India’s green deposit, finance initiatives need push

By Anurag Dwivedi and Shashwat Bhaskar, Shardul Amarchand Mangaldas & Co

A framework for acceptance of green deposits issued recently by the Reserve Bank of India (RBI) comes into effect in June this year. The framework defines green deposits as interest-bearing deposits received for a fixed period that are earmarked for allocation towards green finance.

Anurag Dwivedi, Shardul Amarchand Mangaldas & Co
Anurag Dwivedi
Shardul Amarchand Mangaldas & Co

Deposits form a major source of fund mobilisation for regulated entities or lenders, namely banks and deposit taking non-banking financial companies, including housing finance companies. The framework envisages proceeds of green deposits made with lenders for green finance to be used as loans or investments contributing to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives including biodiversity management and nature-based solutions.

The framework stipulates that proceeds raised from green deposits should be lent to sectors such as renewable energy, energy efficiency, clean transportation, green buildings, and terrestrial and aquatic biodiversity conversation.

Importantly, the framework specifies a negative end-use list, restricting the use of such proceeds for activities including nuclear power generation, direct waste incineration, landfill projects, or projects where the core energy source is fossil fuel-based. Lenders are required to introduce a board-approved policy on green deposits and a financing framework for allocation of their proceeds, as well as certain reporting and disclosure requirements.

Such a move comes against the backdrop of continuing efforts undertaken by the Government of India, the RBI and other government entities to promote sustainable finance. In recent times, the RBI has issued sovereign green bonds aggregating to INR160 billion (USD1.9 billion) for proceeds directed to green projects aiming to reduce the economy’s carbon footprint.

Shashwat Bhaskar, Shardul Amarchand Mangaldas & Co
Shashwat Bhaskar
Shardul Amarchand Mangaldas & Co

Another mode of sustainable finance is green debt securities, with the Securities and Exchanges Board of India (SEBI) having set up a framework for their issuance in 2017. Earlier this year, the SEBI expanded the definition of green debt securities to incorporate blue bonds (funds raised for sustainable water management), yellow bonds (for solar power generation), and transition bonds (for transitioning to sustainable form of operations) within its ambit.

The Green Growth Equity Fund, anchored by the National Investment and Infrastructure Fund Fund of Funds, was also set up as India’s first sustainability and climate-focused fund, scaling up investment in green infrastructure projects such as renewable energy and waste-water treatment.

The RBI’s framework is another step in the same direction, as a means to enhance green finance in the economy.

It became evident from an RBI survey on climate risk and sustainable finance, published in July 2022, that certain lenders were already accepting green deposits. However, 62% of lenders in the survey noted they had no intention of introducing green deposits in the short term. So, it seems that despite the RBI introducing the framework, ensuring that lenders are amenable to its effective implementation will be a different ball game.

While it will aid lenders’ sustainable finance goals, with the framework yet to come into effect, it would still seem prudent for the RBI to assess incentivising lenders to take up green deposits proactively. Importantly, the RBI and lenders providing green finance should also be wary of “greenwashing”, which is defined under the framework as marketing products or services as green when in fact they do not meet the requirements to be defined as green activities or projects.

The framework states that it aims to address greenwashing concerns, and it appears that a third-party verification of allocation of funds and an impact assessment of funds lent to or invested in green activities or projects, contemplated under the framework, are aimed at helping such concerns. A robust check on greenwashing, whether under or outside of the framework, is necessary to ensure the effective use of green finance, and the RBI should consider providing further guidance to lenders to ensure there are no instances of greenwashing. In turn, lenders should consider including relevant checks and balances in their board policies and financing frameworks.

In addition, it would also be helpful to incentivise depositors to participate in green deposits and increase awareness among depositors regarding green deposits. There is currently no tangible or intangible benefit for a depositor to consider green deposits as a preferred mode. Ensuring adequate awareness and incentivising green deposits may go a long way in encouraging and advancing green finance.

Anurag Dwivedi is a partner and Shashwat Bhaskar is an associate at Shardul Amarchand Mangaldas & Co

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