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RBI’s Revolutionary “Green Deposits” Framework – Explained Simply
Introduction to Green Deposits
Green deposits refer to financial deposits that are specifically earmarked to finance environmentally sustainable projects and activities.
The key features of green deposits include:
- The proceeds are allocated exclusively to projects that have positive environmental impact such as renewable energy, energy efficiency, sustainable transportation, etc.
- External reviews and verifications are conducted to ensure transparency and compliance with green standards. This helps address concerns around “greenwashing”.
- Preferential interest rates and terms may be offered to encourage investment in green deposits.
Green deposits have emerged as an innovative instrument that channels funds towards climate change mitigation and adaptation efforts. They allow banks and financial institutions to mobilize resources at scale while also providing depositors an avenue to contribute towards building a sustainable future.
The introduction of green deposit frameworks by central banks and regulators around the world has given further momentum to this evolving area of sustainable finance.
RBI Framework for Green Deposits
The Reserve Bank of India (RBI) released its framework for acceptance of green deposits by financial institutions in April 2023. The framework came into effect from June 1, 2023.
Overview of the RBI Framework
The RBI framework aims to formalize green deposits as an instrument to direct funds towards green activities and projects. It covers scheduled commercial banks, small finance banks and select deposit-taking NBFCs including housing finance companies.
As per the framework, these regulated entities (REs) can accept interest bearing green deposits from corporate and individual customers, denominated only in Indian Rupees.
The proceeds must be allocated to eligible green activities and projects as per the framework guidelines and official Indian green taxonomy, when finalized. Temporary allocation in liquid instruments up to 1 year is permitted.
Purpose and rationale behind the framework
The RBI green deposit framework has been introduced with the following objectives:
- Encourage REs to offer green deposit options while protecting depositor interest
- Aid customers to achieve their sustainability goals through green deposits
- Address concerns around greenwashing of financial products
- Augment capital flows towards green activities and projects
The framework aims to develop a well-regulated ecosystem for green finance in India, in line with global sustainable development priorities.
Applicability to Regulated Entities (REs)
As per the RBI guidelines, the green deposit framework is applicable to:
- Scheduled Commercial Banks including Small Finance Banks (excluding RRBs, LABs and Payments Banks)
- All deposit-taking NBFCs registered with RBI, including Housing Finance Companies
These regulated entities can formally introduce green deposit schemes based on the specifics laid out in the framework.
Key Features of the RBI Green Deposit Framework
The RBI framework defines the building blocks for introducing green deposits by regulated entities:
Denomination and currency restrictions (Indian Rupees only)
As per RBI guidelines:
- Green deposits can be cumulative or non-cumulative
- Must be denominated in Indian Rupees only
- Interest rates, size, tenor etc. will follow prevailing RBI deposit guidelines
- Premature withdrawal is allowed without impact on green activities / projects
Interest rates and tenor of deposits
The interest rates applicable on green deposits will be determined basis existing guidelines for deposits issued by RBI for commercial banks and NBFCs respectively. In line with normal deposits, green deposits may also be issued for tenors ranging from 7 days to 10 years.
Use of proceeds for green activities as per the official Indian green taxonomy
The proceeds from green deposits can fund projects in sectors such as:
- renewable energy
- energy efficiency
- clean transportation
- climate-change adaptation
- sustainable water and waste management
- pollution prevention and control
- green buildings
- management of living natural resources
- biodiversity conservation
The exclusions include:
- fossil fuel projects
- nuclear power generation
- waste incineration
- certain industries such as alcohol, weapons, tobacco, gaming, and palm oil
- certain renewable energy projects such as those using feedstock from protected areas or hydropower plants larger than 25 MW
Third-party verification, assurance, and impact assessment
REs are required to:
- Establish board approved policies and financing framework for green deposits, covering project evaluation, management of proceeds and disclosures
- These must be made available on the RE’s website, and an external review conducted before implementation.
Incentives and Regulations for green deposits by RBI
RBI’s Special incentives and conditions applicable for green deposits include:
Differential interest rates and their implications
- REs are allowed to offer differential (lower) interest rates on green deposits vis-à-vis normal deposits
- However, they will have to pay the contracted interest rate to depositors, irrespective of actual utilization towards green activities
Overdraft facilities against Green Deposits
- Banks permitted to provide overdraft facility against green deposits to customers
Coverage by Deposit Insurance
- Green deposits will be covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) regulations
Investment in liquid instruments
- Unallocated proceeds of green deposits can be invested in liquid instruments with maturity up to one year
Distinguishing Green Deposits from Normal Deposits
While green deposits share most features with traditional fixed deposits, some key differentiators include:
Allocation of funds towards green finance
The proceeds from green deposits can only be utilized for projects and activities deemed as green or environmentally sustainable as per relevant frameworks and taxonomies. Normal deposits do not have any such restrictions.
External review and reporting requirements
Issuing entities are required to get their green deposit policies and frameworks externally reviewed. They also need to disclose allocation details and submit impact assessment reports periodically.
Protection against greenwashing
The verification and disclosure requirements aim to address concerns around greenwashing and ensure genuine environmental impact from green deposits.
Implementation and Challenges in green deposits
The need for a board-approved financing framework
A board-approved financing framework that delineates the policies and procedures for green deposits is critical for regulated entities to ensure robust governance[1]. This framework should cover project evaluation, allocation of funds, reporting standards, and temporary allocation guidelines. A copy must be publicly shared for transparency.
Engagement with domestic/international agencies for external review
Seeking periodic external reviews of allocation processes and reporting standards by reputed domestic and international agencies can enhance integrity and credibility. This allows an independent assessment of compliance and impact.
Disclosure requirements and transparency
Comprehensive disclosures in annual reports are mandated, encompassing amounts raised through green deposits, project details, allocation status, third party verification reports, and impact assessments[1]. Public disclosures foster transparency and investor confidence in banks’ sustainable financing commitments.
Potential Impact of green deposits on the Financial Ecosystem
Mobilization of resources for green activities/projects
Green deposits can channel low-cost funds from retail and institutional investors to finance environment-friendly projects. This expands banks’ lending capacity for climate-aligned initiatives.
Addressing greenwashing concerns
Robust board-approved policies, third party verifications, and disclosures help address concerns around potential greenwashing. This upholds integrity and trust in the sustainable finance market.
Augmenting the flow of credit to sustainable initiatives
By offering green retail products like electric vehicle loans and green mortgages, banks can boost lending to eco-friendly activities. Green deposits augment the availability of finance for such products.
Discussions on Lowering CRR for Green Deposits
State Bank of India has requested the RBI to reduce cash reserve ratio on green deposits to incentivize climate-aligned lending. While this can ease liquidity constraints, it may dilute monetary policy transmission. The RBI can consider selective incentives without compromising systemic stability.
Future Prospects for green deposits
Green deposits can mobilize low-cost funding for India’s net zero transition[4]. Further policy measures like tax exemptions for green depositors can accelerate growth. As ESG considerations gain prominence, these instruments signify the mainstreaming of sustainable finance.
Conclusion
Green deposits have noteworthy potential for channeling investments towards climate-resilient growth. Their success hinges on integrity, transparency and impact assurance through robust policies and disclosures. By incentivizing green lending, these deposits can aid India’s sustainability push.