Many foreign and Vietnamese financial institutions are now enthusiastically enforcing green loans or bonds as they continue to work towards transition to a low carbon economy. However, issues such as debtors’ leverage ratio or energy project quality are associated with risks. Pham Nhu Anh, member of the Board of Management, head of the Corporate and Investment Banking Division at Military Bank, talked to VIR’s Luu Huong about the risks and rewards of these climate-friendly initiatives.

Pham Nhu Anh, member of the Board of Management, head of the Corporate and Investment Banking Division at Military Bank

How is green credit classified in the country at this time?

Green credits can be understood as a loan provided by banks to projects that pose few risks to the environment, contributing to the protection of the ecosystem.

Under the regulations of the State Bank of Vietnam (SBV), green credit refers to funded projects that meet specific criteria in various areas such as green agriculture, sustainable forestry, renewable and clean energy, recycling resources, waste treatment and much more. In recent times, a sharp focus has been put on renewable energy – more specifically, solar and wind power.

What would be potential risks related to green credit in a country like Vietnam?

While it is true that green credit might pose potential risks, it is normal considering that every type of credit is subject to certain threats. Green credit has been a popular field among developed countries, yet quite new to Vietnam. Risks related to green credit might arise from five key issues.

First are risks from project appraisal. This stage might encounter complicated issues since green projects often require substantial investments and high-technology equipment. In addition, risks might also stem from insufficient legal corridors, long payback period, and market risks.

Secondly, there can be issues in balancing and meeting the capital needs for projects. Green credit requires huge medium- and long-term loans while commercial banks’ capitals are mainly short-term with relatively high interest rates and there haven’t been any preferential or special policies introduced by the SBV. Therefore, providing green credit might cause banks risks in capital balance.

Potential risks can also arise from collateral, which is mainly assets formed by borrowed capital that are green projects or projects with low liquidity. In addition, the handling of collateral is quite specific.

Revenue or project efficiency are other causes of risks. In the field of renewable energy, the output and revenue of projects are unstable and dependent on natural conditions, such as solar radiation capabilities or wind speed.

In addition, power transmission connection insufficient to release power generation capacity as well as the electricity price policy can affect the customers’ ability to pay debts and banks’ ability to recover loans.

It is also worth noting that the rapid development of solar power recently has caused a surplus of renewable energy. EVN therefore has reduced the mobilisation of solar power and will soon reduce the mobilisation of wind power as the scale of inverters increases. This has seriously impacted projects’ revenue and increased the risks of these projects.

Last but not least, risks might come from policies. Green credit is planned to be the central development direction of the government; however, there has not been a strong and sufficient set of tools to boost the development of green credit. More specifically, the legal corridor is still incomplete and unclear; government and SBV policies to support investors and commercial banks providing green credit have not been strong enough, and changes in the operating policies of ministries, departments, and agencies could pose a risk to banks.

As an active lender in providing environment-friendly credit, what does Military Bank (MB) expect to face in the green credit sector?

As a bank active in the green sector, we hope that changes will be made in the positive direction.

From a macro perspective, in terms of policy, we expect firstly that government, ministries, departments, and agencies will soon issue a list of criteria to identify green projects in line with Vietnam’s current economic sub-sectors. In addition, legal framework, mechanisms and policies on taxes, fees, techniques, markets, planning and development strategies of each green sector will be completed.

Secondly, the government and the SBV will issue policies to assist investors in loan guarantee tools in order to access foreign capital sources with reasonable cost; support commercial banks with medium- and long-term capital as well as concessional capital for the green sector through various solutions; increase the rate of short-term capital provided to medium and long-term projects; and create a synchronous mechanism for commercial banks to provide payment guarantees for export credit agency.

From the perspective of MB, we will be more proactive and aggressive in researching in-depth the green sector in order to successfully sponsor green credit projects, offering great benefits to customers, society, and the bank. Aside from that, MB will also establish synchronous and advanced risk assessment and risk management systems, as well as update changes to promptly come up with solutions and effectively handle the situation.

Considering the green sector as one of the inevitable trends that bring significant benefits to the society, MB hopes to receive guidance from regulators and the SBV as well as the cooperation of credit institutions and the support of customers so as to better fulfill our role in providing green credit.

By VIR