Date: Sept. 6, 2010 Source: Board of Directors
After the global financial crisis, banks began to reflect on their current operation concepts and business modes, asking the questions: what kind of business logic can bring about a unity in social and corporate benefit? What kind of business mode can bring about sustainable commercial gain? How can “irrational impulses” be prevented in innovation? For China, which is now undergoing a key period of economic restructuring and the transformation of its development mode, such refection is of vital importance.
Over the past few years, the Industrial Bank has started a boom of “green finance” in China's banking industry, and has launched a series of moves and experiments in the innovation of its business modes. Behind these seemingly complicated innovations, the business logic of sustainable finance is highly apparent.
Gao Jianping: seek the true meaning of sustainable development
As climate issues have come to bear an impact on the future of humanity, concepts such as low carbon economies and environmental protection have gradually become universally accepted. However, the question of how harmonious development among the economy, environment, society and enterprises can be achieved and how the relationship between corporate social responsibility and corporate profit can be balanced is still lacking a convincing answer.
Can social responsibility and corporate development co-exist? The actions of some socially responsible business leaders have managed to ease our worries. An apt example of this is the practice of the Industrial Bank.
The lesson that the Industrial Bank has given us is like this: in a society with sound public order, enterprises that integrate morals into their quest for profits (namely to provide products and services that cater to social demand) will not only aid the sustainable development of society but will also provide a foundation for their own commercial gain and sustainable development.
New Value Proposition - Sustainable Development
Board of Directors: 22 years ago, the Industrial Bank emerged in a corner of Southeast China. With the changes in the structure of the banking industry, the Industrial Bank rose rapidly to secure a place among the top 10 domestic banks. The bank's initiatives in green finance have won a great deal of attention. What kind of force is driving the bank on in this regard?
Gao Jianping: Our bank has always placed an emphasis on our responsibility to the country and society. When we were established, we set the business tenet of “exploring a path for financial reform and making a larger contribution to economic development”, the management principle of “operating steadily, honestly and in line with the law” and the operation philosophy that “the state needs tax revenue, shareholders need profits, employees need income and the enterprise needs development”. This was a fairly simple understanding of social responsibility. Later, as the company grew, our understanding of social responsibility became deeper and deeper. Our recent efforts in green finance, which are characterized by business mode innovation, represent an enhancement and a product of our previous efforts in regard to social responsibility.
In practice, green finance hasn't become a financial burden for the bank; instead, it has opened up a new domain of business with quality assets and new income sources. In addition, with our increased understanding of the essence of green finance, sustainable development has become a guiding principle of the bank that is influencing its operations and process reconstruction.
Board of Directors: The sun doesn't set on industries or enterprises; it only sets on ways of thinking. How did IB come to develop this idea of pursuing sustainable development?
Gao Jianping: Our knowledge of the concept of sustainable development derives from our years of practice and our unremitting efforts to identify a more competitive business mode. In our years of experience, we recognized that committing to the sustainable development of the economy, environment and society was the fundamental means for the bank to lay-down long standing foundations and secure its own sustainable development. An enterprise is a unit of society. It cannot exist and develop independently outside of society. Only by binding the interests of the company with the interests of society can an enterprise realize sustainable development. We believe that if we treat society and our stakeholders in a responsible manner, we will receive fair payment in return.
In 2006, when we cooperated with the IFC to develop energy saving and emissions reducing loans, we were primarily interested in the competitiveness of the new product and the new business mode that it represented. Subsequently, in the course of in-depth interactions with the government, enterprises as well as communities and non-governmental organizations during product promotion, we gradually came to understand the essence of green finance and the concept of sustainable development embodied therein. We then began to introduce this concept into our corporate governance step by step, proposed a mode of fulfilling social responsibilities called “Integrating Morals into Profits”, and took this as a basis for further innovation in regard to business modes.
Board of Directors: Sustainable development calls for innovation in regard to business modes as well as a striking value proposition. What kind of value does IB want to send out to the public through its products, services and returns?
Gao Jianping: During our practice of sustainable development, we strongly advocate such a value proposition:
Firstly, the bank should be responsible for securing steady returns for shareholders, carefully managing their investments and satisfying their requirements with value growth; secondly, the bank should regard serving customers as its mission, accurately ascertain customer needs and changes, and do its best to help customers realize value growth and sustainable development; thirdly, the bank should not only offer employees basic payment, but should also regard their development as its obligation, respect employees and their contributions, be committed to heightening their sense of achievement and helping them to grow; fourthly, the bank should establish a sound concept of competition and cooperation. Competition is not about everybody losing out or even about there being a winner and a loser. Instead, based on competition and cooperation, everybody should come out on top; finally, the bank should abide by laws and regulations, follow the highest code of business ethics, show concern for social welfare and promote social harmony.
Board of Directors: How do you come to realize the business values that you perceive and propose?
Gao Jianping: A value proposition has to be realized through specific operations. At the Industrial Bank we have always adhered to a business mode innovation principle. Namely, to run business in the correct way, be aware of and promptly address stockholder concerns, take full advantage of a bank's special strengths and influence in economic and social development, promote work in all areas by drawing upon the experience gained on key points and urge other enterprises and even the whole industry to show concern for and actively fulfill their social responsibilities. For years, we have adhered to such practice. Whether you are looking at energy saving and emissions reducing loans or the Bank-Bank Platform, these are typical cases of IB's fulfillment of social responsibility and realization of business value.
Practicing social responsibility by “Integrating Morals into Profits”
Board of Directors: There are many ways for an enterprise to fulfill its social responsibilities. How do you find the mode that's best for you?
Gao Jianping: The ways and methods that enterprises fulfill their social responsibilities are determined by various factors, such as the age they operate in, environment, culture, development phase and the philosophy of the core decision-making level. Regarding specific methods, there is no divide between good and bad. The important thing is that it should suit the requirements of times and environment and accord to the development of the enterprise.
