Legal Status of Bank Lending Activities in Relation to Environmental Issues

green growth strategy for the period 2014-2020. To implement this strategy, the State Bank of Vietnam (SBV) is assigned the task of perfecting institutions and enhancing the financial and credit capacity of commercial banks to serve green growth. Accordingly, the SBV issued Directive No. 03/CT-NHNN on promoting green credit growth and managing environmental and social risks in credit activities (March 2015) and the Action Plan of the banking sector to implement the National Strategy on Green Growth to 2020 (August 2015). These policies encourage credit institutions to proactively develop policies on environmental and social risk management as well as implement solutions to promote green credit growth. However, by 2016, only 3 banks had or were developing internal policies on environmental and social risk management.

The fact that banks have not paid attention to environmental and social standards in lending activities is partly due to the lack of comprehensive regulations in Vietnamese law directly related to the need for banks to consider environmental and social risks for credit loans. Most legal documents only focus on the responsibility of units that directly cause pollution. This has led to a subjective mentality of credit officers when conducting appraisals without paying attention to assessing environmental risks. Strict control right from the credit appraisal stage can limit environmental and social risks through the decision to agree or refuse to lend capital to projects with bad signs. Therefore, a legal regulation plays a very important role in determining the joint responsibilities of banks in the face of environmental incidents. From there, banks will need to be more careful in their lending decisions so that credit can reach investors in a "quality" manner, while ensuring legally binding conditions on green criteria and environmental friendliness.

Chapter 2: Legal status of bank lending activities in relation to environmental issues

2.1. Legal status of lending activities for investment projects with high environmental risks

For projects with high risks to the environment, Vietnam's environmental laws have quite strict and detailed regulations on the process of appraisal, approval and implementation of strategic environmental assessment (SEA), environmental impact assessment (EIA) and environmental protection plan. However, in these regulations, the role of banks in the whole process of developing and supervising the implementation of these assessments has not been mentioned.

In the regulations on bank capital provision processes, including regulations on lending conditions, non-borrowed capital needs, regulations on appraisal, approval of lending decisions, monitoring of the lending process, use of loans and cases of loan termination, environmental factors have not yet been incorporated into the main regulations.

2.1.1. Regulations on the role of banks in the process of appraisal, approval and implementation of environmental protection commitments

Decree 18/2015/ND-CP of the Government regulating environmental protection planning, strategic environmental assessment, environmental impact assessment and environmental protection plans has quite detailed regulations on the process of appraisal, approval and implementation of environmental protection commitments as stipulated in the Law on Environmental Protection 2014. In particular, Article 20 of this Decree stipulates the financial regime in this field. Accordingly, the source of costs for conducting environmental impact assessment is taken from the project's investment source, the source of costs for implementing environmental protection plans is also arranged from the project's investment source, production and business plan. So, where is the main source of investment for the project mobilized? The answer is from credit institutions, mainly from the lending business of banks themselves.

Therefore, the fact that banks do not pay attention to environmental issues will affect the implementation of environmental commitments of project owners. If banks only provide capital and do not participate in the process of using capital of project owners for the purpose of implementing approved environmental protection commitments, the implementation of these commitments will only be effective depending on the awareness of project owners. More detailed legal regulations on the role and responsibility of banks in supervising the process of using capital of project owners for the purpose of implementing environmental protection commitments are very necessary. Because, current legal regulations only use very general terms such as " Getting opinions from political-social organizations, social organizations, socio-professional organizations, and relevant experts" [5, Article 10] without specifying any specific organizations or individuals.

The regulations on public consultation are only at the level of encouragement or formality, the responsibility for appraisal and approval still belongs to the competent state agencies. The responsibility for implementing the approved commitments in the environmental protection commitments only belongs to the project owners. Meanwhile, the responsibility of the related parties, including the bank as the capital provider, has not been regulated. This is a loophole that makes banks not interested in assessing environmental and social risks when providing investment capital for projects.

2.1.2. Regulations on bank lending procedures for projects with high environmental risks

Directive 03/2015/CT-NHNN on implementing green credit has opened up new hopes in building a greener banking credit system, serving the green growth trend and protecting the living environment. However, although it has been issued for nearly 2 years, the effectiveness of this directive is still very modest. One reason for the low effectiveness of this directive is that this directive is only at the level of encouragement, not mandatory implementation, still depending on the awareness of the banks themselves.

