India faces a significant challenge in mobilizing the estimated $2.5 trillion needed by 2030 to meet its climate goals.
The RBI’s Green Deposit Scheme, introduced in June 2023, allows depositors to fund environmentally sustainable projects through interest-bearing fixed deposits, aiming to support green finance and climate resilience.
However, challenges such as the absence of a clear Indian green taxonomy, vague eligibility criteria, and inadequate disclosure practices hinder the scheme’s potential.
Addressing these issues through robust frameworks, transparency, and governance is essential for the scheme to become a mainstream driver of sustainable development.
India’s Financial Needs For Climate Goals
The Government of India projects a financial requirement of approximately US$ 2.5 trillion by 2030 to fulfill its climate commitments outlined in the Nationally Determined Contributions (NDCs).
Securing such a massive amount of funding is challenging but crucial for implementing effective adaptation and mitigation strategies.
Leveraging Domestic Savings
To meet these financial needs, India must harness domestic savings through innovative mechanisms that channel resources into climate initiatives. One such approach is the Green Deposit Scheme introduced by the Reserve Bank of India (RBI) in June 2023.
Green Deposit Scheme
From June 1, 2023, depositors, including individuals and institutions, have the option to convert their fixed deposits into “green” deposits. This scheme enables banks and specific deposit-taking non-bank financial institutions, such as housing finance companies, to bolster their fundraising capacity. The funds raised through these deposits are earmarked for projects and activities that promote environmental sustainability.
Supporting the Transition to Net-Zero
The scheme offers businesses improved access to green loans, often under more favorable terms, to help them transition to net-zero emissions. By creating a dedicated fund for eco-friendly projects, the initiative supports sustainable development and aligns financial systems with India’s climate goals.
What Are Green Deposits?
Green deposits are fixed deposits in Indian rupees that earn interest, much like regular fixed deposits.
However, the key distinction lies in their purpose—the funds collected through green deposits are allocated exclusively to projects or activities that provide environmental benefits.
Under the RBI framework effective from June 1, 2023, proceeds from green deposits must be used for activities such as improving energy efficiency, reducing carbon emissions and greenhouse gases, promoting climate resilience, and preserving biodiversity and natural ecosystems.
Both public and private sector banks now offer green deposit options to individual and institutional customers. Although the interest rates are generally similar to traditional fixed deposits, some banks issue a “green certificate” to depositors, recognizing their role in supporting a sustainable future.
Key Features of the RBI Framework
To ensure transparency and prevent greenwashing, the RBI framework mandates financial institutions to adhere to strict guidelines when raising and deploying green deposits.
- Board-Approved Policies: Financial institutions must have a clearly defined, board-approved policy for mobilizing and allocating green deposits.
- Public Disclosures: Institutions are required to publicly disclose their financial framework for deploying the proceeds.
- Evaluation and Impact Assessment: A structured process must be in place for evaluating the feasibility of projects and assessing the impact of funds utilized.
- Third-Party Verification: The framework encourages independent verification of various performance metrics to enhance credibility.
The RBI has also outlined specific activities that qualify for funding through green deposits, ensuring clarity and alignment with environmental objectives.
While some existing green deposit products already meet parts of the framework, institutions may face heightened scrutiny of their practices moving forward.
Challenges In The RBI’s Green Deposit Framework
The RBI’s initiative to promote green deposits is commendable; however, several critical shortcomings limit its effectiveness and credibility.
Lack of a Clear Green Taxonomy
A major challenge is the absence of a well-defined Indian green taxonomy. Without clear definitions of what qualifies as “green,” the eligibility criteria for green projects remain vague and overly broad.
A standardized taxonomy is essential to:
- Clearly define environmentally sustainable activities.
- Improve transparency and reduce greenwashing.
- Equip financial institutions and banks to channel funds effectively into projects aligned with environmental criteria.
Inadequate Sector-Specific Standards
Currently, the framework relies on the interim adoption of the Framework for Sustainability-Linked Green Bonds (SGrB) to categorize eligible projects across nine sectors.
These sectors include renewable energy, energy efficiency, clean transportation, climate change adaptation, and others.
However, there is a lack of sector-specific indicators, measurable targets, and standards.
For instance, the renewable energy sector is vaguely described as “incentivizing adoption of renewable energy.”
Such broad descriptions fail to provide actionable guidance, leaving significant room for interpretation and ambiguity.
Insufficient Disclosure Practices
Another critical issue is the inadequacy of disclosures by banks. Depositors lack visibility into how their investments are being utilized, as banks do not disclose information about the borrowers or specific projects funded by green deposits.
In some cases, banks provide only sample lists of green products, which often overlap with activities under existing government schemes. This raises concerns about double counting and the absence of rigorous project evaluation or tailored impact assessments.
Without transparent disclosures and robust risk identification, depositors cannot accurately assess the environmental impact of their investments, eroding trust and undermining the credibility of green deposits.
Risk of Becoming a Subset of Fixed Deposits
These challenges create the risk that green deposits may end up as a marginal extension of conventional fixed deposits rather than an innovative product driving sustainable finance.
Way Forward
Despite these challenges, the conceptual introduction of green deposit schemes represents a step forward for sustainable finance in India. However, substantial improvements are needed to ensure their credibility and effectiveness.
Establish a Clear Green Taxonomy
Developing a comprehensive Indian green taxonomy should be a top priority. This taxonomy will provide:
- Clear definitions of green activities.
- Standardized benchmarks to evaluate project eligibility.
A foundation for transparency and accountability, fostering confidence among depositors and financial institutions.
Strengthen Frameworks and Standards
The RBI must design a robust, permanent framework for green deposits with clearly defined sector-specific indicators, measurable targets, and evaluation standards.
- This will ensure consistency and meaningful impact across sectors.
- Enhance Transparency and Governance
- Banks must adopt transparent disclosure practices, including:
- Publishing detailed information about the deployment of green deposit proceeds.
- Providing insights into specific projects or borrowers funded.
- Ensuring third-party verification of impact metrics to build depositor trust and confidence.
Build Internal Capacity
Financial institutions must focus on building expertise to evaluate, appraise, and fund viable green projects. This internal capacity is critical to expanding the scope and impact of green deposits.