Summing up with abstract theory, the mode of the enterprise's fulfillment of social responsibilities can be divided into three types: classic, reactive and strategic. The classic type holds that the enterprise shall adhere to the principle of shareholders first and that its single responsibility is to make money lawfully for shareholders. The reactive type refers to passively formulating codes of responsibility as a result of social pressure to conform, or to cater to the needs of various interest groups by conducting environmental, occupational health and social responsibility certification. The strategic type refers to the fulfillment of social responsibility in an active manner. Namely, binding the enterprise's business interests with social interests by means of value chain innovation, such as product or service innovation, technology innovation and process innovation, and seeking business opportunities whilst committing to sustainable environmental and social development, thereby promoting the sustainable development of the enterprise. These three types represent a process of progressive development.
Board of Directors: The strategic mode appears to be the most superior, and the best suited to current social and economic trends.
Gao Jianping: The strategic mode of enterprise social responsibility is a developmental phase that emerges once society, economy and the enterprise develop to a certain stage and possess significant resource, technological and economic strength. Through proactive management, the strategic mode links corporate social responsibility, corporate development strategy and corporate business mode to provide a boost of vitality. After three decades of reform and opening up, China's economy and society have undergone massive changes. Especially over the past decade, social responsibility has gradually become a consensus and an important part of the business environment that enterprises operate in. For many enterprises, especially those with significant strength and market competitiveness, adopting the strategic mode of enterprise social responsibility not only falls in line with current social and economic development trends but is also important for the development of the company as well.
Board of Directors: What kind of a strategic mode of social responsibility has the Industrial Bank established?
Gao Jianping: Only by seeing an enterprise's social responsibility from a strategic perspective can we exert the most positive impact on society and realize our own sustainable development. Based on this realization, IB proposed the social responsibility fulfillment mode of “Integrating Morals into Profits”, that is, “linking social responsibility with the bank's business and implementing it in the specific operations of the bank; seeking business opportunities and exploring a sustainable and expandable business mode and social responsibility mode that allows mutual benefit between the bank and society.” By establishing such a strategic social responsibility approach and promoting it in practice, we hope that we can exert the most positive impact on society as we obtain rational business gains, and thereby realize harmonious development between people and nature and between business and society.
Green Concept: IB's sowing and harvesting
Green wasn't there as a core value of IB from the start, nor did it appear suddenly. Instead, this concept developed and deepened gradually as the bank grew. After two decades of growth, IB has realized a four-stage leap-forward from a local bank to a regional bank, a national bank and finally to a listed bank. Its corporate governance concept has also undergone a three-stage development from putting shareholders' interests first to taking account of stakeholders and finally to advocating the fulfillment of social responsibility in multiple ways and promoting the sustainable development of the economy, environment and society. The external factors that have driven the formation and development of the bank's corporate governance concept have been the gradual advance of the reform and opening up movement into the micro-operation of companies and increasingly sound laws and corporate regulations. Intrinsically, an important driving force has been the change in equity structure and corporate governance structure.
Stage 1: putting shareholder interests first
This stage spanned from the bank's establishment in 1988 to the mid/late 1990s. In response to national economic and financial reform, IB was established by contribution from an initiator and then continued to attract new investors to expand its stock. This provided the foundations for the early growth of the bank. At that time, IB's corporate governance aim can be summed up as maximization of shareholders' interests which was reflected by high dividend payout ratio, allowing shareholders to share the bank's benefits gained from the growth.
IB was established in the form of a joint-stock company from the very beginning, which was a pioneering innovation in the 1980s when China was essentially still a planned economy. This enabled IB to be more intimate with market, and laid down sound foundations for future development. However, there is no denying that in those days, the essence of the modern corporate system was not understood in China. We had no experience or reference in constructing a sound corporate governance system. The first group of domestic joint-stock enterprises, including IB, essentially had to make it up and learn as we went along. IB had introduced the basic structure of modern corporate governance. But constrained by the historical backdrop of that time, our corporate governance concepts and operation were hardly perfect. The company tended to emphasize the demand for profit among shareholders and seldom considered the sustainable development of the bank and society in general. A typical example of this is that up to the year 2000, the annual profit distribution ratio of the bank was around 70%. Little consideration was given to capital adequacy and long-term accumulation, let alone enhancing the inner accumulation rate to support the bank's rapid growth and enhance bad debt coverage to guard against risks and support sustainable development.
Stage 2: taking account of stakeholders
Starting from 2000, IB gradually realized that as a special form of public-oriented enterprise, a commercial bank benefits from the support of shareholders, clients, employees and society, and that its business performance has a direct impact on their interests. Thus, the aim of corporate governance should not just be to satisfy shareholders. It should also take account of the common interests of all stakeholders.
For the past decade, China's economy has continued to develop rapidly and the nation's banking reform has gradually deepened with increased openness to foreign markets. With strategic optimization aimed at boosting their own development, commercial banks are becoming less government oriented and more market oriented and diverse. Now, banks in China are actually worthy of the name banks. Corporate governance was a core part of China's commercial bank joint-stock system reform. Commercial bank ownership structures are more rational, organization systems and operation mechanisms are healthier and the capital market's restraint on banks is more obvious. In reference to the international advanced banks, corporate governance in China began to align itself more in spirit and not just form, and improved constantly.
This was also a key decade for IB in which it transformed its operation mechanisms. IB conducted private financing in 2001 and 2003 which increased share capital from RMB 1.5 billion to RMB 3.999 billion and resulted in major changes to the ownership structure, which promoted the improvement in the structure and functions of the Board of Directors and helped to enhance the bank's operational philosophies.
