GREEN BANKING IN BANGLADESH

GREEN BANKING IN BANGLADESH Complied By: Ajoy Paul, Management Trainee, AB Bank Limited 1) INTRODUCTION: Sustainable development has emerged as a new paradigm of development in response to the current discourse of development that over-exploits natural environment for economic prosperity. The sustainable development can best be achieved by allowing markets to work within an appropriate framework of cost efficient regulations and economic instruments. One of the major economic agents influencing overall industrial activity and economic growth is the financial institutions such as banking sector. The banking sector influences the economic growth and development in terms of both quality and quantity, there by changing the nature of economic growth. Banking sector is one of the major sources of financing investment for commercial projects which is one of the most important economic activities for economic growth. Therefore, banking sector can play a crucial role in promoting environmentally sustainable and socially responsible investment (SRI). Banks may not be the polluters themselves but they will probably have a banking relationship with some companies/investment projects that are polluters or could be in future. Banking sector is generally considered as environmental friendly in terms of emissions and pollutions. Internal environmental impact of the banking sector such as use of energy, paper and water are relatively low and clean. Environmental impact of banks is not physically related to their banking activities but with the customer’s activities. Therefore, environmental impact of bank’s external activity is huge though difficult to estimate. Moreover, environment management in the banking business is like risk management. It increases the enterprise value and lowers loss ratio as higher quality loan portfolio results in higher earnings. Thus, encouraging environmentally responsible investments and prudent lending should be one of the responsibilities of the banking sector. Further, those industries which have already become green and those, which are making serious attempts to grow green, should be accorded priority to lending by the banks. This method of finance can be called as “Green Banking”, an effort by the banks to make the industries grow green and in the process restore the natural environment. This concept of “Green Banking” will be mutually beneficial to the banks, industries and the conomy. Not only “Green Banking” will ensure the greening of the industries but it will also facilitate in improving the asset quality of the banks in future2. Internationally, there is a growing concern about the role of banking and institutional investors for environmentally responsible/socially responsible investment projects3. Banking and other financial institutions are more effective towards achieving this goal for the kind of intermediary role they play in any economy and for their potential reach to the number of investors. Environment is no longer the exclusive concern of the government and the direct polluters, but also the other partners and stake- holders in the business like financial institutions such as banking institutions can play a very important role in fostering linkage between economic development and environmental protection. To substantiate, quality of service, the implementation of environmental conservation measures, support to the deprived section of the society, concern about the quality of life and nature are the basic principles that the financial institutions are relying on in their business strategy in recent years. The banking operation targets a certain long-term rate of return on their credit and investment. However, every credit extension and investment caries the risk of non-payment and reduction of value (in case of direct investment) due to environmental liabilities. Therefore, it is of importance to the banking sector to follow certain environmental evaluation of the projects before financing. There are studies showing positive correlation between environmental performance and financial performance. Thus, it is imperative for the financial institutions in the present context to consider environmental performance in deciding whether to invest in companies or advise clients to do so. The formation of different rules for environmental management like resource conservation, clean water act, clean air act, toxic substance control act are also viewed as potentially significant contributor to the recent increase in environmental liability for banking institutions. Adoption of these principles will offer significant benefits to financial institutions, to consumers and also the stakeholders. There have been attempts to adopt sustainable development strategies from various quarters at international level. Multilateral agencies, international consortiums, multilateral financial and development institutions have been advocating for environmental standards and strategies to evaluate investment projects. In the recent years, the international organization for standardization (ISO) has issued series of comprehensive guidelines for incorporating environmental protection and pollution prevention objectives into industrial activity worldwide, known collectively as ISO 14000. It would certainly give the much needed impetus for the banking industry to expand the use of environmental information in their credit extension and investment decisions. 