In addition, the lending regulations for domestic credit institutions and foreign bank branches issued together with Circular 39/2016/TT-NHNN were issued after Directive 03/2015/CT-NHNN but did not specify the provisions in this Directive. This lending regulation is mandatory, banks must strictly comply with the provisions in this regulation. Therefore, if the provisions in Directive 03 can be integrated into this lending regulation, it will bring higher practical efficiency, forcing banks to consider more carefully in their lending decisions, if they do not want to violate the law and affect their reputation.

2.1.2.1. Regulations on lending conditions

The lending regulations issued with Circular 39/2016/TT-NHNN stipulate the following loan conditions:

“Credit institutions consider and decide to lend when customers meet the following conditions:

1. The Customer is a legal entity with civil legal capacity as prescribed by law. The Customer is an individual from 18 years of age or older with full civil act capacity as prescribed by law or from 15 years of age to under 18 years of age who has not lost or had limited civil act capacity as prescribed by law.

2. Need to borrow capital for legal purposes.

3. Have a feasible capital usage plan.

4. Have the financial ability to repay the debt”. [10, Article 7]

Regulations on lending conditions are the source for banks to build their lending procedures later. Based on the regulations on lending conditions, banks will specify these conditions in the appraisal, approval, lending and monitoring processes. However, looking at the above regulations, it can be seen that banking law still stops at specialized regulations, which only aim to ensure the debt recovery ability of banks. Factors

Other factors, including environmental and social factors, have not yet been specified in this lending condition. It all depends on the banks' awareness when building their own internal regulations.

Currently, banks have a black credit list, which includes customers with a bad credit history, who do not repay their debts on time, are late many times, or bankrupt businesses that are unable to pay their debts. In China, after the "green credit" policy was issued, banks have compiled a list of production and business establishments and businesses with a history of causing environmental pollution into the black credit list, restricting lending. This action demonstrates China's strong determination in controlling environmental pollution, a pressing issue today in this populous country with the second largest economy in the world. Therefore, banks in Vietnam should also consider creating a black list of businesses and business establishments with a history of causing environmental pollution in their lending activities, not just stopping at customers who do not pay their debts.

2.1.2.2 Regulations on appraisal, approval and lending decision process

The new lending regulations issued with Circular 39/2016/TT-NHNN replace the old lending regulations, giving banks more initiative in their lending process.

According to Circular 39/2016/TT-NHNN, credit institutions have the right and obligation to issue internal lending regulations, including the loan appraisal process for customers, in accordance with the provisions of law and ensuring clear division of responsibilities between the appraisal and loan decision stages.

Loan application appraisal is a process that includes many different tasks such as checking the financial capacity of the borrower, checking the ability to recover capital from the projects that the borrower borrows capital to implement, checking the assets used to secure the loan capital, etc. The results of consultations from banks (in Hanoi) show that the Environmental - Social factors (risks) have been somewhat considered and integrated in the

process of appraising loan proposals. For BIDV, this bank does not approve credit for projects that have not been included in the planning, while Vietcombank only approves credit for projects that have been approved for environmental impact assessment, and at the same time, project owners are also required to provide information related to technology and environment in the loan application. This is a common situation when banks only stop at checking whether the loan application project has been approved (reported) for EIA or not. On the one hand, credit institutions believe that the function of assessing and appraising environmental risks belongs to state agencies responsible for environmental management; on the other hand, banks believe that (their) credit officers do not have the expertise to be able to appraise the impacts of projects on the environment and society, and in fact, the assessment depends a lot on the experience of credit officers. The legal responsibility of the appraisers has also only stopped at crimes such as negligence causing serious consequences, mainly due to losses for the bank. The legal responsibility of the bank itself or the appraisers in projects causing environmental pollution has not been considered.