In 2000, in consideration of both internal and external changes, the Bank proposed the strategy of becoming a nationwide and modernized bank. With this, the Bank set out on a quest to operate on a nationwide scale. In order to achieve this goal, the bank increased capital and shares to take its registered capital to RMB 3 billion. This time, the proposed investors were large-scale industrial and mining businesses from outside Fujian Province, including CEC, Guohua Energy, the Baosteel Group and the China Merchants Group. Some emerging private enterprises, like Septwolves, were also among them.
The more diverse ownership structure resulted in a shift in the interests sought by the bank. The bank's operation guidelines, development strategy, business process and profit distribution mode all underwent changes that reflected such a shift. Regarding profit distribution, the bank began to emphasize the combination of shareholders' current interests and long-term interests. The profit distribution ratio was adjusted accordingly, remaining at around 25%. Afterwards, with the dramatic growth after China's economic transition and entering a new century, IB rapidly expanded across the nation, with 3 to 4 new branches emerging every year.
In 2002, a new round of capital increase was put on the agenda. This time, IB chose to introduce foreign strategic investors. At that time, most banks were choosing to go public as a means of increasing capital. After prudent deliberation, IB deemed that improving the ownership structure and strengthening the foundations of corporate governance foundation were a more pressing issue, and thus decided to adopt the strategy of introducing strategic investors first and going public second.
After tough negotiations, IB signed an investment agreement with the Hong Kong Hang Seng Bank, IFC and GIC December 2003, which increased stock by of 999 million shares and raised RMB 2.6973 billion. This investment introduction scheme set new records for Chinese commercial banks in several areas, including: most foreign shareholders introduced in a single time, the highest proportion of shares and the largest amount of foreign investment.
The introduction of foreign strategic investors, especially the introduction of independent directors and foreign directors, played a major role in the optimization of Board of Directors' knowledge structure and the improvement of corporate governance. IB gradually became a modern commercial bank with international insight and employing an international operation mode.
In this stage, IB took effective measures to protect stakeholder interests, for example, being the first to take out senior executive liability insurance and bank property insurance in the industry. The rate of non-performing assets dropped year-on-year and the NPL provisioning rate was very high. This went a long way in ensuring good investment returns for investors and protecting the interests of consumers. In this way we safeguarded the interests of the bank and stakeholders. At the same time, the bank enhanced employee training and career planning, protected their lawful rights and interests, and helped them to fulfill their potential; also, the bank was active in social and public undertakings and acted as a responsible corporate citizen.
Stage 3: fulfill social responsibility in multiple ways and promote sustainable development of the economy, environment and society
For the past few years, especially in the context of global climatic change and environmental degradation, IB began to give more thought to the relationship between stakeholders and the sustainable development of the bank, and proposed a new corporate governance concept of “actively exploring diverse ways to fulfill the bank's social responsibilities and seeking a balance between people and nature and environment and society”. This provided a conceptual basis for the sustainable development of the bank.
In May, 2006, IB signed a cooperative agreement with IFC in Shanghai to jointly launch energy efficiency financing in China. The agreement integrates the market-oriented financing strengths, utility service strengths and risk management strengths of the Industrial Bank and the IFC. In response to demand in China for financing for energy saving technology application and circular economic development, an innovating loan principal loss sharing mechanism was created. According to the agreement, if a loan turned into a non-performing loan, IFC was willing to share the loan principal losses based on an agreed proportion. This way it supported a loan portfolio as large as RMB 460 million Yuan. This is the first time that the IFC carried out energy efficiency financing projects in China with a market-oriented operation mode, and represented an all new attempt of the Industrial Bank in the development and promotion of green credit.
Before this, due to the fact that the industries where energy efficiency financing projects were required were often restricted by the nation's macro control of natural resources and companies with high energy consumption and companies with high pollution, banks were often unable to provide financing with a lack of policy support. Meanwhile, because a mature domestic carbon transaction market was yet to emerge and transaction rules were unclear, domestic financial institutions found it hard to further develop this business. The result was that a number of energy saving and emissions reducing and environmental protection projects had to be shelved due to a lack of funding. When IB approached the IFC about energy saving financing projects, its decision makers were keenly aware of the business opportunities and social benefits that this involved. In this regard they demonstrated strategic acumen. Chairman Gao Jianping gave specific instructions:“expand the scale and quality of energy efficiency projects, make a brand and exert influence”, which set the tone for IB's green finance business.
Since 2006, the Phase I cooperation of the energy efficiency project has yielded remarkable results. In the project, the Bank provided total loans of RMB 1.2 billion Yuan to 51 programs for energy saving and emission reduction. Programs involved the renovation of industrial boilers, heat recovery, steam-electricity cogeneration, joint generation of steam, electricity and cooling, power saving and the optimization of industrial energy utilization. It also developed and successfully operated seven energy saving and emission reducing business modes, including technological upgrade loan mode to conserve energy and cut emissions, carbon finance mode, energy saving service provider mode, financing lease company mode, buyer credit mode, energy efficiency equipment supplier production enhancement mode and public utilities service provider mode.
On February 25, 2008, the Industrial Bank signed the phase II cooperation agreement in energy conservation and emission reduction with the IFC in Beijing. According to the agreement, the IFC will provide risking-sharing loan principal of USD 100 million to the Industrial Bank, which will be used to support the bank in the issue RMB 1.5 billion Yuan of loans to energy saving and emission reducing projects.
The significance of the energy saving and emission reducing project loans to the IB is not only that it has provided a new product and profit source, but more importantly, it has offered IB insight into sustainable finance and promoted corporate governance and operation philosophy.
In January 2007, IB was listed on the Shanghai Stock Exchange. Its shareholding structure began to make the transition from being regionally-based to being national, international and public. It acquired a shareholder structure plural in constitution, rational in stakeholder ratio, complementarily in strengths and harmonious in cooperation. Becoming a listed company has given IB a larger stage and a stronger sense of social responsibility. Influenced by the rise of the social responsibility movement in China over recent years, the IB gradually formed a more mature concept of social responsibility. It has come to emphasize blending responsibility into its products and services by integrating morals into profits, namely, making contributions to society by providing financial products that meet needs.
