Date: August 5, 2013 Source: Capital Week Reporter: Yang Lian
The two features of listed banks – financial resource distributor and public enterprise – make their performance of social responsibilities more important. Nonetheless, to perform social responsibilities is not just limited to public benefit activities such as donation, poverty alleviation and education support, but more to benefit people and promote environmental protection in a better way by offering products and services. This is also a meaning contained in the “Guiding Opinion on Support of Finance to Structural Adjustment, Transformation and Upgrading” issued by the General Office of the State Council on July 5, namely the “10 State Guidelines for Finance”. In recent years, the bank-bank platform and green finance, as the two areas where Industrial Bank (IB) (601166, stock bar) has made outstanding performance, completed each other in the practice of social responsibilities and business development.
How should we see the development paths of IB's bank-bank platform and green finance? How should we see the financial logic behind them? With such questions, our reporter made an exclusive interview with Tang Bin, director and board secretary of IB.
Capital Week: What are “bank-bank platform” and green finance in essence on earth?
Tang Bin: The “bank-bank platform” of IB is, based on the construction of a networked financial platform, to transmit advanced management experience, financial products and technological capability to the small- and medium-sized financial institutions in the cities of the third and fourth tiers and rural areas, so as to cover both rural and urban areas and serve “Agriculture, Rural Area and Farmers”. Namely, the “bank-bank platform” of IB effectively reaches the small- and medium-sized urban commercial banks, rural credit cooperatives and rural banks which lack advanced financial support and service, and improves the services of these financial institutions to the “Agriculture, Rural Area and Farmers” and small- and mini-sized customers at the terminal indirectly.
The so-called green finance usually refers to all financing behaviors and institutional arrangements made centering on energy conservation, emission reduction and environmental protection. The targets of such services are usually SMEs and small- and mini-sized enterprises which are characterized by small scale and light assets. As they are in lack of enough guarantees and pledges, it is not easy for them to receive the support of conventional credit financing. By making use of a variety of financial tools innovatively, IB has effectively reduced the threshold for energy conservation and emission reduction financing of enterprises so that those SMEs and small- and mini-sized enterprises that lack guarantee and pledge resources could receive financial support and have fair access to financial services.
Now, a popular term in the financial market is “inclusive finance”, which refers to the financial system that can provide services to all social hierarchies and groups in an efficient and all-round manner. What the term conveys is to provide customers to which conventional financial institutions cannot provide services or which they neglect with opportunities to access financial services. In the past, we used to call micro credit “inclusive finance”. But, if we look at the “bank-bank platform” and green finance of IB in detail, they can be considered as practice of inclusive in the special version of IB in essence.
C apital Week: How can the “bank-bank platform” outdo institutional competition to achieve “resource sharing” and “complementing the respective advantages” with each other?
Tang Bin: The interest rate in the inter-bank lending/borrowing market has begun to rise since the later 10 days of May. The rising trend didn't stop after the Dragon Boat Festival and it reached the peak at June 20. Nonetheless, when we look back to see all Shibor offering banks carefully, we can see that the Shibor offers of IB around June 20 only remained at a medium-low level and the bank did not show great thirst for funds. For IB with a high proportion of institutional liabilities, how could we remain calm against the possible coming of a “perfect storm” in the market of funds? An important reason is that the institutional deposits brought in by the “bank-bank platform” of IB showed certain immunity to the “money shortage”.
Now, the institutional deposits of IB remain stably above RMB 1 trillion, of which the banking institutional deposits account for more than RMB 750 billion, with about 50% being the institutional deposits from small- and medium-sized banks which mainly consist of urban commercial banks, rural commercial banks, rural credit cooperatives and rural banks. Coming from a great number of institutions, this part of money boasts high stability, of which the settlement deposit is even more immune to the influence of fluctuation in capital price.
