Roles of banking industry to promote Green Finance
Green financing policy requires more support and clarity from the banking industry in Bangladesh
Green finance industry of Bangladesh is expanding at a rapid rate.
It gained momentum especially in light of the Bangladesh Bank's Sustainable Finance Policy Circular, published on 30 August 2023. This policy stipulates that green financing, which comprises 14 sectors, including renewable energy, must receive 5% of all term loans.
Even with a clear mandate, the commercial banking industry still has a long way to go before completely adopting green finance.
Challenges in Green Finance
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The program sets aside 5% for green finance, but it does not specify how much of that 5% should go toward renewable energy or other 12 areas of green finance. This uncertainty may result in vital renewable energy initiatives receiving insufficient funding.
The only options for refinancing and green funding are 5% term loans. Demand or continuous loans are not eligible for these advantageous rates, which deters borrowers from choosing them and drives them toward conventional loans with interest rates higher than 13%.
Many commercial banks are reluctant to fund these projects because of the novelty of green finance and having only 94 green products introduced by Bangladesh Bank. This hesitation is a result of both not being familiar with these products and the perceived recovery challenges with newly introduced products.
The differences of green and sustainable financing remain mostly unknown to bank officers. They often mix sustainable finance with green finance. However, it is sometimes futile to make them understand that all sustainable finances are not green but all green finances are green finance! At the branch level, this ignorance makes it difficult to accurately report on and promote green finance efforts.
Branch banking officials frequently fail to report green finance accurately. The actual development and significance of green financing projects may be hidden by careless or inaccurate reporting.
Recommendations
Bangladesh Bank ought to think about establishing distinct goals for renewable energy under the 5% green finance mandate. Suppose, 3% of the mandate should be set aside for renewable energy. This will guarantee that renewable energy initiatives receive sufficient funding and a focused approach.
Refinance options should be expanded to demand and continuous loans in order to increase the appeal of green finance, possibly at a lower interest rate more in line with term loans. Green Financing choices would become more appealing and accessible as a result.
Currently, a lack of centralisation causes disparities in the data provided by various departments, posing problems for many institutions. One form of data is generated by the Core Banking System (CBS), another by branch banking officials, and a third version is provided by Credit Risk Management.
The real data of green finance becomes inaccurate as a result of this contradiction. A centralised system that all banks could use would promote sustainability and drastically lower the amount of green finance data that goes unreported.
All departments would be in sync with one another through a single approach, making accurate and thorough reporting possible.
Furthermore, the identification of green finance would become standardised with the implementation of required green marking in loan proposals and the Core Banking System (CBS).
To guarantee that each loan proposal is assessed for its potential for green financing, Credit Risk Management should establish thorough guidelines and a centralised framework for loan proposals that have been pre-approved by the Senior Management Team. Branch banking officials would be empowered by this standardising to properly identify and report green finance.
The implementation of those procedures would be imperative in mitigating the amount of green finance that remains unreported and in improving the general transparency and accountability of reporting on green and sustainable finance.
Human Resources Division, Training Institute, Sustainable Finance Department of Commercial Banks and Bangladesh Bank should arrange training programme on Environmental and Social Risk Management (ESRM), Green and Sustainable Finance, Refinance, Green Transformation Fund, Technology Development Fund and Climate Related Financial Disclosure etc. Additionally, bank officers should actively participate in these extensive training programs.
Bank management should provide branch-level incentives if branch officers can achieve green finance target.
Moreover, monetary incentives to branch banking officials for providing accurate and thorough quarterly reports on green financing can enhance to improve data quality overall. Acknowledging and praising officers and branches for accurate reporting may encourage them to focus more on green finance projects.
Solar energy project financing by commercial banks ought to be promoted, especially for the ready-made garment (RMG) industry.
Banks can lower energy costs and improve sustainability by assisting RMG manufacturers in implementing solar energy solutions and energy-efficient machineries. Banks must do this to make the most of the Technology Development Fund (TDF), Green Transformation Fund (GTF), and other refinancing programmes -- in order to encourage the adoption of sustainable and energy-efficient practices in sectors such as RMG and Export Processing Zones (EPZs).
In Bangladesh, green finance has enormous potential to promote sustainable development. Commercial banks must, however, overcome current obstacles in order to realise this potential. This can be done by implementing focused campaigns, raising awareness and enlisting the strategic cooperation of regulatory organisations like Bangladesh Bank.
Nikhil Chandra Nath is a Banker, working at the Sustainable Finance Unit in the NCC Bank Plc.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
