Context: In April 2023, the Reserve Bank of India (RBI) had issued a comprehensive framework for lenders to accept green deposits. It was done with the intent to enable the lenders and customers to further the green cause. However, over 20 months since its introduction, banks still face hurdles in pricing and public engagement.
Relevance of the topic:
Prelims: Key features of Green Deposits.
Mains: Green Deposits- Bottlenecks, Way Forward
What are Green Deposits?
- A green deposit is a fixed-term deposit for investors looking to invest their surplus cash reserves in environmentally friendly projects.
- Lenders shall issue green deposits as cumulative/non-cumulative deposits.
- On maturity, the green deposits can be renewed or withdrawn at the option of the depositor.
- According to RBI norms, these deposits shall be denominated in Indian Rupees only.
- Who can offer green deposits? All scheduled commercial banks (excluding Regional Rural Banks, Local Area Banks, and payment banks) and all deposit-taking NBFCs registered with RBI, including Housing Finance Companies.
- RBI’s Regulatory Framework for Green Deposits lays down clear allocation guidelines for sectors eligible to receive green deposits.
- RBI also mandates an independent annual third party audit of allocation of funds raised through green deposits to ensure compliance to green objectives.
Eligible sectors/projects to receive green deposits:
- Renewable energy- solar, wind, biomass, hydropower
- Sustainable Water & Waste management
- Clean transportation
- Energy efficiency
- Afforestation
- Climate change adaptation
- Green buildings
- Coastal and marine environment projects
- Certified organic farming
Excluded projects: Projects involving new or existing extraction, production and distribution of fossil fuels; Nuclear power generation; Direct waste incineration; Landfill projects; Hydropower plants larger than 25 MW, etc.
Note: Green deposits are different from green bonds.
Challenges facing Green Deposits in India:
- Lower interest rate: For instance, SBI offers a 7% interest rate for 2-3 year tenor retail domestic term deposit, whereas a green deposit with similar tenor has 6.65% rate of interest. Customers usually do not consider the nature of deposit as they seek higher returns.
- Lack of alignment with green goals: Customers are neither aware of nor attracted by the philosophy behind or benefits of green deposits.
- Poor adoption by private banks: While most public sector banks have started accepting green deposits, private banks have been slow adopters to market green deposits.
- Absence of Indian green taxonomy: There is a lack of an established Indian green taxonomy in the green deposits framework . Establishing a green taxonomy is essential not only to define what constitutes “green” but also to enhance transparency, prevent greenwashing and effective deployment of green deposits.
- E.g., the description of the renewable energy sector is mentioned as “incentivising adoption of renewable energy,” which is vague.
- Weak regulatory enforcement: There are inconsistencies in operational practices across banks. E.g., one bank’s green deposit policy mentions opportunities for green investment in the highly polluting oil and gas sector, raising questions of legitimacy and greenwashing.
RBI has not enforced any penalties for non-compliance or partial compliance with its related guidelines.
Way Forward
- Reduction in CRR: Lowering cash reserve ratio (CRR) requirement for green deposit can boost growth and will help garner more customers.
- Increased customer awareness: Customers must be informed that funds they park with banks as green deposits are used for financing renewable energy projects, projects that lower carbon emission, and enable clean transportation. This can boost volumes of green deposits.
- Streamlining ESG funds: Placing ESG funds (environmental, social and governance) of large corporations in green deposits with banks, will further the green cause.
- Develop an Indian Green Taxonomy: Clear definition of ‘green’ projects and activities with sector-specific measurable targets.
- Robust Regulatory Enforcement: Imposition of penalties for non-compliance or inadequate disclosures by banks. Technological mechanism to monitor the implementation of green deposits framework to prevent greenwashing.
Ensuring authenticity and the impact of green projects requires robust monitoring and reporting mechanisms. Technology can play a pivotal role in overcoming these challenges.