Recent climatic disturbances in the Bay of Bengal and Arabian Sea have heightened concerns about climate change. According to a report by Indian Express, experts expect increased systems forming in the Arabian Sea due to changes in climatic conditions. Financial institutions are expected to fund projects targeting climate change. Green finance is progressively gaining traction in India. Deposits constitute a major source for mobilizing of funds by the Regulated Entities (REs).
Financial institutions, while not mandated to raise green deposits, are supposed to follow the Reserve Bank of India (RBI) framework if they are planning to start green financing. In this direction, RBI released FAQs on the 'Framework for acceptance of Green Deposits,' bringing more clarity on guidelines for banks and non-banking financial companies (NBFCs) aiming to mobilize funds for green activities/projects.
Voluntary Compliance: RBI said, "It is not mandatory but in case REs intend to raise green deposits from their customers they should follow the framework prescribed therein."
Investment Allocation in Liquid Instruments: Unallocated proceeds of green deposits can be temporarily parked in liquid instruments for a maximum maturity of one year, but this has to be specified under the Financing Framework.
Supervisory Review: The framework does not envisage any penalty for non-allocation of proceeds towards green activities/ projects; however, it shall be subject to supervisory review.
Timeline: The framework applies to green deposits raised on or after June 1, 2023. REs cannot finance green activities/ projects first and raise green deposits thereafter.
Priority Sector: The green activities/ projects financed under the framework can be classified under the priority sector if they meet the requirements laid down in the priority sector lending (PSL) guidelines of RBI.
Overdraft Facility: Banks are allowed to offer overdraft facilities to customers against Green Deposits subject to instructions.
The deposits raised under the framework are covered by DICGC by the Deposit Insurance and Credit Guarantee Corporation Act, 1961. The current framework permits green deposits to be denominated in Indian Rupees only.
The framework brings more clarity to the role of the financial sector in mobilising resources for green activities while ensuring the allocation of funds toward sustainable initiatives.
Sovereign Green Bonds (SGrBs) investments also fall under the framework's purview. "The activities/ projects listed in the framework are the same as indicated in Sovereign Green Bonds (SGrBs) framework, investment by REs in SGrBs are covered under the framework," RBI said. Various entities in India both government and private have issued green bonds to support environmentally sustainable projects. These bonds, aim to fund projects contributing to environmental conservation and sustainability in India.