2) GREEN BANKING DEFINED: Green banking is a general term, which can cover a multitude of areas from a bank being environmentally friendly to how and also where their money is invested. Green banking, which considers all the social and environmental factors, is also called 'ethical banking'. Ethical banks started with the aim of protecting the environment. These banks are like normal banks that aim to protect the environment and are controlled by the same authorities. 3) GEEN BANK DEFINED: A green bank is a bank that promotes environmental and social responsibility but operates as a traditional community bank and provides excellent services to investors and clients. Its progressive approach to the community and the earth makes it different from the crowd. Green banking involves pursuing of financial and business policies that are not hazardous to environment rather help conserve environment. 4) WHY GREEN BANKING IN GENERAL: The broad objective of green banking is to use resources with responsibility and giving priority to environment and society. It is more about focusing on 'mother planet and its sustainability', shifting from a traditional approach on 'profit' or even 'people'. Green banking is not just another corporate social responsibility (CSR) activity; it is all about going beyond to keep this world livable without much damage. Green banking, compared to normal banking, attaches more importance to environmental factors. Its aim is to provide good environmental and social business practices. It checks all the factors before considering a loan whether the project is environment-friendly and has any implications on the future of people and planet. Basically, green banking avoids as much as paper work as possible from go-green credit cards and go-green mortgages to all transactions done online. It creates awareness around business people about environmental and social responsibility, enabling them to adopt environment friendly business practices, and follows environmental standards for lending. Overall, green banking is a good way of making people aware of global warming. Each businessman will contribute to the environment and make this earth a better place to live and enjoy. 5) WHY GREEN BANKING IN PARTICULAR: Until recently, environmental concerns were not considered relevant to the business operation of banks and financial institutions. Traditionally, banking sector’s concern for environmentally degrading activities of clients is like interfering or meddling in their business affairs. However, now it is being perceived that dealing with environment brings risks to their business. Although the banking and financial institutions are not directly affected by the environmental degradation, there are indirect costs to banks. Due to strict environmental disciplines imposed by the competent authorities across the countries, the industries would have to follow certain standards to run their business. In the case of failure, it would lead to closure of the industries leading to a likelihood of default to the bank. For example the enactment of Comprehensive Environmental Response, Compensation and Liability Act in 1980 (CERCLA) in the US in late 1980s has resulted in huge loss to the banks in the US as banks held directly responsible for the environmental pollution of their clients and made to pay the remediation cost. This is the reason for which banks in the US are ahead of other countries in integrating environmental concerns into their business operations. In the recent years several other countries (more in Europe) are seen adopting policies that have made banks responsible for the misdeeds of their clients. Therefore, the financial institutions need to engage proactively with the stakeholders on environmental and social policy issues and evaluate the impacts of their client’s investment. In turn, that would force the customers to take care of their management of environmental and social policy issues relating to investment. This should cover all project financing activities across all industries. The importance of Green Banking is immense for both the banks and economy by avoiding the following risks involved in banking sector— Credit Risk: - It can arise indirectly where banks are lending to customers whose businesses are adversely affected by the cost of cleaning up pollution or due to changes in environmental regulations. The cost of meeting new requirements on emission levels may be sufficient to put some companies out of business5. Credit risks may be higher due to the probability of customer default as a result of uncalculated expenses for capital investment in production facilities, loss of market share and third party liability claim. Credit risks are also associated with lending on the security of real estate whose value has diminished owing to environmental problems (additional loss in the event of default). Further, risk of loan default by debtors due to environmental liabilities because of fines and legal liabilities and due to reduced priority of repayment under bankruptcy. In few cases, banks have been held responsible6 for actions occurring in which they held a secured interest (see Schmidheiny and Zorraquin, 1996 and Ellis, Millians and Bodeau, 1992). Legal Risk: - It can occur in different forms. Most obviously, banks like other companies are at risk if they themselves do not comply with relevant environmental legislation. But more specifically, they are at risk of direct lender liability for clean up costs or claims for damages ifthey have actually taken possession of contaminated or pollution causing assets. An