Sustainable financing soars 160% in Dec quarter as banks scramble for positive ratings

Infograph: TBS

Loan disbursements in the green and sustainable sectors have surged by a staggering 160%, equivalent to Tk60,280 crore, in the December quarter of 2023 as banks and non-bank financial institutions (NBFIs) rushed for a positive rating by the Bangladesh Bank.

According to the Quarterly Review Report on Sustainable Finance, Tk98,109 crore was disbursed in the Green and Sustainable Finance sectors during the October-December quarter, marking a significant increase from Tk37,829 crore in the previous three months.

In the December quarter, the top 10 performing banks were EXIM Bank, BRAC Bank, Eastern Bank, Jamuna Bank, City Bank, Trust Bank, Prime Bank, Bangladesh Krishi Bank, Uttara Bank, and State Bank of India.

Meanwhile, CVC Finance, Bangladesh Infrastructure Finance Fund, National Finance, Bangladesh Finance, and IDLC Finance were among the highest performing NBFIs.

Bankers noted that one of the reasons for the significant loan disbursements was the drive to secure favourable ratings.

The Bangladesh Bank evaluates banks based on their investments in the green and sustainable finance sectors and publicly announces these ratings. So, banks have significantly increased their lending in this sector.

During the October-December quarter of 2023, 25 banks and 10 NBFIs have surpassed the 5% target of green finance compared to the total term loan disbursement.

Moreover, 20 banks and nine NBFIs have been able to fulfil their target of 20% sustainable finance compared to the total loan disbursement.

Sustainable finance refers to conducting business in such areas and in such a manner that helps reduce overall external carbon emissions and internal carbon footprints.

One of the major areas of financing for banks and NBFIs is industrial projects such as steel, paper, cement, chemicals, fertilisers, power, and textiles, which cause maximum carbon emissions.

According to the Bangladesh Bank report, in the December quarter, banks and financial institutions disbursed loans to the Sustainable Finance sector amounting to Tk90,704 crore, compared to just Tk33,473 crore in the previous quarter.

Additionally, the amount of loans disbursed in green financing increased to Tk7,405 crore, from only Tk4,356 crore in the September quarter.

The central bank has issued directives mandating banks and financial institutions to allocate 5% of their total loans to green finance and 20% to sustainable financing.

However, in 2023, banks and financial institutions disbursed loans under sustainable financing of Tk1.97 lakh crore, which accounts for 17.23% of total loans.

In contrast, loans to this sector in 2022 were Tk1.30 lakh crore, representing 11.59% of the total disbursed loans.

Additionally, banks and financial institutions disbursed loans in the green financing sector in 2023 amounting to Tk19,304 crore, which is 7.25% of the disbursed loans. This is an increase from 4.97% in 2022.

Chowdhury Liakat Ali, director at the Sustainable Finance Department of the Bangladesh Bank, told The Business Standard, "The central bank is pursuing boosting up the whole scenario by taking appropriate policy initiatives."

He continued, "Refinance support from the Bangladesh Bank is also playing an important role in incentivising green banking activities. As a result of these initiatives, it is expected that a positive impact will be evidenced in the trend of sustainable finance by banks and financial institutions in a gradual manner."

He also mentioned that they have three schemes for sustainable and green finance. Banks can raise funds from here at just 1% interest. Besides, they disburse at the highest 5% interest to the customer level. Loan disbursement is increasing due to the low interest rate on these loans.

The managing director at a private bank said investments in the sustainable sector are primarily directed towards industries. In the first three quarters of last year, disbursement to these sectors was low, but it increased in the December quarter due to several reasons.

He explained that overall loan disbursement was low due to a liquidity crisis at many banks. However, disbursement increased later because banks and financial institutions were rated at the end of the year based on their loan disbursement to these sectors. Consequently, banks have increased the disbursement of loans in these sectors to maintain a good rating.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said sustainable finance and investment in the green financing sector are very important to bring sustainability to the country's economy.

"In order to overcome the country's investment, social, and corporate governance risks, it is necessary to invest in this sector," he added.

He also said the banks that follow the rules to finance this sector will do well in the future. Besides, there are some international standards for investment in these sectors; if they are followed, more progress will come.