A major highlight of the 21st century is the exploration of renewable energy as a replacement for fossil fuels in the wake of alarm bells sounding off of drastic climate change over the past few decades. In line with other global green financing initiatives, the Reserve Bank of India (“RBI”) has introduced the ‘Framework for Acceptance of Green Deposits’ on April 11, 2023, and shall be effective from June 1, 2023.
The RBI has identified all scheduled commercial banks (excluding regional rural banks, local area banks and payment banks), deposit taking non-banking financial companies and housing finance companies (collectively, “Regulated Entities”) as entities permitted to offer green deposits to its customers.
The main objective of introducing this framework is to aid customers of the Regulated Entities to achieve their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities/projects. To this end, eligible activities can be financed out of proceeds raised through green deposits which includes: (i) renewable energy projects (solar / wind / biomass / hydropower) which integrate energy generation and storage or incentivize adoption of green energy; (ii) projects for design and construction of energy-efficient and energy-saving systems and installations in buildings and properties or which reduce electricity grid losses; (iii) projects promoting electrification of transportation, including building charging infrastructure; (iv) projects aimed at making infrastructure more resilient to impacts of climate change; (v) projects promoting sustainable water and waste water management infrastructure or flood defence systems; (vi) projects targeting pollution prevention and control; (vii) projects targeting preservation of biodiversity, environmentally sustainable agriculture, animal husbandry, aquaculture and forestry management; and (viii) projects related to buildings that meet regional, national or internationally recognized standards or certifications for environmental performance.
RBI has also mentioned about a list of 'exclusions' for Regulated Entities which includes projects involving new or existing extraction, production and distribution of fossil fuels, nuclear power generation, landfill projects, hydropower plants larger than 25MW and direct waste incineration.
Regulated Entities will have to put in place a comprehensive board-approved policy on green deposits which shall be available on their website.
The Regulated Entities making green deposits shall be subject to an independent third-party verification, vis-à-vis end use of the green deposits impact associated with the funds lent for or invested in green finance activities or projects, which shall be done on an annual basis through an impact assessment report.
Regulated Entities are permitted to issue green deposits as cumulative/non-cumulative deposits and shall be denominated in Indian Rupees only. On maturity, the green deposits can be renewed or withdrawn at the option of the depositor.
The Regulated Entities, however, can only offer green deposits on the same terms and conditions (viz. interest rate, tenure and other terms) as applicable for deposits under the Master Direction - Reserve Bank of India (Interest Rate on Deposits) Directions, 2016 dated March 3, 2016, Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 dated August 25, 2016 and Master Direction - Non-Banking Financial Company - Housing Finance Company (Reserve Bank) Directions, 2021 dated February 17, 2021.
This implies that a Regulated Entity has to offer a uniform rate of interest on all deposits including green deposits.
Certain lenders in India have already been accepting green deposits and the introduction of a framework by RBI provides a clear structure to this initiative, which we hope will boost effective implementation and visibility to green deposits. However, since the terms of a green deposit are broadly the same as those for regular deposits, the limited incentive which may be available to customers availing green deposits is to avail it in the form of bulk deposits (wherein banks have the flexibility to offer interest rates higher than the interest rate card in their core banking system). For non-bulk depositors, there appears to be practically no difference between a green deposit and a normal deposit since both would have the same interest and both have the option of withdrawal on demand.
India has already begun the move towards reducing reliance on fossil fuels and increasing sustainability by giving various incentives to promote renewable energy and green initiatives. While the Framework for Acceptance of Green Deposits is broadly in line with the nature of green deposits provided by other countries such as United Kingdom, Singapore, China and the European Union, we believe that it would be conducive in India, to provide additional incentives such as prescribing a compulsory allocation of funds pooled from green deposits within a specified timelines in order to propel the funding requirements of the renewable sector, allowing higher interest rates, exempting statutory reserve ratio requirements, prescribing certain concessions or rebates to the customers and the Regulated Entities. This would encourage customers to avail the option of creating green deposits and encourage Regulated Entities to actively market and mobilise assets generated through green deposits and increase lending to green projects. We also believe that by implementing such incentives Regulated Entities would be able to increase the corpus of funds available for utilization towards green activities / projects.
Zeeshan Khan is a Partner and Mallika Jain is an Associate at Krishnamurthy & Co.