environmental management system helps a bank to reduce risks and costs, enhance its image and take advantage of revenue opportunities. Reputation Risk: - In all likelihood, due to growing awareness about environment safety, banking institutions are more prone to loose their reputations if they are involved in big projects, which are viewed as socially and environmentally damaging. There are also few cases where environmental management system has resulted in cost savings, increase in bond value etc (Heim, G et al, 2005). In few cases the environmental management system resulted in lower risk, greater environmental stewardship and increase in operating profit. Reputation risks involved in the financing of ecologically and ethically questionable projects. The adoption of green banking strategies will help the bank to deal with these risks involved in their business operation. Green banking strategies involves two components managing environment risk and (2) identifying opportunities for innovative environmentally oriented financial products (IFC, 2007). To manage environmental risk, the banks have to design proper environmental management systems to evaluate the risks involved in the investment projects. The risks can be internalized by introducing differential interest rates and other techniques. Moreover, bank can withdraw itself from financing high-risk projects. The second component of green banking entails creating financial products and services that support commercial development with environmental benefits. These includes investment in renewable energy projects, biodiversity conservation, energy efficiency, investment in cleaner production process and technologies, bonds and mutual funds meant for environmental investments etc. Thus, the banking and financial institutions should prepare an environmental risk and liability guidelines on development of protective policies and reporting for each project they finance or invest (Jeucken, 2001). They can also have an environmental assessment requirement for the projects seeking finance. Banks also can issue Environmental hazards management procedures for the each project and follow through8. International financial institutions like International Financial Corporation (IFC), Japan Bank for International Cooperation (JBIC) have incorporated environmental management into their business operation. All project proposals are classified in terms of its potential environmental impact taking into account factors such as the sector and scale of the project, the substance, proposed project site, the degree and uncertainty of its potential environmental impact. Often, the World Bank’s loans and grants are associated with certain level of commitment of the beneficiary countries to adopt environmental protection measures. The perception towards complying with environmentally norms and standards is changing over time. Adhering to environmental norms and standards were considered costly and as a bottleneck to development. If we will consider the economic benefits of these in terms of health care, productivity and insurance then the benefit is much higher than the cost9. A study confirms that only air pollution causes the loss of 200 million working days and the resulting losses in productivity and medical expenses costs around 14 billion pound to the European Union (Stavros Dimas, 2005). If all the impacts of environmental degradation are considered and costs are measured, then we can find the huge economic benefits these protection measures brings in. Environmental friendly technologies also make economic sense for the industries and actually lessen the financial burden. The cost of pollution is rising with more awareness about these issues all over the world. The polluting industries face more resistance and often forced to closedown or face massive boycott by the consumers. This adds to their cost enormously. Environmental concerns are integrated into the international trade policy and often act as trade barrier for environmentally sensitive goods (ESGs). So adopting environmentally sustainable technologies or modes of production is no more considered as a financial burden, rather it brings new business opportunities and higher profit. Green banking saves costs, minimizes the risk, enhance banks reputations and contribute to the common good of environmental sustainability. So it serves both the commercial objective of the bank as well as its social responsibility. Green banking solves the problem faced by the environmental regulation and enforcements authorities related to size and location of the polluting unit. The authorities have practical limitations on enforcing environment standard on small-scale industries and also industries located in far off places. 