 176-185. Bihari, S. C. (2010). Green banking-towards socially responsible banking in India. International Journal of Business Insights & Transformation, 4(1). Biswas, N. (2011). Sustainable Green Banking Approach: The Need of the Hour. Business Spectrum, 1(1), 32-38. Dash, R. N. (2008). Sustainable ‘Green’Banking: The Story of Triodos Bank. Cab Calling, 26-29. Directive 03/CT-NHNN dated 03/24/2015. 84
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