Currently, IB has gradually formed a structure for sound governance characterized by clearly-defined rights and liabilities, effective checks-and-balances and coordinated operation. In July 2007, IB set up a social responsibility leadership team, led by Chairman Gao Jianping. The organization, coordination and promotion of sustainable finance are strengthened and social responsibility work is advanced by establishing and improving social responsibility mechanisms. The 6 th Board of Directors of the Industrial Bank explicitly clarified “the study and formulation of strategies and policies regarding the Bank's social responsibilities, and the supervision, examination and assessment of the social responsibilities performed by the Bank” as one of the duties of the BOD executive committee, and formally wrote it into the newly-revised Work Rules of the Executive Committee of the Board of Directors. This way, social responsibilities and sustainable finance became the core concept and guiding principle of the bank in management and business activities.
Under the guidance of the concept of sustainable development, BOD and senior management incorporated social responsibility and sustainable development into the bank's development strategy and actively engaged in sustainable financial innovation. This resulted in the bank being the first to offer low-carbon loans, the first to adopt the “Equator Principles” and the first to establish a sustainable finance operating agency. This allowed the bank to realize leap-frog development from energy efficiency financer to Equator Bank.
By the end of July 2010, the bank had lent a total of RMB 34.675 billion in 607 loans to support projects for energy conservation and emission reduction, realizing its public commitment of “granting RMB 10 billion in three years (2008-2010)” in advance. The energy saving and emission reduction projects that IB has supported are expected to be able to reduce the consumption of coal by 15.1381 million tons per year, emissions of carbon dioxide by 41.184 million tons, emissions of COD by 682,000 million tons, emissions of sulfur dioxide by 6,373 tons, bring about 5.005 million tons of comprehensive utilization of solid waste and decrease water consumption by 22.5426 million tons. In addition, since this business was launched, none of IB's energy saving and emission reducing project loans have become bad assets. The non-performing rate of loans has remained at zero and loan rates are a slight mark-up over the market benchmark rates for the corresponding period. This means that these loans have a high yield among medium and long-term projects. IB has sown the “green” seeds of social responsibility and harvested “golden” benefits.
Business Mode Innovation: Creating a New Corporate Ecology
Essentially, a mode of business is a framework for dealings between corporate stakeholders. It is a bridge linking client value and enterprise value. A business mode provides a bond for various stakeholders, such as providers, clients, other partners, departments and employees to interrelate with each other during their transactions. A good business mode can always reflect a unique enterprise value that recognized is by stakeholders.
In practice, IB commits itself to business mode innovation under the guidance of the concept of sustainable finance, such as being the first to adopt the “Equator Principles”, setting up a sustainable finance operation agency, creating an interbank cooperation mode and promoting interbank cash management. These innovations, which aim to promote environmental and social sustainable development, have integrated the bank's corporate governance, products & services, credit & interbank business and risk control system into a whole to create a brand-new corporate ecology. Thus, the bank has gradually developed its own distinguishing features and competitive advantages, which provide endless impetus for its sustainable development.
Interbank Platform: a mutually beneficial mechanism for cooperation
The Bank-Bank Platform is one of the business modes that IB has developed in recent years under the concept of sustainable finance. This mode enjoys a prominent competitive edge in the industry. Industrial Bank President Mr. Li Renjie holds that: “In the future, we are sure to take a more socialized path. We will bring in the strengths of others and outsource what we don't do well. It is important to form a cooperation mechanism that allows us to complement each other's advantages and share resources”. Though this seems quite simple, it reflects the bank's flexible thinking in its bid to secure development space in today's world. This isn't about just expanding scale and increasing the number of branches, it's about establishing an effective cooperation mechanism to achieve the mutual development of both the bank and society.
IB Interbank Business Department Manager Zheng Xinlin told the press: “The interbank platform is a platform to integrate resources, and is directed towards small and medium banks. The bank integrates all the resources it can into this platform and then provides products and services to these clients. That is to say, when these banks cooperate with IB, they can get support in traditional business and innovative business too, such as “Counter Fast”, IT, agent access and gold transaction agency, etc. Compared with other banks, perhaps we have a more complete range of products.”
The Bank-Bank Platform is a brand name of an overall service that IB provides to financial banks. It emphasizes advantage complementation and resource sharing so as to form strategic alliances. The Bank-Bank Platform mainly serves city commercial banks, urban credit cooperative and rural credit cooperative, rural commercial banks, rural cooperative banks and township banks in eight main business areas, namely payment and settlement, wealth management, technological output, financing service, foreign exchange agent, capital and asset debt structuring services, application of funds and training exchange.
In regard to the business mode of the Bank-Bank Platform, industry insiders including some bank analysts thought that as a kind of interbank business mode, though fund calling featured large amounts and low cost, its stability was lower than that of ordinary company and personal business, and was vulnerable to various external environmental factors such as monetary policy. However, three years of practice and achievements have proved that through establishing strategic alliances with small and medium banks, the Bank-Bank Platform realized resource complementation, reduced small and medium banks' overlapping investments, and expanded the bank's service network, which actually benefitted social resource distribution efficiency. This mode has significant social value, which is reflected in the following ways:
Promoting business innovation. The Bank-Bank Platform keeps launching a variety of innovative products, such as repayment of funds owed by credit card holders by the bank, gold transaction agency, access to information systems of small and medium banks, disaster backup and electronic banking, etc. Its basic mode is to capitalize on the difference in products, credentials, outlets, management and technology between these banks and IB to export IB's various mature products, management concepts and technology. It is one of the important ways for IB to realize differential operation.
Expanding service network. Through cooperation with small and medium banks, service networks are jointly expanded and more outlet services and more quality financial services for platform parties are provided. After three years of development, the Bank-Bank Platform “Counter Fast” and “Counter All-fast” have interconnected with 46 banks, with the number of interconnected outlets reaching over 12,000.