6) POLICY OF THE GOVERNMENT AND CENTRAL BANK REGARDING IMPLEMENTATION OF GREEN BANKING: The Bangladesh Bank vide their BRPD Circular No. 02 dated 27-02-2011 has given directions to all scheduled banks to take necessary initiatives for implementation of Green Banking Policy in their business with the view to ensure necessary measures to protect environmental pollution while financing a new project or providing working capital to the existing enterprises. Banks have been advised to facilitate their clients with utmost care in opening Letter of Credit (L/C) for installation of Effluent Treatment Plant(ETP) in the industrial units. Banks have been advised to finance in Solar Energy, Bio-gas, ETP and Hybrid Hoffman Kiln (HHK) in brick field under refinance program of Bangladesh Bank. Considering the adverse effects of Climate Change, banks have been advised to be cautious about the adverse impact of natural calamities and encourage the farmers to cultivate salinity resistant crops in the salty areas, water resistant crops in the water locked and flood prone areas, drought resistant crops in the drought prone areas, using surface water instead of underground water for irrigation and also using organic fertilizer, insecticides by natural means instead of using chemical fertilizer and pesticides. Strategy for adopting Green Banking Policy: Bangladesh Bank has formulated a vigorous policy for all scheduled Banks which will ensure complete implementation of the policy within a stipulated time. In this regard, Bangladesh Bank has structured following 03 (three) phases: FIRST PHASE: In this phase, banks must accomplish the following works within December 31, 2011: •Policy Formulation and Governance Bank shall formulate and adopt broad environmental or Green Banking policy and strategy approved by their Board of Directors. A high powered Committee comprises of directors from the Board in case of scheduled Bangladeshi Banks and a high powered committee comprises Regional Chief of Global Office and members from the top management including CEO in case of Foreign Banks should be responsible for reviewing the banks environmental policies, strategies and program. Bank shall approve a considerable fund in their annual budget allocation for green banking. Banks are required to establish a separate Green Banking Unit or Cell having the responsibility of designing, evaluating and administering related green banking issues of the bank. A senior executive should be assigned with the responsibility of heading the unit. The unit will report to the high powered committee time to time. •Environmental Risk in CRM Banks shall comply with the instructions stipulated in the detailed guidelines on Environmental Risk Management (ERM) in consideration of a part of the Green Banking Policy. Bank shall incorporate Environmental and Climate Change Risk as part of the existing credit risk methodology prescribed to assess a prospective borrower. This will include integrating environmental risks in the checklists, audit guidelines and reporting formats. •In-house Environment Management Banks shall prepare an inventory of the consumption of water, paper, electricity, energy etc. by its offices and branches in different places. Then it should take measures to save electricity, water and paper consumption. A 'Green Office Guide' or at least a set of general instructions should be circulated to the employees for efficient use of electricity, water, paper and reuse of equipments. In place of relying on printed documents, online communication should be extensively used (where possible) for office management and make sure that the printers are defaulted to duplex for double-side printing to save papers. • Green finance Eco friendly business activities and energy efficient industries will be given preference in financing by bank. Environmental infrastructure such as renewable energy project, clean water supply project, wastewater treatment plant, solid & hazardous waste disposal plant, bio-gas plant, bio-fertilizer plant should be encouraged and financed by bank. Consumer loan programs may be applied for promoting environmental practices among clients. •Creation of Climate Risk Fund Bank should finance the economic activities of the flood, cyclone and drought prone areas at the regular interest rate without charging additional risk premium. However, banks should assess their environmental risks for financing the sectors in different areas for creating a Climate Change Risk Fund. This will be used in case of emergency. The bank would ensure regular financing flows in these vulnerable areas and sectors. The fund could be created as part of banks’ CSR expenses. •Introducing Green Marketing Green marketing incorporates a broad range of activities, including product modification, changes to the production process, packaging changes, as well as modifying advertising. It refers to the process of selling products and/or services based on their environmental benefits. Banks should use environmental causes for marketing their services to consumer. Green marketing is expected to help awareness development among common people. • Online Banking Banks should give more emphasis to make the easiest way to help environment by eliminating paper waste, saving gas and carbon emission, reducing printing costs and postage expenses. Online banking is the practice of making bank transactions or paying bills via the Internet on a secure website of the respective bank that allows the customers to make deposits, withdrawals and pay bills. -Employee Training, Consumer Awareness and Green Event Employee awareness development and training on environmental and social risk and the relevant issues should be a continuous process as part of the bank's Human Recourse Development. Awareness development among consumers and clients would be a continuous job of a bank under its public relation department. SECOND PHASE: In this phase, all scheduled banks are advised to accomplish the following works within December 31, 2012: • Sector Specific Environmental Policies Banks need to formulate strategies to design specific policies for different environmental sensitive sectors such as Agriculture, Agri-business (Poultry & Dairy), Agro farming, Leather(Tannery), Fisheries, Textile and Apparels, Renewable Energy, Pulp and