Table 1 - Appraisal contents for projects proposed for loans by Vietcombank

STT

Appraisal content
1.	Customer capacity and experience
2.	Technology process and production equipment
3.	Input materials and supply markets
4.	Electricity, water and fuel supplies
5.	Labor supply
6.	Contractors implementing the project
7.	Market for products and services
8.	Environmental problems and mitigation solutions
9.	Total investment and project capital structure
10.	Financial performance and debt repayment capacity of the project

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• Pre-tax Profit of Bidv Tien Giang in the Period 2011-2015 zt2i3t4l5ee zt2a3gsnon-credit services, joint stock commercial bank zt2a3ge zc2o3n4t5e6n7ts At that time, the Branch had to set aside a provision for credit risks, which reduced the Branch's income. Chart 2.2. Pre-tax profit of BIDV Tien Giang in the period 2011-2015 Unit: Billion VND 140 120 100 80 60 40 20 0 63.3 80.34 89.29 110.08 131.99 2011 2012 2013 2014 2015 Profit before tax (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, through chart 2.2, it can be seen that BIDV Tien Giang's profit is still increasing continuously, and its operating efficiency is currently leaking. This is a contribution of non-credit services, and this service segment will be increasingly focused on growth by BIDV Tien Giang to ensure the highest profit safety because credit activities have many potential risks. At the same time, focusing on developing non-credit services is consistent with one of the contents of restructuring the financial activities of credit institutions in the project "Restructuring the system of credit institutions in the period 2011-2015" approved by the Prime Minister in Decision No. 254/QD-TTg dated March 1, 2012 [14]: "Gradually shifting the business model of commercial banks towards reducing dependence on credit activities and increasing income from non-credit services". 2.2. Current status of non-credit service development at BIDV Tien Giang. 2.2.1. BIDV Tien Giang has deployed the development of non-credit services in recent times. Along with the development of the Head Office, BIDV Tien Giang's products and services are constantly improved and deployed in a diverse manner to ensure provision for many different customer groups in the area: individual customers, corporate customers, and financial institutions. Typical services are as follows: Payment services, treasury services, guarantee services, card services, trade finance, other services: Western Union, insurance commissions, consulting services, foreign exchange derivatives trading, e-banking services,... 2.2.1.1. Payment services: In accordance with the Prime Minister's Project to promote non-cash payments in Vietnam [15], banks in Tien Giang province have continuously developed payment services to reduce customers' cash usage habits through card services and electronic banking services such as: salary payment through accounts, focusing on developing card acceptance points, developing multi-purpose cards, paying social insurance by transfer, paying bills through banks, etc. Chart 2.3. Net income from payment services in the period 2011-2015 Unit: Million VND 6000 5000 4000 3000 2000 1000 0 3922 4065 4720 5084 5324 2011 2012 2013 2014 2015 Net income from payment services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Along with the technological development of the entire system, BIDV Tien Giang has a payment system with a fairly stable transaction processing speed, bringing many conveniences to customers. The results of observing chart 2.3 show that the income from payment services that the Branch has achieved has grown over the years but the speed is not high and the products are not outstanding compared to other banks. Domestic payment products such as: Online bill payment, electricity bills, water bills, insurance premiums, cable TV bills, telecommunications fees, airline tickets, etc. bring many conveniences to customers. Regarding international payment, this is an indispensable activity for foreign economic activities, BIDV Tien Giang is providing international payment methods for small enterprises producing agriculture, aquatic food and seafood that have credit relationships with banks in industrial parks in Tien Giang province such as: money transfer, collection, L/C payment. 2.2.1.2. Treasury services: BIDV Tien Giang always focuses on ensuring treasury safety and currency security, always complies with legal regulations, and minimizes risks in operations such as: counting and collecting money from customers, receiving and delivering internal transactions, collecting from the State Bank (SBV) or other credit institutions, receiving ATM funds, bundling money, etc. BIDV Tien Giang's treasury service management department is always fully equipped with modern machinery and equipment such as: money transport vehicles, fire prevention tools, money counters, money detectors, magnifying glasses, etc. to ensure absolute safety in treasury operations, immediately identifying real and fake money and other risks that may affect people and assets of the bank and customers. In addition, implementing regulation 2480/QC dated October 28, 2008 between the State Bank of Tien Giang province and the Provincial Police on coordination in the fight against counterfeit money, in the 3-year review of implementation, BIDV Tien Giang discovered, seized and submitted to the State Bank of Tien Giang province 475 banknotes of various denominations and was commended by the Provincial Police and the State Bank of Tien Giang province [17]. Chart 2.4. Net income from treasury services in the period 2011-2015 Unit: Million VND 350 300 250 200 150 100 50 0 105 122 309 289 279 2011 2012 2013 2014 2015 Net income from treasury services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, as shown in Figure 2.4, income from treasury operations is not high and fluctuates. Specifically, in the period 2011-2013, net income increased and increased most sharply in 2013, then in the period 2013-2015, there was a downward trend. This fluctuation is due to the fact that fees collected from treasury services are often very low and can even be waived to attract customers to use other services. 