Taking various small- and medium-sized banks (urban commercial banks, rural commercial banks, rural credit cooperatives and rural banks) as the major service targets, the “bank-bank platform” of IB used to handle agency payment and settlement of small- and medium-sized financial institutions. Now, it has grown into a program with integrated financial service solutions covering technological management output, wealth management, payment and settlement, etc. At present, with more than 23,000 interconnected outlets, the “bank-bank platform” has members accounting for about 60% urban commercial banks and 1/3 rural financial institutions.
If we compare the backbone business network of IB distributed in major cities around China as the trunk, then to cooperate with these small- and medium-sized banks and rural financial institutions via the “bank-bank platform” is equivalent to adding numerous branches and leaves to the big trunk of IB. To extend to the broader urban and rural market across China is of the effect to have a big tree with strong branches and exuberant leaves. With the “bank-bank platform”, it is equivalent that IB has established a nationwide network of outlets and does not need to send forth leaves any more. For the small- and medium-sized banks, even if they are only leaves, they can enjoy the whole tree.
IB sums up the “bank-bank platform” as a model “complementing the respective advantages and resource sharing” with each other beyond competition. Via the bank-bank platform, IB drives the small- and medium-sized banks in the cities of the third and fourth tiers and rural areas to improve their management level, enrich their product lines, and enhance their technological strength. Meanwhile, the complementation and sharing of networked outlets and financial functions with small- and medium-sized banks help avoid malicious competition and repeated construction, save social resources, and transmit outstanding financial service products from the developed areas to the underdeveloped ones. In the meantime, IB also obtains business opportunities in the process. If banks handle transactions at the platform, we should ensure the normal liquidation of all banks, which need to put an appropriate amount of funds in IB. This brings steady institutional deposits from small- and medium-sized banks at a low price. Meanwhile, the “bank-bank platform” also brings extensive assets business trading counterparts for the bank.
Capital Week: IB has showcased a distinctive feature of differentiated businesses from “bank-bank platform” to financial market businesses. Will this strategy be changed in the future?
Tang Bin: Starting to set foot in the financial market in 1996, IB is one of the commercial banks providing services to financial institutions in China at the earliest time. In 2001, IB took the lead to establish the Institutional Banking Department among the Chinese banking industry, which is especially responsible for carrying out business cooperation with financial institutions both from home and abroad. In order to adapt to the trend changes including market-oriented interest rates, financial disintermediation, and the construction of multi-level financial market and improve the structural system under which the financial market businesses serves the market in a proactive manner, IB established the Capital Operation Center in 2003, Assets Custody Department in 2005, and Banking Cooperation Service Center, officially released the inter-bank cooperation brand “bank-bank platform”, and took the lead to make arrangements in various markets including monetary market, capital market, debt market, inter-bank market, and the trading markets of precious metal, foreign exchange and derivatives, thus accumulating good business, customer and management foundation, and building a market reputation.
We can see that the financial market businesses of IB have gone beyond the institutional lending/borrowing transaction or redemptory sale. Based on many years' accumulation, IB has, in fact, formed integrated services targeting at financial institutions and financial markets, with products covering joint service and resource sharing among many markets and institutions. They are the type of businesses coming into existence under the push of multiplied financial market, diversified customer demands, and the development of integrated operation of our own businesses, corresponding to the market demands. As it turns out, they are full of great vitality.
To overtake another one at a curve, your car may not touch the yellow line. The premise to overtake another car is that you should see far enough, ensuring that no other cars come at the two or three curves ahead. Next, your car should have enough horsepower. Last, it also depends on the driving skills of the driver. To remain steady and to be innovative is not a contradiction that cannot be conciliated. As long as we can take prior measures, we can overtake another car without touching the yellow line. IB lays great stress on research and judgment on changes in macroeconomic policies and market situation, and adheres to adopting effective working mechanism, including several management team meetings each month. Based on the resolutions reached at such meetings, IB makes flexible adjustment to the staged business strategies in a timely manner and controls the development rhythm reasonably. Specifically, the research team represented by Lu Zhengwei, Chief Economist of IB, has released a large number of prospective research reports, which have drawn attention and gained recognition in the industry in a prevailing manner.