Paper, Sugar and distilleries, Construction and Housing, Engineering and Basic Metal, Chemicals (Fertilizers, Pesticides and Pharmaceuticals), Rubber and Plastic Industry, Hospital/Clinic, Chemical Trading, Brick Manufacturing, Ship breaking etc. •Green Strategic Planning A bank should determine green targets to be attained through strategic planning. Bank should determine a set of achievable targets and strategies, and disclose these in their annual reports and websites for green financing and in-house environment anagement as well. •Setting up Green Branches A Green Branch should be featured by the provision of the maximum use of natural light, use of renewable energy, use of energy saving bulbs and other equipments, reduced water and electricity use, use of recycled water etc. Such a branch of a bank would be specifically designated as a ‘Green Branch’. A Green Branch will be entitled to display a special logo approved by Bangladesh Bank. The criteria for certification of a ‘Green Branch’ will be circulated by Bangladesh Bank in due course of time. • Formulation of Bank Specific Environmental Risk Management Plan and Guidelines: Banks should develop and follow an environmental risk management manual or guidelines in their assessment and monitoring of project and working capital loans. In addition to the compliance of national regulation the bank may set internationally accepted higher environmental standards. In this connection, Green initiatives by a group of banks will not only be effective but will also offer competitive advantage. Bank alliances may prepare standard and guidelines for themselves for improving Green Banking practices. • Programs to Educate Clients: Clients and business houses should be encouraged and influenced to comply with the environmental regulations and undertake resource efficient and environmental activities. Banks should introduce rigorous programs to educate clients. THIRD PHASE: In this phase, all scheduled banks are advised to accomplish the following works within December 31, 2013: •Designing and Introducing Innovative Products Alongside avoiding negative impacts on environment through banking activities, banks are expected to introduce environment friendly innovative green products to address the core environmental challenges of the country. •Reporting in Standard Format with External Verification Banks should publish independent Green Annual Report following internationally accepted format like Global Reporting Initiatives (GRI) targeting their stakeholders. There should be arrangement for verification of these publications by an independent agency or acceptable third party. •Reporting on Green Banking Banks shall report their initiatives/activities under the said program to the Department of Off-site Supervision of Bangladesh Bank on quarterly basis. Banks shall submit their first quarterly report on June 30, 2011 basis within July 15, 2011 and similarly they will be required to continue to submit reports on the subsequent quarters within the next 15 days of the respective quarter end. 7) MOTIVATIONAL FACTORS FOR IMPLEMENTATION OF GREEN BANKING POLICY: One would be awarded a loan only when all environmental safety standards are followed. When a person is awarded a loan, the interest is less than normal banks because ethical banks give more importance to environment-friendly factors, they do not operate with high interest rates only. Beside this, Bangladesh Bank has declared the following privileges for complete implementation of Green Banking Policy: (i) BB will award points to banks on Management component while computing CAMELS rating where there will ultimately be a positive impact on overall rating of a bank. (ii) BB will declare the names of the Top Ten Banks for their overall performance in green banking activities in the BB websites. (iii) BB will actively consider green banking activities/practices of a bank while according permission for opening new bank branch. 8) GREEN BANKING: INTERNATIONAL INITIATIVES: The financial sector’s growing adherence to environmental management system is attributed to the direct and indirect pressures from international and local Non-Governmental Organisations (NGOs), multilateral agencies and in some cases the market through consumers. In the early 1990s, the United Nations Environment Programme (UNEP) launched what is now known as the UNEP Finance Initiative (UNEPFI). Some 200 financial institutions around the globe are signatories of this initiative statement to promote sustainable development within the framework of market mechanisms toward common environmental goals. The objective is to integrate the environmental and social dimension to the financial performance and risk associated with it in the financial sector. As the commitment of this UNEPFI statement goes, sustainable development is regarded basic to the sound business management. It advocates for a precautionary approach towards environmental management and suggests integrating environmental considerations into the regular business operations, asset management, and other business decisions of the banks. IFC’s environmental unit was established in 1991 for reviewing each project for environmental assessment. Similarly, the US Export-Import Bank regularly reviews while financing exports on the ground whether they are environmentally sound. It will be noteworthy to mention that Netherland-based ABN-Amro bank has developed certain Reputational Risk Management (RRM) policies to identify, asses and mange nonfinancial present within