Creating Unique Service Mode. The Bank-Bank Platform is the first mode to promote marketing and services for small and medium banks, It adopts management, technology and business processes as products to be output and provides complete financial service solutions. At the same time, the Bank-Bank Platform has established a new cooperation mode that transcends competition and achieves mutual benefit with a view to enhancing small and medium banks' operation management standard, enriching their product line and improving their competitiveness.
Interbank cooperation can be compared to waterfall. There is a height difference between the top and the bottom, which results in a waterfall. There is also a difference between IB and many small and medium banks, including outlets, talent, business qualification, products & service, management capacity and IT technology, etc. Therefore, IB can use these things as products to export to small and medium banks. As long as there is such a gap, interbank cooperation will always have a market.
Currently, with the Bank-Bank Platform as the forefront, the bank has developed a service system that incorporates technological management service output, payment & settlement, funds application, wealth management, exchange agency, financing service, capital and asset debt structuring services and comprehensive training. For example, considering that small and medium banks are confined in terms of operation scope, IB launched the Bank-Bank Platform “Counter Fast” business. Through system networking, the parties mutually open their outlet counter resources to each other. This addresses the issue of non-local depositing or withdrawing of cash for small banks and allows them to establish a national presence. This also allows IB to expand its outlet services, and is thus a mutually beneficial mode. Another example, considering that small and medium banks lack business credentials for wealth management products and face problems such as client and capital loss, IB took the lead in launching agent-based selling of wealth management products under the Bank-Bank Platform to help small banks enrich their product lines and retain high-end clients. Also, as small and medium banks lack in information technology, IB launched technological management output services drawing on its core business system with fully independent intellectual property rights and highly trained and efficient IT technicians. This helps to enhance the IT standard of the cooperative banks.
As Protiviti Director and Greater China Corporate Risk Management and Financial Risk Strategy and Management Executive Huang Jiasheng put it, the quantity and quality of virtual outlets will become the main focus of competition between commercial banks in the future. On the surface, this is competition over financial products and financial services, while in essence it the competition over It standard and talent in finance. The upgrade of equipment and utilization of existing equipment will become an important feature in a modern commercial bank's image. In fact, interbank cooperation has expanded the horizons of cooperation among domestic financial institutions. It has opened up new business field and mode for the Industrial Bank and domestic commercial banks. On the whole, the Bank-Bank Platform has played an important role for IB in expanding its service network, advancing business innovation, strengthening competitiveness and enhancing comprehensive benefits. It is a key approach of the bank to take advantage of differential competition methods, break away from product homogenization and open up new territories for development.
The interbank cooperation platform brought huge changes to small and medium banks in relatively backward areas in enhanced financial service level and development. General Manager Zheng Xinlin said that such changes were mainly reflected in: after IT systems are established in small and medium banks, they begin to look like a modern bank; IB's management concepts have been output to these banks along with the IT systems; IB has established agent payment & settlement systems to help small and medium township banks access payment systems; IB has provided a rich range of financial products to township banks on the basis of IT systems.
Meanwhile, the Bank-Bank Platform establishes a new cooperation mode that transcends competition and achieves mutual benefit with a view to enhancing small and medium banks' operation management standard, enriching their product line, improving their competitiveness and driving small and medium banks to move towards modern operation and management. This has also become an important way for IB to assume its corporate social responsibility.
In order to help many township banks get through payment and settlement bottlenecks and improve the rural financial services, IB keeps on launching a variety of innovative products under the “Bank-Bank Platform” brand, provides a comprehensive financial solution for township banks, commits to providing payment and settlement network support for rural financial institutions and jointly boosts rural financial service quality and standard.
Recently, the modern payment system bank No. of Zhejiang Yueqing United Township Bank was officially approved by People's Bank of China. The number of township banks that have connected to modern payment systems through IB agency and been put into operation surmounts to 10, with another 5 township banks currently undergoing joint debugging and testing for agent connection to payment systems. IB has cooperated with 15 township banks for agent connection to payment systems.
The agent connection to payment systems as a service offered by IB for domestic township banks dates back to the second half of 2009. The first cooperative bank was the Xiaolan Town Bank of Zhongshan, Guangdong. This March, based on the original system, IB upgraded to offer a client end mode, which exempts many township banks from system development, renovation and hardware equipment purchase, saves huge system construction and operation costs and greatly enhances system operation efficiency. At the same time, IB also provides value-added services such as system operation training for township banks. This service became very popular among many village and town banks after it was launched. In a short space of time, over 10 township banks signed cooperative agreements with IB, including Dongguan Chang'an Town Bank, which has more registered capital than any other bank of its type.
Apart from agent connection to payment system service, IB also actively provides science and technology export services for township banks. Currently, it has provided core system construction and trusteeship, operation and maintenance services for five township banks, and has signed cooperative agreements for “Bank-Bank Platform Counter All-fast” with six township banks.
Since the start of this year, IB has set township banks as its key objective for “Bank-Bank Platform” service and expansion, mainly launching payment & settlement and science & management export in the hope of helping rural banks to break through payment & settlement bottlenecks and helping emerging rural banks improve their services. The bank will also perform its social responsibilities to advance rural financial service outlets construction and serve agriculture, farmers and villages.
Project Financing: green finance well implemented
Following its innovative energy efficiency financing projects, IB established itself as a foregoer and advocator of “green credit” in China. This successful trial made IB decide to keep exploring green finance. At the end of 2006, IB began to study the “Equator Principles”. After careful deliberations, it finally announced itself as an “Equator Bank” on October 31, 2008, becoming the 63 rd Equator Bank in the world and China's first.
