Blog Details

WHY IN NEWS?
Recently, Reserve Bank of India (RBI) released the Framework for acceptance of Green Deposits for the Development of Green Finance Ecosystem (GFS) in India.

WHAT IS GREEN DEPOSITS?
• “Green Deposit” means an Interest-Bearing Deposit, received by the Regulated Entities for a fixed period and the proceeds of which are earmarked for being allocated towards Green Finance.

WHAT IS GREEN FINANCE ECOSYETEM?
• Green Finance Ecosystem is a loan or investment that promotes environmentally – positive activities, such as the purchase of Ecologically – Friendly Goods and Services or the Construction of Green Infrastructure.

GREEN DEPOSIT FRAMEWORK:
RBI’s GD Framework is expected to come in force on June 1, 2023, the key features of the Frameworks are:
(i) Applicability: The RBI has limited to scheduled commercial banks including small finance banks (excluding Regional Rural Banks (RRBs), local area banks (LABs), payment banks) and all deposit taking NBFCs registered with RBI.
(ii) Design: Green deposits are designed in a way that is similar to a Fixed Deposit. I.e. Interest bearing for a Fixed Period and subject to withdrawal at the option of the Depositor.
(iii) Board approved Financing: RBI has rightly implemented a Board approved Financing Framework for funds raised through investment in Green deposits.
(iv) Disclosures: Disclosure of green deposits and its utilization in the Annual Financial Statements.
(v) Third-Party Verification/Assurance Report: GD Framework including end-use of funds allocated for green deposits, the RBI has placed an additional check by way of subjecting REs to an Independent Third-Party Verification/Assurance, to be done annually.

EXCLUSIONS:
• Projects involving new or existing extraction, production and distribution of Fossil Fuels
• Direct Waste Incineration
• Alcohol, Weapons, Tobacco, Gaming, or Palm Oil Industries
• Renewable Energy Projects generating energy from Biomass using Feedstock
• Originating from protected areas and Landfill projects.
• Nuclear Power Generation and Hydropower Plants larger than 25 MW.

PURPOSE OF GREEN DEPOSIT:
• To Encourage Regulated Entities (REs) to offer Green Deposits to Customers, Protect Interest of the Depositors,
• Aid customers to achieve their Sustainability agenda,
• Address Green Washing concerns and help augment the Flow of Credit to green activities/projects.

IMPORTANCE OF GREEN DEPOSITS IN THE INDIAN ECONOMY:
• Supporting the National Agenda for Sustainable Development: RBI is supporting for Sustainable Development, Fostering Innovation in Clean Technology, and driving investment in Environmentally Sustainable Projects.
• Attracting International Green Investments: The adoption of the Green Deposits framework can attract international investors looking for sustainable investment opportunities.
• Mitigating Climate Risks and Promoting Resilience: Green deposits can help mitigate Climate risks and promote resilience by directing funds towards projects that address Climate Change adaptation and mitigation.
• Addressing Green washing Concerns: The Green Deposits Framework aims to address Green Washing concerns by providing clear guidelines for Financial Institutions on what constitutes green activities and projects.
• Educating and Engaging Customers: Financial Institutions can encourage their customers to think about the Environmental Impact of their financial decisions and contribute to a more sustainable future.

WAY FORWARD:
• Deposit Insurance: With recent International Bank Collapses and Indian NBFC insolvencies, Depositors would be reasonably worried about all deposits, including Green Deposits.
 In this regard, a formal clarification from RBI, will give some respite to interested investors and also encourage participation.
• Maturity transformation and returns: Although structured as fixed deposits, there is a real risk of maturity transformation and related asset-liability mismatches.
 This could be a prudential concern for the regulator as well since it could have liquidity and other capital implications.
• Consequences for non-compliance: It might also be relevant to have provision for depositors to raise Grievance with REs and there is a discrepancy in the end-use of these funds.
• Increasing Awareness: With the increased awareness about the threats of Climate Change, many customers and investors are seemingly more inclined towards businesses, which are Environmental Friendly.
• Sustainability financing: To step up their engagement with Corporate Customers on ensuring Sustainability-focused Financing and Services to help them transition towards a Low-Carbon Economy while reducing their own Carbon Footprint
• Environment, Social, Governance (ESG): Pivoting towards Green Practices without jeopardizing the Livelihood of their employees, the banks might focus on Lending to green or Environment, Social, Governance (ESG) compliant projects on account of regulatory as well as Commercial and existential imperatives.

CONCLUSION:
• In conclusion, the RBI’s green deposits framework represents a significant step forward in promoting sustainable finance in India.
• By providing a clear and comprehensive framework for green deposits, the RBI is encouraging the financial sector to support green activities and projects, which can have a positive impact on the environment.

Reference:
 rbi.org.in
 bqprime.com