Recently concerns were raised over slow or no progress in green deposits in India, even after a year of regulatory framework by the RBI.
- Over 20 months since its introduction, banks still face hurdles in pricing and public engagement. It is being debated whether the Indian economy should consider any alterations.
- SBI’s green deposit scheme, launched last fiscal, garnered only Rs 22.39 crore, a small amount for the country’s largest lender, as revealed in its annual sustainability report.
- Bank of Baroda (BoB) has performed significantly better than SBI in attracting green deposits, accumulating Rs 106.69 crore through over 12,000 accounts since launching its scheme.
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- RBI Framework: Last year, RBI unveiled the framework for banks & NBFCs to accept green deposits that will invest in environment-friendly projects.
- Deposit Options: According to the RBI framework, banks will offer green deposits as either cumulative or non-cumulative options
- Maturity Options: Upon maturity, depositors can choose to renew or withdraw their green deposits.
- Currency: Green deposits will be denominated exclusively in Indian rupees.
- Applicability: The framework applies to all scheduled commercial banks and small finance banks (except regional rural banks and local area banks), as well as non-banking finance companies, including housing finance companies.
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About Green Deposits
- It is a fixed-term deposit for investors looking to invest their surplus cash reserves in environment-friendly projects.
- It aims to prevent greenwashing, which refers to making misleading claims about the positive environmental impact of an activity.
- It can fund projects in sectors such as renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
- Projects involving fossil fuels, nuclear power, and tobacco are excluded from green deposit financing.
- Lack of Incentives for Banks:
- Green deposits are long-term deposits meant to fund environmentally friendly projects.
- Banks currently lack incentives to promote these deposits compared to regular deposits.
- For example, a lower Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) on green deposits could encourage banks to offer them.
- Limited Customer Interest:
- Customers prioritize return on investment over the environmental impact of their deposits.
- Green deposits often offer slightly lower interest rates compared to traditional deposits.
- Limited Project Scope:
- Design flaws in green deposit schemes restrict the range of eligible green projects for bank investment.
- Perceived Ineffectiveness:
- Green investment products are sometimes perceived as merely symbolic, offering investors a feel-good factor without significant positive environmental impact.
- Project Sustainability Concerns:
- The long-term viability and sustainability of projects funded by green deposits are uncertain.
- Internal Knowledge Gaps:
- Insufficient awareness among bank staff about green deposit procedures hinders efficient processing.
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Way Forward
- Addressing Design Flaws and Expanding Project Scope:
- Clear Green Taxonomy: Establish a well-defined and comprehensive green taxonomy that clearly outlines eligible green projects across various sectors. This will provide clarity to banks and investors about what qualifies as a green investment.
- Expand Eligible Sectors: Broaden the scope of eligible green projects beyond traditional areas like renewable energy to include sustainable agriculture, waste management, green buildings, and other environmentally beneficial activities.
- Standardized Framework: Develop a standardized framework for green deposit schemes, including clear criteria for project evaluation, monitoring, and reporting.
- Enhancing Perceived Effectiveness and Transparency:
- Impact Reporting: Mandate regular and transparent reporting on the environmental impact of projects funded by green deposits. This will demonstrate the tangible benefits of these investments and build trust among investors.
- Third-Party Verification: Encourage independent third-party verification of green projects to ensure their environmental integrity and prevent greenwashing.
- Public Awareness Campaigns: Conduct public awareness campaigns to educate investors about the importance of green finance and the positive impact of green deposits.
- Ensuring Project Sustainability:
- Robust Project Appraisal: Implement rigorous project appraisal processes to assess the long-term viability and sustainability of green projects before funding.
- Monitoring and Evaluation: Establish mechanisms for ongoing monitoring and evaluation of funded projects to ensure they continue to meet environmental standards and achieve their intended outcomes.
- Risk Mitigation Measures: Develop risk mitigation strategies to address potential challenges and ensure the long-term success of green projects.
- Improving Staff Awareness:
- Training Programs: Conduct regular training programs for bank staff to educate them about green deposit schemes, procedures, and their importance in promoting sustainable finance.
- Dedicated Green Finance Teams: Establish dedicated green finance teams within banks to handle green deposits and related activities.
- Addressing Investor Concerns about Returns:
- Incentives for Green Deposits: Offer attractive incentives for green deposits, such as slightly higher interest rates, tax benefits, or other preferential terms.
- Green Bonds and Other Products: Develop a wider range of green investment products, such as green bonds and green mutual funds, to cater to different investor preferences and risk appetites.
- Bundling with Other Benefits: Consider bundling green deposits with other benefits, such as discounts on green products or services, to enhance their appeal.
Conclusion
India needs to create a more robust & effective ecosystem for green deposits & and investor-attractive schemes to ensure environment-friendly investment in projects and to achieve climate goals (SDG 7 and 9).
December 23, 2024