it business engagements. Similarly, some of the big international banks like ABN Amro, Deutsche, Standard Chartered, HSBC Bank etc. look at environment issues discussed under Kyoto Protocol. Going further, the Dutch Government has made a formal request to banks in achieving sustainable development. The dialogue between banks and government was established in 1999 to initiate policies for environmental improvements through the development of new financial products and services. Similalrly, Earth (FoE) and the Rainforest Action Network (RAN) challenged the industry with high-profile campaign that highlighted cases in which commercial banks were “bankrolling disasters” in 2000 in the US. In 2002, a global coalition of NGOs formed a network named ‘BankTract’ to promote sustainable finance in the commercial sector. This coalition came up with a resolution constituting six principles promoting environmental protection and social justice by banks and this is popularly known as Collevecchio Declaration. The six principles that this declaration advocated included commitments to sustainability, no-harm, responsibility, accountability, transparency and sustainable market, and governance. More than 200 organizations have endorsed this declaration and urged the banks to incorporate these commitments into their business operation. The declaration states that “Finance and Commerce has been at the center of a historic detachment between the world’s natural resource base, production and consumption. As we reach the boundaries of ecological boundaries of the ecological limit upon which all commerce relies, the financial sector should take its share of responsibility for reversing the effects this detachment has produced”. All these concerns for sustainable finance or green finance have compelled the banking institutions to devise a common and coherent set of environmental and social policies and guidelines that can be used to evaluate the projects. A small group of banks along with IFC came together to initiate the process of designing the common guidelines in October 2002 and came up with a guidelines in June 2003 that is known as Equator Principles with 10 leading commercial banks adopting these voluntary set of principles. This equator principle was subsequently 10 updated and the new revised sets of principles are launched in July 2006. The coverage of projects being financed are expanded in this revised set of principles by lowering the finance threshold from $50 million to $10 million. Presently 46 financial institutions from 16 countries with business operation in more than 100 countries have embraced this equator principle. So this principle has become a common standard of project finance that incorporated environmental and social issues in project finance. The activities of the equator banks (banks adopting equator principles) are being reviewed by NGOs worldwide and are being published whenever it is realized that they are not committed to Equator Principle. IFC along with the Financial Times has initiated ‘Sustainable Banking Award’ since 2006. More than 104 financial institutions out of 151 entries from 51 countries have made it to the final lists of award in 2007. The number of banks applying was up by more than 100 per cent compared to the previous year's 48 banks from 28 countries. All the international initiatives towards integrating environmental concerns into business operation of banks are voluntary in nature and are meant to promote a common good of a better ecosystem. Voluntary commitment has its own shortcoming in a competitive market. Unless the market for green money will increase, the lenders will always have an incentive to procrastinate their social commitment and prioritize the commercial interest in the short run. So demand for green money is a precondition of green banking if it will be voluntary. A Government legislation that makes banks accountable for the misdeeds of their clients will help promote green banking. The Indian government has been trying to address the issue of environemental pollution by framing environmental legislations and encouraging industry to follow environmental technologies and practices. The environmental regulations in India can be broadly classified into two broad categories i.e. command and control regulations and liability law. The command and control regulations are ex ante regulations that are designed to dissuade environmentally damaging projects. This regulation is implemented by setting industry specific pollution standards, scrutinizing the projects and granting/denying permissions by the concerned authorities like Ministry of Environment and Forest. The liability laws are ex post in nature and are implemented by enforcing authorities through imposing fines, closing down the defaulting industries etc. However there is no law and rule in India that can hold banks responsible for scrutinizing investment projects before financing and for the environmental damage created by its client. Once legal framework for the environmental pollution standards are formulated in India, the polluting industries either have to close down or have to make necessary investment to comply with the standard. In this process these industries will loose their competitiveness in the international market, which would directly affect Indian economy and the banking sector. Thus in the present context, it is equally important for banks to guard themselves against the conversion of the now performing assets into non-performing one in the future. Realization of these facts by banks will certainty make them fast adopt the concept of Green Banking. The industries, which are ill equipped to control pollution now, are the possible polluters of future. A day may come, when legislation may take a hard stance against these environmental culprits and may order the closer of these units. Almost 150 SSI units around Agra and Delhi were forced to close down for their non-compliance to the mandated environmental standards. In such an eventuality, the industries cannot be rescued from becoming the non-performing ones, as the banking institutions continue to overlook these aspects. 