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Survey eyes ecological, social impacts of lending

Update: August, 27/2012 - 10:09

HCM CITY — A new survey from International Finance Corporation (IFC), a member of the World Bank Group, and the State Bank of Viet Nam (SBV) has found that most of the country's banks would benefit from better environmental and social risk-assessment standards in loan approvals.

"Financial institutions can reduce their own risks and seize business opportunities by encouraging sustainable business practices among companies," Cat Quang Duong, deputy head of the SBV's Credit Department, said.

Simon Andrews, IFC Regional Manager for Viet Nam, Cambodia, Laos, Myanmar, and Thailand, said: "A client's business viability rests not only on its financial health but also on how well it manages the impact of its operations on the environment and the community."

"Addressing environmental and social sustainability issues also opens up new business opportunities, such as energy-efficiency and renewable-energy financing," he added.

Conducted in June, the survey examined 54 Viet Nam-based financial institutions. It found that few Vietnamese banks have formal policies, procedures or systems to manage environmental and social risks faced by their clients.

Many banks are not fully aware that environmental and social risks could affect the financial performances of their clients' businesses and, in turn, the banks themselves. Nguyen Thuc Quyen of IFC Washington said that a survey of 56 financial institutions in seven countries showed that one-third of the respondents had incurred losses related to environmental and social risks.

"They accepted losing money because they did not want to take responsibility and pay compensation for what their customers had done," Quyen said.

She also pointed out that such cases would cause the number of bad loans to increase and affect the reputation of financial institutions.

"During the 2002 – 05 period, financial institutions paid a lot of attention to keeping their good reputation," she added. In the survey, while 89 per cent of banks said there were no regulations related to environmental and social standards, 93 per cent of them said such regulations were necessary.

The mining, processing, construction, electricity, agriculture and forestry sectors are the most sensitive, and small – and medium-sized enterprises also bear the most risks.

"Local banks should take advantage of foreign partners who have knowledge and experience in environmental and social risks to improve the situation, but a strong commitment of time and resources by leaders is needed," said Dr. Kenneth Macek of the MCG Management Consulting Group.

One of the key constraints hindering banks is the lack of specific guidelines on identifying and managing environmental and social risks in project financing.

Limited knowledge, expertise, qualified consultants and supporting providers in the field are other constraints. Lack of enforcement on related laws is a challenge as well.

Macek recommended that senior bank officials and staff must become more aware of the issues, and that the capacity of law-makers, investigators and consultants should improve.

"The State Bank of Viet Nam should release specific environmental and social standards for the banking sector," he added. — VNS

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