The Constitution of India places an obligation on the State and citizens of India amongst other things, to protect the environment. India has also taken steps to reduce carbon emissions in line with the United Nations Framework Convention on Climate Change and its Paris Agreement. The announcement of Sovereign Green Bonds (SGBs) in the Union Budget of 2022–2023 signifies the Government of India’s plan to raise the necessary funds from potential investors to fund public sector projects aimed at reducing the carbon intensity of the economy. The Reserve Bank of India (RBI), on 11 April 2023, released the framework for Acceptance of Green Deposits applicable to Regulated Entities (REs) with effect from 1 June 2023.
A Green Deposit means an interest-bearing deposit received by a RE for a fixed period and the proceeds are to be used towards funding the eligible green projects/ activities. While REs are already offering green deposits for financing activities and projects, RBI has introduced the framework to put in place a well-defined and regulated ecosystem in India for the improvement of climate and environment.
The framework comes in the backdrop of various initiatives taken by the RBI previously. In 2021, RBI joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS), which is a network of central banks working towards a sustainable economy. In 2022, the RBI released a discussion paper on ‘Climate Risk and Sustainable Finance’, on the basis of which guidelines were issued to REs. The annual report (2022-23) by RBI on the state of currency and finance in India was focussed on ‘Towards a Greener Cleaner India’.
RBI, through the Framework, aims to create a financial system that supports the transition to a low-carbon, resource-efficient, and sustainable economy.
The REs will be required to frame and implement a comprehensive board approved Financing Framework for effective allocation of Green Deposits, which include aspects relating to the issuance of deposits and allocation of the proceeds raised by acceptance of the deposits. Allocation of funds would be in Indian Rupees, and the Financing Framework will be reviewed by an external reviewer and the opinion is required to be disclosed on the website of the RE prior to its implementation.
The proceeds towards which green deposits may to be allocated by the RE’s as stated in the Framework have been adopted from the SGB framework by the Government of India.
The REs shall allocate proceeds raised through Green Deposits towards green activities and projects that encourage energy efficiency in resource utilization, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation, and improve natural ecosystems and biodiversity.
RE’s are permitted to issue green deposits as cumulative/non-cumulative deposits. Similar to a fixed deposit, the green deposit shall be interest bearing which may be renewed or withdrawn at the option of the depositor on maturity.
Exclusion: Projects involving new or existing extraction, production, and distribution of fossil fuels, including improvements and upgrades, nuclear power, direct waste incineration, alcohol, weapons, tobacco, gaming, or palm oil industries, renewable energy projects generating energy from biomass using feedstock originating from protected areas, landfill projects and hydropower plants larger than 25 MW have been excluded from green financing.
Third-party verification of allocation of funds
The REs shall ensure the allocation of Green Deposits proceeds to the eligible green projects. Such allocation of funds shall be subject to an independent third-party verification/ assurance on an annual basis. The third-party report shall cover the (a) use of proceeds in accordance with the eligible green projects, and (b) policies and internal controls in relation to the project evaluation and selection, management of proceeds, reporting and disclosures etc.
Impact Assessment of Use of Proceeds
REs shall conduct an assessment on an annual basis to ascertain the impact the funds lent/ invested by the REs have caused towards the green projects, on the basis of quantifiable impact indicators.
If the REs are not able to quantify the impact, the reasons and difficulties faced, and time bound plans to address the same are required to be disclosed. The report has to be put on the website of the RE. Impact assessment is voluntary for financial year 2023-24 but has to be mandatorily complied with from financial year 2024-2025 onwards.
For ensuring that the raising, allocation, and utilization of the funds is adequately reviewed, the RE shall place before the board, within 3 months from the end of the financial year, a review report covering details as prescribed. Further, the REs shall also make appropriate disclosures in its annual financial statements in the prescribed format.
Challenges Of Green Banking In India
The green deposits carry a similar rate of interest as regular deposits but would carry a higher indirect cost as the banks need to provide third-party verification. The running costs are also significant since green banks require knowledgeable staff members with expertise in dealing with green customers and businesses.
While few banks in India have already taken steps to formalize the instrument including HDFC, Federal Bank, IndusInd Bank, DBS Bank, etc, majority banks have no such plans for the near future. Their is also a mismatch between the generally short-term objectives of investors and long-term green investments. This could also be a hindrance in the path of a successful future for Green Deposits Financing in India.
When it comes to achieving climate targets, India is in a race against time. RBI’s plan to offer Green Deposits to the customers seems to be a progressive move. Green banking may assist banks in getting reimbursements that lower costs and risk and would also benefit banks’ corporate social responsibility as well as its business goals.
For banks to compete and survive in the global market, it is crucial that they understand their obligations towards the environment and society. By involving and assisting stakeholders wishing to engage in sustainable projects, this Framework is a step in the right direction and will undoubtedly encourage banks and financial institutions in India to expand their green financing portfolios.
Contributors: Niyati Shroff, Manish Parmar