The “Equator Principles” are a code designed to provide a basis and framework of internal social and environmental policy, procedure and standards related to the financing activities of financial institutions so as to ensure that the financed project will be developed in a socially responsible manner and thereby avoiding the negative impacts that the financed project may bring to the ecosystem and the community; if these negative impacts are unavoidable, then measures must be taken to reduce and alleviate them or compensate financial institutions, financiers and stakeholders. Financial institutions that implement the Equator Principles promise to provide loans only for projects that accord with the “Equator Principles”. When providing project finance, they must carefully review the social issues and the environmental protection status of the project and ask clients to report rational environmental management practices and state clearly that they will continue to follow the Equator Principles in future financing. With deepening economic integration and financial globalization, the Equator Principles have been proven to be scientific and rational in practice, and play an important guiding role in driving on financial industry social responsibility.
In order to drive the implementation of the Equator Principles, IB established a special sustainable finance office in 2008, in charge of reviewing loan projects that fall into the scope of the Equator Principles. This office is not only responsible for the implementation of the Equator Principles, but also undertakes operation of sustainable financial products and management, including internal & external training, review, promotion, exchange, system construction and project review.
The implementation of the Equator Principles is not simply about setting up the relevant functions. 2009 was a transitional period for IB to implement the Equator Principles. In this year, IB integrated resources to put the system framework of the Equator Principles into practice and update internal management processes. IB has done more than the principles require.
IB's vice president Kang Yukun, who is in charge of the implementation of the Equator Principles, told the media that the Equator Principles are above all a set of risk management tools which ask the bank to follow environmental rules and then sustainable development rules at each stage of credit. For the IB, the Equator Principles needed to be implemented at each level, including understanding of corporate governance, implementing through culture and realization in systems and processes. IB implemented the Equator Principles step by step, which is also in line with China's national conditions and development. However, they penetrated this concept little by little into their staff culture. When seen from the perspective of projects, the Equator Principles applied to financing for projects meeting the standard of USD 10 million. In fact, IB encourages the management of projects less than USD 10 million and non project financing in accordance with the Equator Principles.
When talking about his experiences during the past two years, Kang Yukun exclaimed that some enterprises behaved better than expectations, as they quite understood and agreed with this concept; some enterprises were a little hesitant in the beginning but were willing to cooperate after persuasion. Of course, some enterprises refused to accept it. “If an enterprise is unwilling, we will not be involved in the projects in question. ”
On December 22, 2009, IB held “China's First Equator Principles Project Awarding Ceremony and Press Conference” at Yong'an city, Fujian Province. It announced the official launch of the first project applying the Equator Principles – Fujian Huadian Yong'an Power Generation 2 × 300MW expanded project. This indicates that Chinese banks have realized the transition from standardizing their internal environment and social risk management to implementing specific projects based on these principles, and shows that sustainable finance is going deeper in China.
General Manager of Fujian Huadian Yong An Power Generation Co., Ltd. Huang Biaobin said that though the Equator Principles are new to him, this international tool is quite impressive. They never thought that there would be a bank giving such specific professional advice on establishing social and environmental management systems and preparing occupational safe operation manuals for each post, as well as helping the enterprise to formulate an Action Plan to take remedial measures against project environment and social risks on a staged basis. From the perspective of the enterprise, the Equator Principles has a bearing on not just the project itself, but also on enterprise operation, management and sustainable development.
By the end of June, 2010, IB had finished environmental and social risk reviews on 12 financing projects governed by the Equator Principles, including one A category project and eleven B category projects, representing a total investment of RMB 6.577 billion.
Some other banks still depend on providing special and more favorable policies to realize green credit for high pollution industries, but what IB does is totally different. IB considers this issue at all levels, from corporate governance, corporate culture, implementation of the Equator Principles, establishment and promotion of systems to the application of the whole bank's resources.
Risk Management: a new revolution embedded in environmental factors
Generally, commercial bank's risks that people are concerned about mainly come from within the economic system, such as interest rates, exchange rates and industry risks. However, people tend to show less concern for risks that come from beyond the economic system, such as environmental and social risks.
Environmental and social risks are a major risk that financial institutions face. Poor management of these risks may cause direct losses for financial institutions. The extensive financial development mode that does not emphasize energy saving and environmental protection will lead to damage to the environment in addition to negatively affecting the reputation and sustainable development of financial institutions. However, environmental protection, social responsibility and business interests do not contradict each other. On the contrary, they supplement each other to some extent and their relationship will become closer and closer. Banks should acquire a more complete understanding of risk management.
Unlike the green credit that emphasized by our country's regulatory divisions over the past few years, the Equator Principles take into account not only environmental risks but also other social and human rights risks. This is a total embodiment of the social responsibilities of a bank. Compared with green credit, the Equator Principles involve more parties, including not only Equator Banks and financiers, but also intermediaries, communities where projects are located and suppliers. Social forces play a vital role in this process. In addition, the Equator Principles require not only financiers to formulate corresponding environmental management proposals and action plan, but also the bank to do so. It can be said that under the guidance of the Equator Principles, an Equator Bank can actually penetrate the overall process of environmental management and solution of social issues in project financing. It is an efficient system of tools establishing an environment and social risk management system for commercial banks.
After announcing its adoption of the Equator Principles, IB formulated an equator Principles implementation plan to establish an institutional system and management processes conforming to the principles on a gradual basis.
First, the whole bank should attach high priority to the principles and offer strategic support. IB's Board of Directors established Environmental and Social Risk Management Policy to guide the implementation of the Equator Principles. Meanwhile, it established an inter-departmental work team led by executives of the bank and appointed environmental officers so as to implement the Equator Principles at each level.
Second, organizing the implementation. Drawing from the advance modes of international Equator Banks, IB set up a sustainable finance office and sustainable finance center in succession staffed with designated personnel. The former acts as an administration section in charge of environmental and social risk management. The latter is in charge of business operation and product marketing in energy efficiency financing, carbon finance and environmental finance.