IB will not change the views given at the exchange conference for investors held on June 26, i.e. institutional banking business covers the entire business sector of the financial market. As a highlight in the differentiated business operation of IB, the general strategy will remain unchanged, but we will make timely adjustment to some tactics based on the external regulatory environment and requirements of national policies. Next, we will further the bank-bank platform by focusing on wealth management portal and inter-bank capital liquidation. Meanwhile, relying on the platform of Hong Kong Branch, we will fully entered the RMB trading market of Hong Kong, thus achieving the linked development of RMB business both at home and abroad. In addition, we also strive for entering the list of mainstream traders in the institutional market of Hong Kong.
Considering the development process of the financial industry, especial the banking, in developed economies, the financial market businesses have long become a mainstream business model, and now they have entered into a mature development phase after going through the impact and test of many crises. In contrast, although certain progress have been made in the reform and development of the banking industry at home, on the whole, some problems still stand out prominently, such as low market-oriented level, simple business structure, and homogenized competition. Therefore, drawing on the international experience, it must be the general direction for the future reform and development of the Chinese banking industry to develop the financial market businesses based on the market-oriented interest rates, differentiated products and integrated services vigorously.
Capital Week: As green finance cannot help you to earn money in the short run, why does IB march into the area against risks?
Tang Bin : In October 2008, IB officially announced to adopt the “Equator Principles”, becoming the first “Equator bank” in China. Five years have passed, but IB is still the only Equator bank at home, seeming to leave a profile of “lonely pioneer” to the public.
The so-called “Equator Principles”, jointly launched by International Finance Corporation (IFC) and ABN AMRO Bank in October 2002, are a range of benchmarks for the financial industry established in reference to the sustainability policies and guidelines of IFC, specifically consisting of statement of ten principles, eight performance standards, and eight categories of 62 industry-specific environmental, health and safety guidelines. The “Equator” also upholds the concept of “giving consideration to both the south and the north, and balancing interests around the globe”.
By the end of June 2013, IB has examined the applicability of 757 projects to the “Equator Principles”, 170 of which were approved as projects applicable to the financing based on the “Equator Principles”, involving 167 customers with a total project investment of RMB 253.9 billion.
On the matter why IB has developed the business of green finance with unremitting perseverance, Mr. Zoellick, President of the World Bank, asked Gao Jianping, Board Chairman of IB: “Mr. Gao, if green finance could bring profits, why don't other banks in China do it? If it cannot bring profits, why do you engage in it?”
To the question of Mr. Zoellick, Board Chairman Gao answered: “The green finance cannot bring profits in a short run and we should even run some risks, but the cause of environmental protection needs support. Banks may exert their own strong suits and make use of the credit leverage to support the cause of environmental protection. With the joint cultivation of all parties concerned, market and profits will come forth finally. In this way, we can combine our banking operation activities with social responsibilities in an effective manner.”
The above concept and understanding have take root in our corporate governance philosophy of sustainability. To look back at the evolution of IB, the corporate governance philosophy has undergone three development phases, from “shareholders' interests foremost” to “giving consideration to the interests of stakeholders”, and to “giving full consideration to the appeals of multi-parties”. In confrontation with the increasingly protruding environmental problems, IB put forward the new corporate governance philosophy to “explore different ways to promote the bank to perform social responsibilities and build a good situation where human being coexists with the nature, environment and society harmoniously”, giving consideration to the interests of multiple stakeholders and realizing sustainability.
As early as 2005, when learning that IFC was looking for partners to develop energy efficiency financing program in China, IB actively got in touch with and launched cooperation with the company. Both parties invested some funds respectively to initiate the mechanism for sharing the loss of loan principal as the bad debt reserve for energy efficiency financing. With the loss-sharing mechanism, IB granted credit to support energy-efficient enterprises, so as to provide services to energy-efficient enterprises and projects in a better effective way.
