RBI’s Green Deposits Framework | 13 Apr 2023

For Prelims: Green Finance Ecosystem, Green Bond, RBI, Non-Banking Financial Companies, UNEP (United Nations Environment Program), Perform Achieve and Trade.

For Mains: Green Finance Ecosystem.

Why in News?

The Reserve Bank of India (RBI) has announced a new framework to offer green deposits to the customers, aiming at developing a Green Finance Ecosystem (GFS) in India.

  • The framework will come into effect from June 1, 2023.
  • A green deposit refers to an interest-bearing deposit received by an RE (Regulated Entity) for a fixed period, with the proceeds earmarked for allocation towards green finance.

What are the Key Features of the Framework?

  • Applicability:
    • The framework is applicable to 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), including Housing Finance Companies.
  • Allocation:
    • REs will be required to allocate the proceeds raised through green deposits towards a list of green activities and projects that encourage energy efficiency in resource utilization, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation, and improve natural ecosystems and biodiversity.
  • Exclusion:
    • Projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades, nuclear power, direct waste incineration, alcohol, weapons, tobacco, gaming, or palm oil industries, renewable energy projects generating energy from biomass using feedstock originating from protected areas, landfill projects and hydropower plants larger than 25 MW have been excluded from green financing.
  • Financing Framework:
    • To ensure effective allocation of green deposits, REs must put in place a Board-approved Financing Framework (FF). The green deposits shall be denominated in Indian Rupees only.
    • The allocation of funds raised through green deposits by REs during a financial year shall be subject to independent third-party verification/assurance, which shall be done on an annual basis.

What is Green Finance Ecosystem?

  • About:
    • GFS refers to the financial system that supports and enables investments in environmentally sustainable projects and activities.
      • It includes a range of financial products, such as green bonds, green loans, green insurance, and green funds, that are designed to promote environmentally friendly practices and projects.
    • The green finance ecosystem aims to create a financial system that supports the transition to a low-carbon, resource-efficient, and sustainable economy, while also addressing the risks and opportunities associated with environmental issues such as climate change, pollution, and biodiversity loss.
  • Need:
    • The financial sector can play a pivotal role in mobilising resources and their allocation thereof in green activities/projects. Green finance is also progressively gaining traction in India.
    • The GFS can augment the flow of credit to green activities and projects while also protecting the interest of depositors and addressing greenwashing concerns.
    • It can promote sustainable development and create a positive impact on the environment in India.
  • Indian Scenario:
    • India has commenced its journey for carbon neutrality and put forward a 'Green Deal' to be achieved by 2070.
      • The Green Deal has classified green finance as an enabler to accelerate decarbonisation. It emphasises on the need for an increased flow of capital from the national government and private entities to establish green infrastructure.
    • In 2016, the RBI had released a report in collaboration with UNEP (United Nations Environment Programme) and India on the lines of sustainable financial systems.
      • The report explores various facets of financial systems in India and its role in accelerating green finance.
    • Carbon trading has been introduced in the policy framework of the country through the 'Perform Achieve and Trade' scheme.
    • According to the World Economic Forum the market for green bonds could be worth more than two trillion dollars by 2023.

What are the Related Initiatives?

  • Encouraging Foreign Capital: The Government has permitted Foreign Direct Investment (FDI) up to 100% under the automatic route in the renewable energy sector.
  • Encouraging Renewable energy:
  • India’s Nationally Determined Contribution: Under the Paris Agreement which was adopted by signatory countries in 2015, India had submitted Nationally Determined Contribution (NDC) with quantified targets.
    • To reduce the emissions intensity of its Gross Domestic Product (GDP) by 33-35% till 2030 from the levels in 2005,
    • To achieve about 40% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.

Way Forward

  • India's green economy is showing promising signs of growth, and banks are playing an important role in promoting sustainable finance and supporting the country's transition towards a low-carbon, resource-efficient, and sustainable economy.
  • Financing green projects is a critical step towards achieving a sustainable future.

Source: IE