GREEN DEPOSITS - ECONOMY
News: Green Deposit Regulatory Framework
What is in the news?
●
Last month, the Reserve
Bank of India (RBI) came up with a regulatory framework for banks to accept
green deposits from customers.
Green Deposits:
●
Green
deposits are interest-bearing fixed deposits denominated in Indian rupees,
similar to regular fixed deposits.
●
The proceeds from green
deposits are earmarked for allocation into projects or activities that yield environmental
benefits.
●
The RBI framework,
effective from June 1, mandates that the funds raised through green deposits
must be utilized for following activities:
○ Promoting energy
efficiency,
○ Reducing carbon emissions
and greenhouse gases,
○ Fostering climate
resilience and adaptation,
○ Preserving and enhancing
natural ecosystems and biodiversity.
●
However, the interest
rates on these deposits are generally low compared to those of traditional
fixed deposits.
●
Some banks issue a
"green certificate" to depositors, highlighting their contribution to
creating a greener and more sustainable planet.
Green Deposits Regulatory Framework:
1. Banks will have
to come up with a set of rules or policies approved by their respective Boards
that need to be followed while investing green deposits from customers.
2. These financial
institutions must also publicly disclose their financial framework for
deploying the proceeds and establish a process for evaluating project viability
and assessing the impact of the funds deployed.
3. A third party
will have to verify the claims made by banks regarding the projects in which
the banks invest their green deposits as well as the sustainability credentials
of these business projects.
4. The RBI has
come up with a list of sectors that can be classified as sustainable and thus
eligible to receive green deposits. These include,
● Renewable energy,
● Clean transportation,
● Energy efficiency,
● Afforestation,
● Climate-change
adaptation,
● Sustainable water and
waste management,
● Pollution prevention and
control,
● Green buildings,
● Management of living
natural resources,
● Biodiversity conservation.
5. Banks will be barred
from investing green deposits in business projects involving fossil fuels,
nuclear power, tobacco, gambling, palm oil, and hydropower generation.
6. The new rules
are aimed at preventing greenwashing, which refers to making misleading claims
about the positive environmental impact of an activity.
7. The allocation
of proceeds raised from green deposits should be based on the official Indian
green taxonomy.
8. On maturity,
the green deposits would be renewed or withdrawn at the option of the depositor.
9. The green
deposits shall be denominated in rupees only.
10. 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).
11. Both corporate
and individual customers can invest in green deposits.
12. Further, a
review report shall be placed by the lenders before their Boards within three
months of the end of the financial year, covering the amount raised under green
deposits, details of projects to which proceeds have been allocated, among
others.
Benefits of Green Deposits for depositors:
1. Opportunity to green finance:
●
Depositors see green
deposits as an opportunity to contribute to climate-friendly initiatives and
support India's net-zero goals.
2. Intangible benefits:
●
They gain indirect and
intangible benefits as their deposit proceeds are allocated towards
environmentally and socially friendly activities across various sectors.
3. Ripple effects of the investments:
●
Over time, these
initiatives result in lower emissions, improved air quality, enhanced
biodiversity, and fair allocation of natural resources, leading to positive
externalities and reduced income inequality.
4. Sustainable financing:
●
These deposits will act
as additional sources of sustainable financing to environment friendly
projects.
5. Transparent funding system:
●
Increased transparency
and accountability on the use and management of proceeds, becoming an
additional risk management tool.
Challenges:
1. Accessibility of small firms:
●
Smaller firms may face
challenges in properly assessing their impact or affording second or
third-party assurance.
2. Traceability issue of the projects:
●
In a complex world where
any action involves second order effects that are difficult to see, it can be
extremely hard to know if a project is really environmentally sustainable.
3. Greenwashing:
●
Greenwashing remains a
major challenge for the market in green deposits and other sustainable
investments. This is because the funds generated through the deposits may be
diverted to another product.
4. Lower yield:
●
Green deposits may be
issued with a higher price, and thus have a lower yield compared to other bond
instruments. This has been termed as “greenium”.
5. Low return of investment:
●
Returns from the
investments in green activities will take time and the value of the returns
will be also low.
WAY FORWARD:
1. High interest rate:
●
They have the potential
to become mainstream like traditional fixed deposits if additional incentives,
such as higher interest rates, are provided.
2. Better identification of projects:
● Financial institutions must also focus on building internal capacity and skill sets to identify and appraise viable green projects.
3. Steady supply of investable projects:
●
Ensuring a steady supply
of investable projects that meet the RBI's green investment criteria and the
introduction of a green taxonomy are essential for the growth of green finance.
4. Tax Incentivization:
●
There is a need to
provide clear tax incentives for green depositors and banks in order to improve
fund flow to the green projects.
5. Better surveillance of projects:
●
The monitoring of green
projects needs to be stringent to ensure better completion rates. Recipients of
such funds should be compliant, and a penalty component could be imposed in
case of missing a deadline.