The State Bank of Pakistan has introduced Green Banking Guidelines (GBGs) and has given banks and development finance institutions a year to implement them.

The guidelines cover every aspect of banking. “We’re being encouraged to lend generously to environment-friendly projects. We’re expected to ensure that even our overall general financing goes to the projects and borrowers that meet provincial, national and global environmental benchmarks,” says a senior executive of one of the top five banks.

Above all, banks and DFIs are expected to set their own house in order first: GBGs also require all banks and DFIs to make their infrastructure and operations environment-friendly.

The central bank wants banks and DFIs to create ‘indicative but not exhaustive’ green financing portfolios for making loans for alternative energy (wind, solar, biomass and other renewable energy sources), sewage treatment, water conservation, waste disposal, wastewater treatment and public transport. It calls upon them to consider earmarking a certain percentage of their overall financing and investment portfolio as a dedicated fund for green investment.

“Generally speaking, the central bank wants banks and DFIs to tap all opportunities of financing environment-friendly activities of agriculture and SMEs, and corporate and services sectors,” summed up a senior official of the National Bank of Pakistan. He and several other bankers reached by this writer for a comment on GBGs said they were just guidelines at present but would become binding regulations after a year.

“The SBP will, however, devise a plan to monitor periodical implementation of GBGs, and I hope we’ll be consulted in this regard,” said an official of the Pakistan Banks’ Association.

One important question is whether GBGs would also apply on projects already being financed by banks and DFIs. The answer is a conditional yes.

“The SBP has made it clear that banks and DFIs will have to ensure that in case of already-financed projects, national environmental quality standards (NEQS) are being adhered to. If not, then they can ask their borrowers to undertake an environmental improvement plan (EIP),” according to a senior executive of Habib Bank Ltd.

‘Generally speaking, the central bank wants banks and DFIs to tap all opportunities of financing environment-friendly activities of agriculture and SMEs, and corporate and services sectors,’ a senior NBP official says

Compliance with NEQS is a must for all industries whereas initial environmental examination (IEE) and environmental impact assessment (EIA) are necessary for only those that have been identified for this purpose under environment laws.

As for fresh lending (after the issuance of GBGs last week), banks and DFIs will make all new financing to certain projects only after ensuring that they have complied with IEE or EIA.

The list of such projects includes all those involving construction or use of buildings or other works, construction or use of roads or other transport systems, construction or operations of factories or other installations, mineral prospecting, mining, quarrying, stone-crushing, drilling and the like, any change of use of land or use of water alteration, expansion, repair, decommissioning or abandonment of existing buildings or works, roads or other transport systems and factories or other installations.

Banks and DFIs are supposed to conduct environmental due diligence at the stage of project’s credit appraisals and carry out their credit risk management on all next stages including credit approval, loan contracting and credit administration.

The implementation of GBGs is mandatory on banks and DFIs but the central bank has encouraged microfinance banks as well to act upon them.

A senior central banker told this writer the way banks and DFIs implement GBGs during the first year would bring forth many of their strengths and weaknesses in capturing the essence of GBGs and in profiting from them.

“We want banks and DFIs to understand that well-defined regulatory regimes not only help in mitigating risks or ensuring systemic development of banking activities in a certain area, they also open opportunities for new banking businesses,” he emphasised.

Development of green banking portfolios and their continued monitoring, for example, can give banks and DFIs a unique chance to assess their existing borrowers on additional standards and then design new financing products and new advisory services. .

“We do realise that effective implementation of GBGs can really help us grab some share (both directly as well as in collaboration with the corporate customers) in such profitable areas like energy efficiency development and promotion, green mortgages, green retailing, and carbon credit trading,” said a senior local banker.

Bankers say GBGs have been introduced at a time when flow of credit towards the private sector credit demand is high and this should help them in implementation without running of the risk of a squeeze in credit distribution as a result. Banks’ lending to the private sector touched an all-time high of Rs748 billion in 2016-17, up from Rs446.4bn a year ago on strong demand. This year’s lending target is Rs1 trillion.

“I guess, during the course of implementation of GBGs, stricter credit appraisals, credit approvals and re-examination of existing project financing (in the light of GBGs) could result in slower credit disbursements here and there. But overall, the impact would be negligible as private sector’s credit demand is high,” says former head of a local bank.

“Besides, GBGs-based scrutiny of credit proposals should, in some cases, encourage banks to lend generously to certain companies with better compliance of environmental laws. That, too, could stop a credit distribution squeeze from occurring.”

Some bankers, however, are worried that the evaluation of credit proposals of, and credit disbursement to, public sector projects and enterprises might prove difficult because many get environmental certification from federal and provincial agencies without fulfilling all the requirements.

Published in Dawn, The Business and Finance Weekly, October 16th, 2017