2.2.1.3. Guarantee and trade finance services: BIDV Tien Giang, thanks to the advantages of the province and the favorable location of the Branch, has continuously focused on developing income from guarantee services and trade finance. Chart 2.5. Net income from guarantee and trade finance services in the period 2011-2015 Unit: Million VND 14000 12000 10000 8000 6000 4000 2000 0 5193 5695 2742 3420 8889 3992 11604 12206 5143 5312 2011 2012 2013 2014 2015 Net income from guarantee services Net income from Trade Finance (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.5, we can see that BIDV Tien Giang's income from guarantee services and trade finance has grown over the years. The reason is: Among BIDV Tien Giang's corporate customers, the construction industry is the industry with the highest proportion of customers after the trading industry, this is a group of customers with potential to develop guarantee services. The second group of customers is corporate customers in the fields of agricultural production, livestock and seafood processing with high import and export turnover in the area. are the target of trade finance development. In addition, BIDV Tien Giang also focuses on continuously developing these customer groups to increase revenue for many other products and services in the future. 2.2.1.4. Card and POS services: As a service that BIDV Tien Giang has recently developed strongly, it can be said that this is a very potential market and has the ability to develop even more strongly in the future. Card services with outstanding advantages such as fast payment time, wide payment range, quite safe, effective and suitable for the integration trend and the Project to promote non-cash payments in Vietnam. Cards have become a modern and popular payment tool. BIDV Tien Giang early identified that developing card services is to expand the market to people in society, create capital mobilized from card-opened accounts, contribute to diversifying banking activities, enhance the image of the bank, bring the BIDV Tien Giang brand to people as quickly and easily as possible. BIDV Tien Giang is currently providing card types such as: credit cards (BIDV MasterCard Platinum, BIDV Visa Gold Precious, BIDV Visa Manchester United, BIDV Visa Classic), international debit cards (BIDV Ready Card, BIDV Manu Debit Card), domestic debit cards (BIDV Harmony Card, BIDV eTrans Card, BIDV Moving Card, BIDV-Lingo Co-branded Card, BIDV-Co.opmart Co-branded Card). These cards can be paid via POS/EDC or on the ATM system. In addition, with debit cards, customers can not only withdraw money via ATMs but also perform utilities such as mobile top-up, online payment, money transfer,... through electronic banking services. In order to attract customers with card services, BIDV Tien Giang has continuously increased the installation of ATMs. As of December 31, 2015, BIDV Tien Giang has 23 ATMs combined with 7 ATMs in the same system of BIDV My Tho, so the number of ATMs is quite large, especially in the center of My Tho City, but is not yet fully present in the districts. Basic services on ATMs such as withdrawing money, checking balances, printing short statements,... BIDV ATMs accept cards from banks in the system. Banknetvn and Smartlink, cards branded by international card organizations Union Pay (CUP), VISA, MasterCard and cards of banks in the Asian Payment Network. From here, cardholders can make bill payments for themselves or others at ATMs, by simply entering the subscriber number or customer code, booking code that service providers notify and make bill payments. Chart 2.6. Net income from card services in the period 2011-2015 Unit: Million VND 3500 3000 2500 2000 1500 1000 500 0 687 1023 1547 2267 3104 2011 2012 2013 2014 2015 Net income from card services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.6, it can be seen that BIDV Tien Giang's card service income is constantly growing because the Branch focuses on developing businesses operating in industrial parks, which are the source of customers for salary payment products, ATMs, BSMS. Specifically, there are companies such as Freeview, Quang Viet, Dai Thanh, which are businesses with a large number of card openings at the Branch, contributing to the increase in card service fees [25]. Table 2.6. Number of ATMs and POS machines in 2015 of some banks in Tien Giang area. Unit: Machine STT Bank name Number of ATMs Cumulative number of ATM cards POS machine 1 BIDV Tien Giang 23 97,095 22 2 BIDV My Tho 7 21,325 0 3 Agribank Tien Giang 29 115,743 77 4 Vietinbank Tien Giang 16 100,052 54 5 Dong A Tien Giang 26 97,536 11 6 Sacombank Tien Giang 24 88,513 27 7 Vietcombank Tien Giang 15 61,607 96 8 Vietinbank - Tay Tien Giang Branch 6 46,042 38 (Source: 2015 Banking Activity Data Report of the General and Internal Control Department of the Provincial State Bank [21]) Through table 2.6, the author finds that the number of ATMs of BIDV Tien Giang is not much, ranking fourth after Agribank Tien Giang, Dong A Tien Giang, Sacombank Tien Giang. The number of POS machines of BIDV Tien Giang is very small, only higher than Dong A Tien Giang and BIDV My Tho in the initial stages of merging the BIDV system. Besides, BIDV Tien Giang has a high number of cards increasing over the years (table 2.7) but the cumulative number of cards issued up to December 31, 2015 is still relatively low compared to Agribank, Vietcombank, Dong A (table 2.6). div.maincontent .content_head3 { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: bold; text-decoration: none; font-size: 14pt; } div.maincontent .p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent .s1 { color: black; font-family:"Courier New", monospace; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; } div.maincontent .s2 { color: black; font-family:"Times New Roman", serif; font-style: italic; font-weight: normal; 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• Solutions to improve the quality of consumer lending activities at Vietnam Prosperity Joint Stock Commercial Bank - 2