The third aspect was to reform internal business processes and operation mechanisms so as to ensure the complete implementation of all rules and standards of sustainable finance. In accordance with the requirements of the Equator Principles, it improved environmental and social risk management system and business processes. This mainly included Equator Principles project management measures and classification guidelines, environmental and social risk expert review standard and a series of supporting investigation tools, analysis tools, risk monitoring tools and legal texts; establishing a linkage mechanism and making clear specific responsibilities, work requirements and arrangements of sustainable finance in each operating agency; strengthening internal capacity building, conducting a range of sustainable finance training programs, compiling easy sustainable finance books and distributing to staff so as to increase understanding of sustainable finance; establishing environmental and social risk management expert contacts to provide professional technical support for the implementation of sustainable finance.
The fourth aspect was making a business plan, conducting product innovation and enhancing the actual effects of sustainable finance. IB established middle-long term development planning objectives for sustainable finance. It will formally entered the carbon finance and environmental finance market and focus on loans for energy conservation and emission reduction, carbon purchase agency, carbon delivery guarantee, collection of clean development mechanism funds and equity investment management of renewable energy. It will extensively develop carbon finance and environmental finance products and services in these areas, expand the scope of sustainable finance and enlarge business scale and effects.
The fifth aspect was to strengthen international and domestic exchange and cooperation. While drawing from leading experiences, IB spreads the influence of sustainable finance. Internationally, it held in-depth exchanges and discussions on the promotion of energy efficiency financing, adoption of the Equator Principles and implementation of sustainable finance with international finance experts from the World Bank, IFC and World Wildlife Fund as well as Barclays Bank, Citibank and Vietnam Green Credit Delegation. At the invitation of IFC, it attended the international seminar of “Management Risk – Achieve Sustainable Development” held in Vietnam and introduced to participants IB's experiences in combating climatic change and promoting sustainable development through financial innovation. The bank dispatched important professionals to Mizuho Corporate Bank for 5 weeks of special training. Domestically, the bank held the “China Summit Forum of Energy Conservation and Innovation in Green Financing” with the National Development and Reform Commission, the State Administration of Environmental Protection and China Banking Regulatory Commission. It held the “Energy Conservation and Emission Reduction Crediting Business Training Class” together with the China Banking Regulatory Commission. The bank has also invited key clients to participate in workshops on the Equator Principles so as to enhance their knowledge and recognition of the principles.
Cash Management: open up new territories for development
Under the impact of the financial crisis, problems in cash flow management and overstretched cash in many enterprises which had been concealed by rapid growth were suddenly exposed. They were threatened by distorted financial information, management failure and capital control failure. Under this backdrop, enhancing the capital management efficiency, reducing financial costs and boosting operation standards became inherent needs.
“IB's cash management plan solved this big headache.” said a financial employee from a large-scale group in Northeastern China.
As a state-owned Sino-foreign joint venture, this group owns 2 listed companies and 27 wholly owned companies, holdings and share subsidiaries, as well as 150 member units. In 2009, its output value was RMB 15.5 billion and ranked first in the industry with its profits of RMB 1.613 billion. However, in such a large group, the original cash management system was unable to manage branch units hierarchically. Bank acceptance bills accounting for 65% of the whole income could not be registered or form uniform information, which led to the group being unable to precisely monitor member unit information, budget regulation and decision-making didn't work and capital efficiency was low. Moreover, the hardware system was located outside of the enterprise, raising concerns over safety of business secrets.
When IB's account manager visited the senior management of this group, he acutely sensed this demand. Following this, the president of the Harbin branch Kang Peng visited in person. Following this, IB set up a cash management business service team for the group which was made up of head office and branch cash management experts and a technological supporting team. IB improved the service plan through multiple perspectives, such as activating cash management function and supporting operation and maintenance of technical system software and hardware. It showed great willingness to cover the cost for most hardware devices and relevant software, which eased the worries of executives and helped the bank to win the position of head cash management bank. With the rapid concerted effort of head office and the branch, the group received a customized cash management comprehensive service plan that emerged from the bank's “Gold Cube” brand.
In this cash management plan, which was designed to serve this large-sized group, secondary capital management could be managed in a hierarchical fashion as demanded. “The client has many management levels, thus hierarchical management is needed. We advised the client to establish 3 parallel first grade capital settlement centers, then set up a second grade settlement center and a second management center under one of the first grade management centers, that is 4 cash pools and 1 management center. In this way, the head office, 2 listed companies and over 150 member units can form a business integrated body with independent business and uniform information in accordance with administrative and business relationships. The cash pool management center and its subordinates perform their functions of management & control, budget & approval, capital enquiry & monitoring and report forms & analysis, thereby realizing the aim of settlement as a whole and capital intensive allocation and management.” Said Kang Peng.
The new capital management mode adopts the way of separation between revenue and expenditure and zero balance for non-settlement center member units so as to meet centralized capital management demands. At the same time, a daily budget management mode was applied. Under this mode, the group's subordinates reported a budget every day. Then the settlement center allocates the funds to the outlay account according the reported daily budget. Then at the end of the day, the remaining funds are collected. While as for acceptance bills, the new management mode will offer management from budgeting, opening, collection and discount to negotiability, and they are centrally deposited in the bank.
It is worth mentioning that this cash management plan also conducts many personalized developments for the group, including bill process, financial statements, connection between the bank and the enterprise, centralized payment, etc.
This proactive and innovative cooperation brought about mutual gain. After applying the new capital centralized management scheme, the capital efficiency of the group was greatly enhanced, saving RMB 34 million overall. Meanwhile, the group and all settlement centers are in full control of the revenue and expenditure developments, thereby reinforcing capital and budget management. “After implementing this project, we have managed around 8 subsidies with over 100 accounts. The highest capital for management is RMB 2 billion. From those simple figures, we can tell the scale is very huge.” Said Kang Peng.