9) GREEN BANKING:BANGLADESH INITIATIVES: It is observed that there is a growing awareness among banks and financial institutions to protect the environment and thereby save 'mother planet'. Big banks are committing large funds on a sustainable basis in responsible banking, creating more values for our next generation. They are shifting forward from 'profit' to 'people' and now more importantly, to create a better future for all. The sooner this philosophy of 'green banking' is embraced, the better it is for all. All scheduled banks have already taken initiative to implement Green Banking Policy in their operation and business. Amongst 04 (fourty eight) scheduled banks in Bangladesh following banks have started their operation in this regard with the refinance policy of Bangladesh Bank: 1. Prime Bank Limited 2. Mercantile Bank Limited 3. Mutual Trust Bank Limited 4. Trust Bank Limited 5. National Bank Limited Al-Arafah Islami Bank Limited has also started their Green Banking operation but they are not taking re-finance due to their Islami Banking Policy. 10) BANKERS’ ROLE IN IMPLEMENTING GREEN BANKING: Now a days, most of the commercial lending process in different parts of the world scrutinizes projects with a set of tools by incorporating environmental concerns in their day-today business14. The financial institutions should encourage projects which take care of following points while financing them viz., (a) sustainable development and use of natural renewable natural resources (b) protection of human health, bio-diversity, occupational health and safety, efficient production, delivery and use of energy (c) pollution prevention and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management and (d) there should be a third party expert to draw a plan for the environment management plan. They should keep following aspects in mind while financing any projects— 1. Analyzing the project in terms of scale, nature and the magnitude of environmental impact. The project should be evaluated on the basis of potential negative and positive environmental effects and then compared with the ‘without project situation’. There should be an Environmental Impact Assessment (EIA) of each project recommending the measures needed to prevent, minimize and mitigate the environmental negative impact before financing the projects. 2. While investing or funding the projects, the financial institutions should assess the sensitive issues like vulnerable groups; involuntary displacement etc and projects should be evaluated in terms of environmentally important areas including wetlands, forests, grasslands and other natural habitats. 3. Banking institutions need to evaluate the value of real property and the potential environmental liability associated with the real property. Therefore, the banks should have right to inspect the property or to have an environmental audit performed through the life of the loan. 4. Banks also need to monitor post transaction for the ideal environmental risk management program (Rutherford, 1994) during the project implementation and operation. There should be physical inspections of production, resources, training and support, environmental liability, audit programs etc 5. The next round of evaluation includes loan structuring, credit approval, credit review and loan management. Further banks have annual audits, quarterly environmental compliance certificate from the independent third party and also from the government. Further the banks can introduce green bank loans and products like (i) investing in environmental projects (recycling, farming, technology, waste, etc) for example reduced-rate of interest on loans to homeowners who install a solar energy system (ii) providing option for customers to invest in environmentally friendly banking products (iii) investing in resources that combine ecological concerns and social concerns. 11) CONCLUSION: In a rapidly changing market economy where globalization of markets has intensified the competition, the industries and firms are vulnerable to stringent public policies, severe law suits or consumer boycotts. This would affect the banks and financial institutions to recover their return from investment. Thus, the banks should play a pro-active role to take environmental and ecological aspects as part of their lending principle which would force industries to go for mandated investment for environmental management, use of appropriate technologies and management systems. Green Banking if implemented sincerely will act as an effective ex ante deterrent for the polluting industries that give a pass by to the other institutional regulatory mechanisms. The banking and financial sector should be made to work for sustainable development. It is time we took decisive steps to gradually adhere to green banking guidelines that use environment-sensitive parameters, apart from financial, to fund projects. ***