Global warming and climate change are the most critical challenges faced by the global economy. To mitigate these challenges, India has been instrumental in the development of environmentally sustainable projects and needs various sources of financing for these projects.

'Green Financing' is the term coined for ecologically friendly projects such as renewable energy, clean transportation, energy-efficient, energy conversion projects, etc.

The financial sector plays a pivotal role in mobilizing funds and allocating the resources for such green finance projects.

Government and regulators in the past few years have been taking steps in India to foster and develop a green finance ecosystem in India. Sovereign Green Bonds made its debut at the start of this year for funding green infrastructure and included it in its yearly borrowing plan.

In April 2023, the Reserve Bank of India also published a framework for acceptance of 'Green Deposit' for banks and non-banking finance companies to raise funds for green financing.

What exactly are Green Deposits?

The Reserve Bank of India defined a green deposit as 'an interest-bearing deposit, received by the regulated entity for a fixed period and the proceeds of which are earmarked for being allocated towards green finance.'

Green deposits are like any other regular fixed deposits that banks offer but the proceeds of these deposits are used for only financing the green initiative projects.

The primary goal of green deposits is to finance qualifying enterprises and initiatives that facilitate the transition to a low-carbon, climate-resilient, and sustainable water, and waste management projects, among others.

The green deposits will have to be denominated only in Indian Rupees and will have the same features of regular fixed deposits for interest rates, tenure, etc. as per the RBI's master guidelines.

The RBI's framework for accepting green deposits will come into effect from June 1, 2023.

The central bank has asked financial institutions to put in place a comprehensive board-approved policy for offering green deposits, and to make the green deposit available on their websites.

A few financial institutions, such as HDFC, IndusInd Bank, Federal Bank, Union Bank of India, Central Bank of India, HSBC, have already been offering green deposits to investors as part of their green banking offerings to fund initiatives and businesses that support the United Nations Sustainable Development Goals.

Generally, the green deposit tenure offered by financial institutions ranges between 660 to 3333 days and offers 20-25 basis points higher than the regular fixed deposit rates.

Benefits & Drawbacks

There are several benefits for the depositors to invest in green deposits:

Familiar With The Product: Fixed deposit as a product has been around for decades and is simple to understand. Most retail investors can rarely be surprised by similar green deposits.

Low Risk: There is less risk involved related to securities market volatility or principal loss for green deposits.

Returns Predictability: The green deposits carry a fixed interest rate and hence there is a higher predictability of the returns that a depositor will receive. Also, there is no need for depositors to monitor the deposits frequently.

Support To Green Initiatives: green deposits offer a chance for depositors to play a part in conserving the planet Earth and thereby making a small contribution towards it.

Along with benefits are certain drawbacks of green deposits:

Lower Interest Rates: green deposits often have lower interest rates compared to other securities such as green bonds, or other sources of green financing.

Limited Tenure Options: green deposits tend to be for more than a year and banks currently offer only limited tenures for depositors. This may not necessarily meet the investors' investment goals.

Risk Of Greenwashing: There is always a risk of financial institutions using these green deposits as a tool to attract environmentally conscious depositors, without investing in sustainable projects. This is known as greenwashing. There is no transparency regarding which projects the funds have been utilised.

In conclusion, green deposits can be a useful financial tool for individuals who want to support sustainable projects while also saving money. However, it is important to weigh the benefits against the drawbacks, such as lower interest rates, limited options, and the risk of greenwashing. Customers should carefully research the financial institution offering the green deposit, and evaluate the transparency and impact of the sustainable projects being supported.

Sources: Reserve Bank of India, Media Reports