Banks as environmental guardians

Can a bank be an environmentalist? We may not think of bankers as idealistic "greenies", but in fact banks have the potential to play a significant role in environmental protection. Banks hold a powerful card in their hands, which gives them influence and power in the community. That card is money.

One of the principle functions of banks is that of intermediary between debtors (people with capital shortages) and fund owners (people with capital surpluses). Before deciding to extend credit to debtors, banks will analyze the condition of a debtor to determine the debtor's ability to repay the loan. Banks also set credit terms in order to guarantee that the credit is utilized properly. The ultimate goal of credit is to produce yields for both the bank and the debtor. They do this by setting credit terms. Traditionally this has meant financial covenants, like current ratio, debt equity ratio, return on equity, return on asset, etc.

But why not expand the terms banks consider when they make credit policy and decisions, especially in a country like Indonesia when environmental sustainability is so critical, not only ecologically but also economically? Banks are in a strategic position to help the environment, through their lending policies.

To illustrate, I'd like to refer to one company and its environmental problems: PT Inti Indorayon Utama of Porsea, North Sumatra. The operation of the company has been suspended for the last two years. Subsequently, it must suffer many losses. Obviously the next impact would be its inability to repay loans from banks or other financial institutions.

Indonesian banks can learn much from the case. To avoid making the same mistake, each bank should establish an independent environmental division. The establishment of such a division would be in line with the spirit of the Indonesian banking restructuring program. Even though banks would have their own environmental divisions, it would not automatically eliminate the ongoing terms set by banks, such as an environmental feasibility study, called an Environmental Impact Analysis, done by independent consultants.

The environmental division would have the authority to determine whether or not a company meets environmental sustainability criteria. It would consist of short-term, medium and long-term analysis that must be able to be measured both quantitatively and qualitatively.

Finally it could be inferred that banks had vital roles in keeping our environment sustainable. All this would lead to what people often call sustainable development, which would benefit both the current and future generations.

PETRUS F.T.P. TAMPUBOLON

Jakarta