RBI announces framework on green deposits; to boost ‘green finance’ ecosystem

The Reserve Bank of India (RBI) has announced the framework for the acceptance of green deposits of regulated entities (RE). The central bank has put in place the framework, which will come into effect from June 1, 2023, to foster and develop a green finance ecosystem in the country.

The framework aims to encourage regulated entities (REs) to offer green deposits to customers, protect the interest of the depositors, aid customers to achieve their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities or projects.

In terms of applicability, these instructions will be applicable to scheduled commercial banks, including small finance banks but excluding regional rural banks, local area banks and payments banks.

These will also be applicable to all deposit-taking non-banking financial companies (NBFCs) registered with the RBI, including housing finance companies.

Under these guidelines, a green deposit means an interest-bearing deposit, received by the RE for a fixed period and the proceeds of which are earmarked for being allocated towards green finance.

It also means lending to and investing in the activities or projects that contribute to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives – including biodiversity management and nature-based solutions.

The RBI says the entities will have to allocate proceeds raised from green deposits towards the green activities or projects, which encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience, and adaptation and value and improve natural ecosystems and biodiversity.

These will also have to put in place a board-approved financing framework for the effective allocation of funds covering eligible green activities or projects. The framework will also be used for the process of project evaluation and selection, the allocation of proceeds of green deposits and their reporting, third-party verification and impact assessment.

On denomination, interest rates and tenor of deposits, regulated entities, says the RBI, will issue green deposits as cumulative or non-cumulative deposits. On maturity, the green deposits will be renewed or withdrawn at the option of the depositor. The green deposits will be denominated in Indian rupees only.

Moreover, the allocation of funds raised through green deposits will be subject to an independent third-party verification or assurance, which will be done on an annual basis. The RBI says the third-party assessment will not absolve such entities from their responsibility regarding the end-use of funds, "for which the laid down procedures of internal checks and balances would have to be followed as in the case of other loans".

The regulated entities, with the assistance of external firms, will annually assess the impact associated with the funds lent for or invested in green finance activities or projects through an Impact Assessment Report.

In case regulated entities are unable to quantify the impact of their lending or investment, they will disclose, at the minimum, the reasons, the difficulties encountered, and the time-bound future plans to address the same.