RBI UPDATE | FRAMEWORK FOR ACCEPTANCE OF GREEN DEPOSITS
Recently, the Reserve Bank of India (RBI) issued a Notification to put in place a framework for acceptance of Green Deposits (Framework) with effect from 1 June 2023, pursuant to a survey carried out by the RBI in January 2022. Green Deposits are interest-bearing deposits for a fixed period and the proceeds of which are allocated towards green finance i.e., investment in certain activities/projects that contribute to climate risk mitigation and other environmental objectives. The Framework has been introduced with a view to encourage and regulate the green finance ecosystem in the country and to achieve the sustainability goals.
The Framework is applicable to the following Regulated Entities (REs):
- Scheduled Commercial Banks including Small Finance Banks (excluding Regional Rural Banks, Local Area Banks and Payments Banks); and
- All Deposit taking Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India under clause (5) of Section 45IA of The Reserve Bank of India Act, 1934, including Housing Finance Companies (HFCs) registered under Section 29A of The National Housing Bank Act, 1987.
REs shall issue green deposits in the form of cumulative/non-cumulative deposits, which would be renewed or withdrawn at the option of the depositor on maturity. REs are required to put in place a - Framework approved by their respective boards, which shall be made available on its website, for effective allocation of green deposits covering, inter-alia, the following:
- the eligible green activities/projects that could be financed out of proceeds raised through the green deposits:
- the process for project evaluation and selection by the RE (i.e., climate-related or environmental objectives) including identifying the projects fit for lending/investing within the eligible categories, monitoring and validating the sustainability information provided by the borrower;
- the allocation of proceeds of green deposits and its reporting, third-party verification/assurance of the allocation of proceeds and the impact assessment; and
- the particulars of the temporary allocation (which would only be in liquid instruments up to a maximum original tenure of one year, which shall be specified under the Financing Framework) of green deposit proceeds, pending their allocation to the eligible activities/projects.
LIST OF GREEN ACTIVITIES/PROJECTS
The RBI has compiled a list of green activities/projects based on the official Indian green taxonomy, which is pending finalisation, for allocation of proceeds raised from green deposits. The list, inter alia, includes the following:
- Support to certified organic farming;
- Solar/wind/biomass/hydropower energy projects that integrate energy generation and storage;
- Supporting construction of new low-carbon buildings as well as energy-efficiency retrofits to existing buildings;
- Adoption of clean fuels like electric vehicles including building charging infrastructure.
RBI plays a pivotal role in regulating the allocation of funds by the REs and protecting the interest of depositors. With green finance gaining traction, the REs may engage in misleading the depositors into investing in products/services falsely claiming them to be green. This trend has been observed worldwide. This practise of greenwashing could now be avoided with the implementation of the Framework. However, the Framework needs some rework in terms of making a provision for incentivising the depositors and/or the REs into contributing to green finance. Further, any investment is always associated with risk, and risks associated with climate change are higher. Therefore, we need a robust mechanism to address risk mitigation as well to safeguard the interests of the depositors.
Author: Bhushan Shah - Partner | Shreya Dalal - Associate Partner | Keerthi Kamath - Associate.
This update was released on 28 Jun 2023.
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