The central bank has become strict about ensuring green financing to achieve sustainable growth in the industrial sector and encourage environmentally-friendly projects.
To this end, the regulator warned banks and non-bank financial institutions (NBFIs) that, in the case of their failure to disburse the targeted amount of loans to green projects, their capital adequacy, asset quality, management, earnings, liquidity and sensitivity (CAMELS) ratings will be affected.
This is a fundamental rating maintained by the Bangladesh Bank, which reflects institutions' financial health.
The Bangladesh Bank, in a circular on Wednesday, stated that it will consider green financing of banks and NBFIs when the CAMELS ratings of the entities are prepared.
The circular also mentioned that banks and NBFIs will have to disburse 5% of their term loans, excluding employee loans, for green financing.
The entities' investments or credits to the BB prescribed products, projects and initiatives will only be treated as green financing by those entities.
Earlier, banks were supposed to invest at least 5% of their funded loans in environmentally-friendly initiatives.
An official of the central bank said that the limit will lower the volume of required investments but compliance with the target was made mandatory otherwise the CAMELS ratings of the entities would deteriorate.
A deterioration in CAMELS ratings would ultimately create a multidimensional problem for the financial institutions and would be an indirect penalty.
The central bank came up with the instruction as the disbursement of credit to the environmentally-friendly sector by banks and NBFIs in the second quarter of this year dropped by 16.83% or Tk513.38 crore from that of the previous quarter.
In the April-June quarter, banks and NBFIs disbursed Tk2,537.81 crore for environmentally-friendly initiatives against their disbursement of Tk3,051.19 crore in credits in the January-March period this year.
At the end of the second quarter, green financing by banks was 1.59% of their disbursed loans while the figure was 2.37% in NBFIs.
In Wednesday's circular, the central bank also asked all scheduled banks to set up separate help desks at their headquarters, to extend support and provide suggestions to investors, plus expedite green financing activities.
The banks were instructed to run the help desks as per the framework of the sustainable finance unit.