The Reserve Bank of India (RBI) has unveiled a novel framework to introduce green deposits for its customers, with the objective of fostering a Green Finance Ecosystem (GFS) in India. The new structure is set to be effective from June 1, 2023. Essentially, a green deposit refers to an interest-bearing deposit received by a Regulated Entity (RE) for a designated period where the proceeds are reserved specifically for green financing.
Key Characteristics of the New Green Deposit Framework
The new green deposit framework is primarily applicable to Scheduled Commercial Banks, including Small Finance Banks, and all deposit-taking Non-Banking Financial Companies (NBFCs), barring Regional Rural Banks, Local Area Banks, and Payments Banks.
REs will need to direct the funds raised through green deposits towards select green activities and projects that focus on resource utilization efficiency, carbon emissions reduction, greenhouse gases reduction, climate resilience promotion, and natural ecosystems and biodiversity enhancement.
Certain projects have been intentionally excluded from green financing, including those involving new or pre-existing fossil fuel extraction, production, and distribution and renewable energy projects using feedstock sourced from protected areas, among others.
REs must establish a Board-approved Financing Framework (FF) to guarantee efficient allocation of green deposits. The funds raised through the new green deposits initiative during a fiscal year will undergo independent third-party verification/assurance on a yearly basis.
Understanding the Green Finance Ecosystem
The GFS denotes the financial system designed to support and facilitate investments in environmentally sustainable projects and activities. It comprises a variety of financial products, like green bonds, green loans, green insurance, and green funds, which are crafted to further environmentally friendly practices and projects.
The aim of the green finance ecosystem is to create a financial system that aids the transformation towards a low-carbon, resource-efficient, and sustainable economy, while simultaneously tackling risks and opportunities linked to environmental issues.
The finance sector can play a crucial part in channeling resources towards green activities/projects. Green finance has been progressively gaining momentum in India.
Green Finance in the Indian Context
India has initiated its path towards carbon neutrality and proposed a ‘Green Deal’ aimed at achieving this target by 2070. The Green Deal has identified green finance as a key facilitator to expedite decarbonisation. It underscores the need for an increased capital flow from both the national government and private entities for establishing green infrastructure.
In 2016, a report was released by RBI in association with UNEP (United Nations Environment Programme) and India on sustainable financial systems. The report investigates various aspects of financial systems in India and their role in propelling green finance forward.
According to the World Economic Forum, the market for green bonds could potentially exceed two trillion dollars by 2023.
Related Initiatives in India
Several initiatives have been launched to further green finance. The Government has allowed Foreign Direct Investment (FDI) of up to 100% via the automatic route in the renewable energy sector. Further initiatives include the waiving of inter-state Transmission System (ISTS) charges for inter-State sales of solar and wind power for projects, establishment of Renewable Energy parks, and announcement of the National Hydrogen Mission.
Under the Paris Agreement adopted by signatories in 2015, India has submitted its Nationally Determined Contribution (NDC) outlining specific targets.
India aims to reduce its emission intensity of Gross Domestic Product (GDP) by 33-35% by 2030 compared to 2005 levels and to achieve nearly 40% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.
Moving Ahead
India’s burgeoning green economy is thriving, and banks have a significant role in endorsing sustainable finance and facilitating the country’s shift towards a low-carbon, resource-efficient, and sustainable economy. Financing green projects represents an essential step towards ensuring a sustainable future.
