Why Green Deposits Failed to Take Off in India

Sub : Eco

Sec: Monetary Policy

Context:

The Reserve Bank of India (RBI) has introduced a framework, which came into effect from June 1, 2023 for banks and NBFCs to offer green deposits, aimed at promoting eco-friendly climate projects and tackling greenwashing (misleading claims about environmental benefits).

What are Green Deposits?

Definition: Fixed-term deposits aimed at funding environmentally friendly projects.
Significance: Reflects growing awareness of ESG (Environmental, Social, and Governance) principles and sustainable investing.
Popular Themes: Renewable energy, clean transportation, pollution control, green buildings, sustainable water and wastewater management.
Examples: Lenders like HSBC and HDFC have launched green deposit schemes for individuals and corporates in India.

Key Features of the RBI Framework

Objective:
- Prevent greenwashing by ensuring transparency and credibility in claims regarding environmental impact.
Deposit Structure:
- Offered as cumulative or non-cumulative deposits.
- Denominated in Indian Rupees (INR).
- On maturity, depositors can renew or withdraw funds.
Applicability:
- Covers scheduled commercial banks, small finance banks, and deposit-taking NBFCs (including housing finance companies).
- Excludes regional rural banks and local area banks.
Investor Scope:
- Open to corporate and individual customers.
- Banks and NBFCs must have a Board-approved green deposit policy available on their websites.
Sector Eligibility:
- Sustainable sectors include:
  - Renewable energy.
  - Waste management.
  - Clean transportation.
  - Energy efficiency.
  - Afforestation.
- Excluded sectors include:
  - Fossil fuels.
  - Nuclear power.
  - Tobacco.

Challenges Facing Green Deposits

Lower Interest Rates: Green deposits often offer lower returns compared to regular deposits, deterring investors.
Lack of Awareness: Limited understanding among customers and bank staff reduces demand and effective implementation.
Limited Green Projects: Banks face constraints in identifying and financing sustainable, viable green projects.
Design Flaws: Restrictions on eligible activities and unclear definitions of “green” limit the scope of investments.
Regulatory Gaps: Absence of robust frameworks for assessing and verifying green claims leads to inefficiencies.
High Costs: Independent third-party audits and impact assessments increase operational expenses.
Competition for Funds: Green deposits struggle to attract investors prioritizing higher returns over sustainability.
Low Traction: Minimal uptake by banks and private players slows the growth of the green deposit market.

ESG (Environmental, Social, and Governance) Principles

Environmental Principles – Focus on how an organization impacts the natural environment and its strategies to mitigate environmental risks.

Climate Change and Carbon Emissions: Efforts to reduce greenhouse gas emissions.

Social Principles – Address the impact of a company’s operations on its employees, customers, and communities.

Community Engagement: Supporting local communities through initiatives like education and healthcare.

Governance Principles – Relate to how an organization is managed, its leadership, and adherence to ethical practices and transparency.

Board Composition and Independence: Ensuring a diverse and independent board of directors.