The energy conservation and emission reduction industries mostly involve SMEs, which are characterized by small scale and light assets. They generally encounter the problems of financing difficulty and narrow financing channels as they are in lack of effective tangible guarantees. For an enterprise engaging in waste landfill, for instance, what it possesses is a vacant piece of land. What can it use to apply for a loan?
Based on the loss-sharing mechanism, advanced management technologies are employed to estimate the cash flows of such small- and mini-sized enterprises in energy efficiency projects, considering that they generally have sound cash flows. Then, the sales cash flow incomes of the projects in question are taken as the source of repayment so as to attenuate the second source of repayment including pledge and guaranty. This effectively reduces the threshold for financing of SMEs so that those SME customers that lack guarantee and pledge resources could receive financial support for energy conservation and technical transformation.
Now based on the traditional banking financing products, IB has, with further innovation, released seven characteristics products including financing for energy performance contracting (EPC) by using the future usufruct as the pledge, contract environmental service based financing, carbon assets pledge based financing, emission right pledge-based financing, and energy conservation and emission reduction (CHUEE) financing, and integrated them into a comprehensive multi-layered system of products and services extending from financial products and service models to solutions so that more SMEs and small- and mini-sized enterprises can have more financing solutions and have fair accesses to financial services.
Compared with donation, dividends and tax, this is to combine social responsibilities with our own banking business, implement such responsibilities into the specific banking operation and management, and seek business opportunities during the performance of social responsibilities, so as to explore a sustainable and developable business model and social responsibility practice model in which a win-win result can be achieved between the bank and the society. It is what the philosophy of “obtaining reasonable profits while bringing benefits to the stakeholders” conveys. With business operation and management activities carried out in the orientation of social responsibilities, IB can develop a “blue sea” of business, further strengthen our core competitive edges, and finally realize sustainability.
Capital Week: Could you talk about the future prospect of green finance based on the practice and experience of IB?
Tang Bin : In terms of results, our energy efficiency financing cooperation with IFC has achieved great success at the initial stage. The loss-sharing funds have not been used till now, and the energy conservation and emission reduction loans have witnessed desired benefits. After seven years, the green finance of IB has far gone beyond the original scope of energy efficiency financing cooperation with IFC, covering three major fields of low-carbon economy, recycling economy and ecological economy, and involving a variety of projects such as improvement of energy efficiency, development and utilization of new energy and renewable energy, sewage treatment and water area control, recycling of solid wastes, carbon emission reduction, emission reduction of main pollutants including sulfur dioxide in the mainstream sectors of energy, construction, transport and industry, etc.
By the end of June 2013, IB has provided more than RMB 200 billion of green finance financing with a variety of financial tools, with the financing balance exceeding RMB 150 billion. The projects supported may, each year, save 23.2948 million tons of coal equivalents within China, reduce 67.157 million tons of carbon dioxide, and save 25.7906 million tons of water.
The practice of green finance involves not merely innovation in products, but also the gradual matching, coordination and improvement of external policy environment. For this reason, IB suggests setting down differentiated regulatory and incentive policies, for instance, encouraging financial institutions to issue special financial bonds for green finance, allowing the green finance based loans meeting the given requirements not to be covered into the scope of loan-deposit ratio evaluation, reducing the business tax rate of financial institutions in handling green finance business, and establishing green development fund or guarantee companies by local governments.
In the field of green finance, IB has become a forerunner and leader. During the “12th Five-year Planning” period, the market room in the field of environmental protection is worth RMB 4 trillion, but IB has only finished RMB 200 billion at most. In the future, the great market potential still waits the joint development of IB and other banks. A “Beautiful China” where people can develop together with the nature, economy and environment harmoniously should be constructed with our joint efforts.