Green Deposits

The Reserve Bank of India (RBI) recently clarified that banks and NBFCs are not obligated to raise green deposits but must adhere to the prescribed framework if opted.

What are Green Deposits?

• Green deposits are interest-bearing fixed deposits denominated in Indian rupees, similar to regular fixed deposits.
• The proceeds from green deposits are mandated for allocation into projects or activities that yield environmental benefits.
• These activities include energy efficiency, reduce carbon emissions, climate resilience and adaptation, and preserving and enhancing natural ecosystems and biodiversity.
• The framework mandates financial institutions to have a board-approved policy, disclose deployment plans, and evaluate project viability, including third-party verification.
• RBI released norms for Banks and Non-Banking Financial Companies for accepting green deposits.
• Increased scrutiny is anticipated for mobilization and deployment activities to ensure alignment with the framework.

Benefits of Green Deposits:

• Green deposits offer depositors a chance to contribute to climate-friendly initiatives and support India’s net-zero goals.
• While higher interest rates may not be expected, depositors gain indirect benefits as their funds support environmentally and socially friendly activities.
• It leads to positive outcomes like lower emissions, improved air quality and fair resource allocation, contributing to positive externalities and reduced income inequality over time.

Details on Non-obligations for financial institutions:

• RBI had earlier issued a set of Frequently Asked Questions (FAQs) on the ‘Framework for Acceptance of Green Deposits’.
• It reiterates that premature withdrawals would not affect projects funded by green deposits.
• Interest on green deposits must be paid as per agreed terms, and proceeds can be temporarily parked in liquid instruments.
• Foreign banks can adopt a global policy on green deposits, and deposits in foreign currency are limited to Indian rupees.
• Its rationale is to encourage RBI-regulated entities (REs) to offer deposits to customers, protect interests of depositors, and aid customers to achieve their sustainability agenda.
• This would also address Greenwashing concerns and help augment the flow of credit to green activities/projects.

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