Directive 03/2015/CT-NHNN has regulations for banks to consider environmental and social risks of investment projects during the approval and funding process. This Directive stipulates that when appraising projects, credit institutions should base on environmental and social regulations of relevant ministries and branches to consider and assess environmental and social risks that projects may bring such as " abuse of resources and energy, causing pollution of the natural environment, imbalance of ecosystems, climate change, damage to cultural heritage, threats to safety, security and health of people and communities, unequal labor and forced resettlement " [9, section 4]. However, these regulations have not been specified in any other legal documents, and are still only at the level of encouragement.

On the other hand, the fact that the law allows banks to develop their own criteria in the capital appraisal process, while there are no necessary regulations to control this appraisal process, makes all the regulations in Directive 03 become formal and impractical. For example, Vietcombank has regulations on environmental criteria in the appraisal content, but there is no legal corridor to guide or allow banks to participate in the appraisal process, approve and implement environmental protection commitments of project owners that the bank provides capital. Banks still have to depend on approved environmental impact assessment reports to determine the environmental and social risks that the project may cause, while in the whole process of developing and implementing these reports, banks are not allowed to participate in a formal manner based on legal regulations.

In addition, a reality that makes the process of appraising bank loan applications for projects with environmental risks difficult is that large projects in industries with high risks to the environment such as hydropower, mining, and oil and gas are currently carried out by state-owned corporations such as the General Corporation.

Vietnam Minerals Corporation Vinacomin, Vietnam Oil and Gas Corporation, Vietnam Electricity Group EVN deploy and implement. Meanwhile, large banks accounting for more than 50% of the market share in Vietnam have charter capital mainly represented by the state. Therefore, when conducting appraisals for projects invested by these companies, these banks are in a more passive position than lending to normal projects. Publicity and transparency in the operations of enterprises with capital represented by the state is a prominent issue but has not yet been resolved in Vietnam. Banks themselves are also affected by this issue.

For example, in the case of the Vietnam Development Bank (VDB), this bank lent the Vietnam Electricity Group (EVN) capital to invest in the Vinh Tan 2 thermal power project, with a loan amount of up to 7,500 billion VND. This project started construction in August 2010 and went into operation in March 2015[11]. After only 1 year of operation, the Vinh Tan 2 thermal power plant has caused many environmental problems related to slag dumps, ash and dust in the air. Every day, the two generators discharge nearly 4,000 tons of coal slag but are not transported properly to the slag dump of several dozen hectares. Smoke and coal slag cover the houses and trees of local people. Due to environmental problems, the project had to be suspended many times. The cost for each restart of the system is up to billions of VND.[6]

2.1.2.3. Regulations on the process of checking and monitoring the borrowing process and loan use

According to the provisions of the new lending regulations issued under Circular 39/2016/TT-NHNN, the internal regulations of banks must include the content of " Procedures for checking and supervising the process of borrowing, using loans and repaying debts of customers; decentralization, authorization and responsibility of each individual and department in checking and supervising the process of borrowing, using loans and repaying debts of customers " [10, Article 22]