This group is typical of a wider phenomenon. In fact, after entering the Northeastern market, it only took IB two and a half years to catch up with its counterparts in terms of business scale and standard. Some of these banks opened five or six years ago. Its products and services were highly recognized by local enterprises and habitants. “They can meet our demands.” Many enterprises have said.
It is understood that in 2009 IB formally launched the inter-bank cash management service brand “Gold Cube”, a customized cash management service resolution for enterprises. “Gold Cube” is based on a mutually beneficial principle and represents a complete integration of “Wise Fortune” and “Five Star Navigation of Online IB” products and services. It draws on successful practices from the Bank-Bank Platform and makes full use of the bank's advantages in cash management. The “Gold” in “Gold Cube” stands for capital and wealth. It is the core element in cash management as well as a vital carrier of mutually beneficial cooperation between the bank and the enterprise. The “Cube” is an embodiment of IB's three dimensional solution to various demands of cash management. The “Gold Cube” offers three dimensional services for clients to enhance capital availability, thus realizing mutual benefits and sustainable business prospects for the bank.
“The outstanding feature of IB's cash management is customization. A pharmacy, a steel plant and a trading enterprise all have distinctive operation features, so the cash management will be different during actual operations. Cash management is a generalization. In practice, it is customized according to each enterprise's demands.” Vice president of IB head office Lin Zhangyi told us.
Diversified product innovation brings unique value and opens up a new territory for the bank's development. With the successful implementation of cash management projects, in addition to acquiring new core clients and huge settlement amounts, businesses such as capital, intermediate and retail also grow. Cooperation opportunities in new business areas like syndicated loans, short debts issuing, annexation loans, institutional wealth management and credit transfer also increase.
“The cash management platform is targeted at enterprises, but actually its application scope is quite wide. In addition to state-owned, private-owned enterprises and manufacturers, it is also applicable to water and electric companies; public institutions and some governmental agencies also have cash management business demands, such as real estate's capital monitoring and collection. The bank should carefully study the features of cash management and liquidity based on different industry and business structures and keep close contact with them to ascertain their demands.” Lin Zhangyi pointed out. One important feature of the cash management platform is its implications. For example, with technological development, once the interest accrual mode changes, it may bring a lot of benefits to the enterprise and meanwhile the bank will get more deposits. Because of its good implications, many banking products can be matched to it throughout the course of market development, thereby gaining profits and enhancing profitability. It can be said that the new cash management mode has huge development potential and is an unexplored territory.
He also revealed that cash management is a niche product. But without innovation and exclusive technologies or unique product design concepts, it will become hugely competitive before long. Therefore, only through patenting and differentiation can we avoid homogenization. In the future, as to the development of this core technology, IB will gradually come to possess its own intellectual property rights and brand them with IB's mark.
Undoubtedly, cash management is more than just a product. It is also a successful profit model. IB president Mr. Li Renjie indicated that it incorporates products, like some new interest accrual methods and new settlement tools (electric acceptance). It is about changing products for market. Meanwhile, it is exchanging technology for the market, because the bank's cash management business is closely linked with IT technology and settlement technology. Surely, it is also an act of “exchanging services for the market”, as it is a form of high-end service. It can be seen clearly that cash management is actually a comprehensive carrier, not just a single dimension but an enhancement of pre-existing business modes. During an enterprise's growth, this kind of service is needed. The bank's cash management services help enterprises to improve and keep on developing. Especially, cash management also helps to evade some risks as well. Risk reduction means the strengthening of the bank's core competitiveness.
“In fact, other banks also have cash management business and provide good services, but IB responds the fastest.” A principal from a large Northeastern company indicated.
In fierce competition, banks need a strong overall risk management capacity and capacity for communication and implementation if they are to efficiently win the market over with technology and services. How has IB done this? President of IB Li Renjie pointed out that in the banking industry, IB has a keen market sense, and is good at seizing market opportunities and following market demands. In general, the bank has an effective forward-looking perspective at the head office level, while at branch profit centers implementation is highly effective. So to speak, IB gives deep thought to what the market needs and what clients need. Then it gives a rapid response. Thus our teams find that operations go down well and secure good results.
IB also has very strict risk control.
When doing business, approval from both the branch and the head office is required. Once the head office sets an objective, implementation is very effective and resolute. It is apparent that the decision-making chain is still very long. But with a common objective, once efficiency is enhanced at all levels, market responses are still very rapid.
During the interview, we felt that the Industrial Bank's business mode innovation is more than just a profit mode and business mode innovation under the guidance of sustainable development. More so, it is a corporate culture innovation which has taken roots in the bank.
In recent days, the Hang Seng Indexes Company Limited announced the constituent list of the “Hang Seng Corporate Sustainability Index Series”. IB was successfully listed in “Hang Seng (China A) Corporate Sustainability Index” and “Hang Seng (Mainland and HK) Corporate Sustainability Index” owing to its unremitting efforts and outstanding performance in sustainable development. It also ranks 2nd in the “Hang Seng (China A) Corporate Sustainability Index” constituent stocks with a weighting of 10.32%. IB's listing in “Hang Seng Corporate Sustainability Index Series” not only demonstrates IB's capacity for sustainable development, but also shows that IB has won the trust and support of the capital market and investors.
“Among all innovations, business mode innovation is the most fundamental form, acting as the basis for other management and technology innovations. An outstanding business mode can integrate all internal and external factors to establish an efficient operation system with unique core competitiveness, and through providing products and services, realize continuous gains. This not only applies to the hi-tech industry, but also to the modern financial service industry.” President of IB Gao Jianping stressed, “Currently, our commercial banks face huge challenges such as interest rate liberalization, product & service homogenization and unclear risk management systems. So the issue of how to adjust and innovate the business mode to adapt to current economic and financial development trends is a big strategic issue that calls for the attention of commercial banks. Reviewing and innovating traditional banking modes under the guidance of sustainable development may provide banks with a wider path ahead in a new era.”