The Reserve Bank of India (RBI) has issued a framework for financial institutions to offer ‘Green Deposits’ to customers, address ‘greenwashing’ concerns, and help augment the flow of credit to green activities and projects.

The framework, which aims to foster the growth of the green finance ecosystem in the country, applies to all regulated entities like scheduled commercial banks and deposit-taking non-banking financial companies. It will come into force on June 1, 2023.

The allocation of proceeds from green deposits would be according to the official Indian green taxonomy, which is pending finalization.

As an interim measure, banks would be required to allocate the proceeds raised through green deposits for renewable energy projects covering solar, wind, biomass, and hydropower energy projects that integrate energy generation and storage.

Other sectors for which green deposits can be used include energy efficiency, clean transportation, and climate change adaptation.

The RBI framework excludes the production and distribution of fossil fuels or where the core energy used is fossil fuel-based, nuclear power generation, hydroelectric projects above 25 MW, and renewable energy projects using biomass as feedstock originating from protected areas.

The Central Bank aims to protect the interest of depositors and help customers achieve their sustainability agenda, and address greenwashing issues.

Greenwashing refers to the practice of marketing products/services as green when they do not meet the requirements to be defined as green.

In a notification to banks, the central bank noted that climate change has been recognized as one of the most critical challenges globally. The financial sector can be pivotal in mobilizing resources for green activities and projects. Green finance, it said, is also gaining traction in India.

Third-party verification

The allocation of funds raised through green deposits will be subject to an independent third-party verification/assurance, which must be done yearly. The third-party assessment would, however, not absolve the bank of its responsibility regarding the end-use of funds.

With the assistance of external firms, the banks must annually assess the impact associated with the funds lent for or invested in green finance activities and projects and prepare an impact assessment report.

The central bank said that considering the impact assessment is an evolving area, it can be undertaken voluntarily for the financial year 2023-24. The impact assessment would become mandatory from 2024-25.

The impact indicators include total renewable energy capacity in MWh, energy generated per year and greenhouse gas emissions avoided annually.

The central bank framework has been issued in the backdrop of increasing issuances of green bonds in India by entities in both the public and private sectors.

This February, the Union government completed the sale of ₹160 billion (~$1.9 billion) worth of sovereign green bonds in two equal tranches of ₹80 billion (~$970 million).

Recently, REC, a government-owned infrastructure finance company, issued green bonds worth $750 million under its $7 billion Global Medium Term Note Program.