Green Deposits

Why in news?

RBI has unveiled a framework for banks and NBFCs to accept green deposits that are meant for investing in eco-friendly climate projects.

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.
• It indicates the increased awareness of the importance of ESG (Environmental, social and governance) and sustainable investing.
• Many lenders like HSBC and HDFC have launched green deposits in India for corporates as well as individuals.
• Common themes for green deposits are renewable energy, clean transportation, pollution prevention and control, green building, sustainable water, wastewater management, and others.

What is the RBI framework about?

• Aim - To prevent greenwashing, which refers to making misleading claims about the positive environmental impact of an activity.
• Deposits - As per the RBI framework, banks will offer the deposits as cumulative/ non-cumulative deposits.
• On maturity, the green deposits would be renewed or withdrawn at the choice of the depositor.
• The green deposits shall be denominated in rupees only.
• Application - The framework applies to all scheduled commercial banks and small finance banks (except for regional rural banks and local area banks) and non-banking finance companies (including housing finance companies).
• Investors - Both corporate and individual customers can invest in green deposits.
• Banks and NBFCs shall put in place a comprehensive board-approved policy on green deposits, and a copy of the policy shall also be made available on their websites.
• Sectors eligible to receive green deposits – The sustainable and eligible sectors include renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
• Banks will be barred from investing green deposits in business projects involving fossil fuels, nuclear power, tobacco, etc.
• Review - The allocation of funds raised through green deposits during a financial year shall be subject to an independent Third-Party Verification (TPV) on an annual basis.
• Impact assessment by lenders - Lenders must annually assess the impact associated with the funds lent for or invested in green finance activities and submit a review report before their Board.
• Penalty - There are no penal provisions when the bank doesn’t utilise the deposits.

How are green deposits different from normal deposits?

• Projects - Normal deposits cannot be allocated for specific projects, whereas green deposits are carved out specifically towards green financing.
• Interest rate on green deposits – It is at the prerogative of the lender and currently the rates on these deposits aren’t significantly different from regular deposits.

What are the challenges of green deposit?

• Flaws in design - Flaws in design leads to limitation of the range in the green projects that the banks can invest.
• Reality being different - Green investment products are often just a way to make investors feel good about themselves and that these investments don’t really do much good to the environment.
• Project sustainability - It is not sure whether the banks invested in the green projects will be sustainable.
• Lack of awareness - Lack of awareness among the bank staffs leads to delay in the process of obtaining green deposits.
• Lower interest rate - The investor seeks only for high return deposits and doesn’t care about being green.

References

1. The Hindu│Benefits Of The Green Deposits
2. The Hindu Business Line│Challenges To Green Deposits
3. Financial Express | Green deposits