Green Deposits and Green finance by banks explained

Meaning of green deposits:

The provisions of the framework for green deposits raised in India after June 01, 2023. A green deposit means an interest-bearing deposit, received by Regulated Entities (RE) like Commercial Banks, Small Finance Banks (excluding Regional Rural Banks, Local Area Banks, and Payments Banks), and deposit-taking NBFCs for a fixed period, the proceeds of which are earmarked for being allocated towards green finance.  The Green deposits may be issued by the banks as cumulative/non-cumulative deposits.

On maturity, the green deposits would be renewed or withdrawn at the option of the depositor like normal term deposits. The green deposits shall be denominated in Indian Rupees only. The tenor, size, interest rate, and other terms and conditions (as applicable to the RE) as defined in the Master Direction – Reserve Bank of India (Interest Rate on Deposits) as amended from time to time. There is no restriction on the premature withdrawal of green deposits, however, the REs shall adhere to the extant guidelines for green deposits. Further, premature withdrawal would not have any bearing on the activities/ projects undertaken using the proceeds of green deposits. The green deposits raised under the framework are covered by DICGC by the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and the regulations framed thereunder, as amended from time to time. The extant guidelines for green deposits do not permit REs to offer differential rates of interest on green deposits. Banks are allowed to offer overdraft facilities to customers against Green Deposits subject to the instructions contained in the RBI Circular on Opening of Current Accounts and CC/OD Accounts by Banks dated April 19, 2022, as amended from time to time.

Meaning of green finance:

Green finance means allocating green deposit resources to lending/investing in green activities /projects. The green activities/ projects financed under the green deposit framework can be classified under the priority sector if they meet the requirements laid down in the priority sector lending (PSL) guidelines of RBI. The allocation of proceeds raised from green deposits shall be based on the proposed official Indian green taxonomy (green taxonomy means environmentally sustainable investments). Pending finalization of the taxonomy, as an interim measure, REs shall be required to allocate the proceeds raised through green deposits towards the following list of green activities/projects that encourage energy efficiency in resource utilization, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation and value and improve natural ecosystems and biodiversity.

 The Green Deposit funds mobilized can be utilized for the following green activities/projects.

(1) Renewable Energy                      

(2) Energy Efficiency                        

(3) Clean Transportation                           

(4) Climate Change Adaptation                         

(5) Sustainable Water and Waste Management                           

(6) Pollution Prevention and Control                          

(7) Green Buildings                          

(8) Sustainable Management of Living Natural Resources and Land Use      

(9) Terrestrial and Aquatic Biodiversity Conservation                           

It is not mandatory but in case REs intend to raise green deposits from their customers. However, they shall ensure that the funds raised through green deposits are allocated to eligible green activities/projects. The following projects or activities are excluded from green finance.

• Projects involving new or existing extraction, production, and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based.

• Nuclear power generation.

• Direct waste incineration.

• Alcohol, weapons, tobacco, gaming, or palm oil industries.

• Renewable energy projects generate energy from biomass using feedstock originating from protected areas.

• Landfill projects.

• Hydropower plants larger than 25 MW.

Third-Party Verification/Assurance and Impact Assessment:

The framework on green deposits does not envisage any penalty for non-allocation of proceeds towards green activities/ projects; however, it shall be subject to supervisory review. The allocation of funds raised through green deposits by REs during a financial year shall be subject to an independent Third-Party Verification/Assurance which shall be done on an annual basis. ‘The third-party assessment would not absolve the RE of its 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’ said RBI.

The activities/ projects listed in the framework are the same as indicated in the Sovereign Green Bonds (SGrBs) framework, investment by REs in SGrBs is covered under the green deposit framework.