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Banking & Finance

Banks now keen on green credit

Released at: 13:26, 21/09/2019

Banks now keen on green credit

Photo: Viet Tuan

Green credit is now a trend in the global banking and finance industry and more Vietnamese banks are following suit.

by Hung Cao

The Japan Bank for International Cooperation (JBIC) and the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) signed a $200-million loan agreement two months ago in a cooperative effort to finance green energy projects in Vietnam, contributing to Vietcombank’s green growth and environmental protection plan. Green credit as a global trend has played an important role over recent years in promoting sustainable socioeconomic development and realizing all countries’ green growth strategies. With regard to Vietnam, following the government’s development orientation, green credit has constantly enjoyed special attention and resources from local banks.

Green financing

Recognizing the importance of renewable energy projects for the economy, closely following the government’s orientation to encourage the development of clean energy sources, and completing its goal of becoming a green bank, Vietcombank has been involved in sponsoring a number of clean and renewable energy projects, such as small and medium-scale hydropower plants, eco-thermal power projects, and solar power projects. “Project owners must have good financial capacity and experience in renewable energy as well as in operating other power sources,” said Mr. Pham Manh Thang, Deputy General Director of Vietcombank.

In particular, he went on, renewable energy projects must have legal documents fully complying with the Law on Environmental Protection, which is the basis for Vietcombank to study and consider granting credit. For each project, the requirement for reciprocal capital has different proportions based on evaluating investors’ capacity as well as analyzing the risk level, but normally the minimum counterpart funding is 30 per cent of the total investment.

Meanwhile, in order to promote the investment in and use of clean energy among companies and household businesses, HDBank has been implementing solar power financing packages with total funding of up to $388.5 million. This amount is expected to further increase depending on market demand. 

Since launching about a year ago, HDBank’s solar power financing program has been well received by the market, according to Mr. Tran Hoai Phuong, Deputy Director of the bank’s Commercial Banking Division. “Several solar power projects that are to be connected to the national power grid from the north to the south of Vietnam and invested by reputable contractors have been financed by HDBank,” he said.

HDBank has also been carrying out a special financing scheme for roof-top solar projects, with a limit of up to $432,000 per project. By joining this scheme, investors not only receive financing from the bank but can also obtain professional support from its partners in installing, building, and maintaining solar power systems. In the first half of this year, HDBank has established 16 partner relationships with such companies around the country, successfully granting credit totaling $8.6 million for roof-top solar power projects, and this will rise over the closing months of the year given the number of loan applications now being processed.

These outcomes from solar power financing have set a solid base for HDBank to aim for the objective of reaching a financing ratio for the clean energy field of 10-15 per cent of its entire lending portfolio and strongly conveys its commitment to be a “Green Bank” that balances business growth targets with a responsibility for a sustainable environment, Mr. Phuong added.

Nam A Bank last December joined the ranks of the Global Climate Partnership Fund (GCPF)’s international network of partner institutions and received a credit facility and technical support to launch its green lending activities in Vietnam. Its partnership with GCPF was welcomed by the State Bank of Vietnam (SBV), as it will enable the bank to become Vietnam’s first private commercial bank to launch green lending products for small and medium-sized enterprises (SMEs) and individuals.

This is the first step taken by Nam A Bank in its “I choose to live green” community project, which began this year, said Mr. Tran Ngoc Tam, CEO of Nam A Bank. The preferential interest rate in the program is around 5-6 per cent per annum. “By teaming up with an experienced partner with ample experience in helping financial institutions in emerging economies build up a green lending offering, we are thrilled to lead the way in Vietnam’s financial sector by developing a full green lending program,” he said.

Sustainable growth target

The SBV has taken welcome steps to develop Vietnam’s green credit market with its successful pilot of the Green Credit Program, according to Mr. Aayush Tandon, Policy Analyst at the Organization for Economic Cooperation and Development (OECD)’s Center on Green Finance and Investment. Green credit is now the largest source of green financing in the country.

Recent figures from the central bank reveal that the credit balance for green projects was around $10.5 billion as at the end of the first quarter, up 2 per cent quarter-on-quarter. Among credit growth figures at the end of 2018, the “green” sector surprised with growth of some 30 per cent; higher than other priority areas such as rural agriculture (15.5 per cent), SMEs (13.5 per cent), and exports (3.5 per cent). 

Similarly, the SBV’s latest survey of credit institutions in the field of green growth and green credit, released recently, showed that awareness among them about green credit has improved significantly. Specifically, 13 credit institutions have integrated the content of environmental and social risk management in the process of green credit assessment, while ten have built credit products and banking services for green sectors and have shown an interest in providing credit for these sectors, mainly for the medium and long-term with preferential interest rates for green projects.

The SBV last year approved a project on green banking development, in which ten or 12 banks will have specialized units on the environment and social risk control, while 60 per cent will lend for green projects by 2025. Many local banks have been implementing preferential policies in green credit licensing in order to realize that goal.

For example, HDBank has received $9.3 million in funding from the Japan International Cooperation Agency (JICA) to support SMEs investing in green projects and environmental preservation. The IFC and the Dutch fund FMO have also been in discussions to provide green funding for renewable energy projects, solar energy for households, and others.

HDBank has at the same time had initial dialogue with international non-profit organizations such as the Global Green Growth Institute (GGGI) and the Clean Energy Investment Accelerator (CEIA) to seek cooperation opportunities with international financial institutions to implement financial support tools to businesses investing in green segments, such as green credit insurance funds or entrustment to finance green projects.

Restricted capital sources

Recent developments in the green credit market have been appreciable, Mr. Tandon from the OECD commented. However, banks in Vietnam are still reluctant to finance green projects, for instance renewables and energy efficiency. This is largely due to limited experience and expertise in appraising such projects. Cost of debt finance is consequently high in Vietnam. Foreign banks, in theory, can extend finance at cheaper rates to Vietnamese projects but hold back due to high-risk perceptions. It is essential, he said, for domestic banks to become more comfortable with new green technologies to lower the cost of capital and expand the market. 

There are other challenges, he noted, not unique to Vietnam, that need to be addressed for the green credit market to grow, for instance the absence of commonly agreed-upon standards and definitions and the measurement of impact. SBV figures also show that funding for green projects remains restricted, with only 24 per cent of green projects developed by banks for credit appraisal.

Challenges concerning the longer payback period, sizeable initial investment cost, as well as market risks businesses in green segments face may not, in fact, be much different to businesses engaged in different segments and industries. The real challenge HDBank has been facing in lending to green segments are somewhat similar to others, for instance how to find investors that have the right capabilities and experience and feasible and effective business plans.

Besides green credit, policy interventions to create an enabling environment to lower investment risk will be central to scaling-up green finance in Vietnam, according to the OECD. Given the scale of investment needed to meet the country’s long-term development and climate objectives, it is important to mobilize domestic and foreign private capital. There are multiple tools and techniques available to governments to unlock private investment, in particular institutional investment. 

Mr. Tandon added that targeting institutional investors can be beneficial to accelerate green credit. Institutional investors like pension funds and insurance companies are well placed to hold long-term assets. They can enter the market to refinance operational assets, thus taking them off the balance sheets of short-term financiers like banks, which frees up bank capital for new investments and fosters a sustainable finance ecosystem. 

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