Bumpy ride ahead for green deposits with questions raised about workability

The RBI's framework for green deposits is well meant but raises many questions on its workability

The Reserve Bank of India (RBI) has switched on the ignition for the long and bumpy ride towards raising resources for addressing climate risks with its framework for green deposits last week. Though no different from the current interest-bearing deposits of its regulated entities (REs), proceeds have to be deployed in green projects. More clarity will flow through when the official Indian taxonomy for this is firmed up, but the central bank has for the interim drawn up a list of activities qualifying as “green” — those that boost energy efficiency and climate resilience; and cut carbon emissions and greenhouse gases.

Mint Road’s move builds on the Union Budget FY23’s significant focus on green; and the country’s stated goal of achieving net-zero carbon emissions by 2070. A start has been on the liabilities side of the RBI’s REs with the green-deposit framework. But just how do you get people to park funds in these offerings?

A few banks do raise such deposits, but its pricing (that is, the interest rate offered on them) is lower when compared to the ubiquitous deposits. Why? The idea is that you as a good, evolved citizen will not look at returns alone; are altruistic; and concerned for the future of the planet. The problem is that rarely are these sensibilities on display in everyday life; and to expect many to queue up to park funds in green deposits requires a Bob Beamon leap of faith, especially with inflation at its current levels (and this is not to suggest that in a benign inflationary scenario, more would be keen to do so either).

To that extent, it’s also hard to read much into the maiden twin sovereign green bond auctions held on January 25. It saw a good response. The RBI sold a five-year Rs 4,000-crore paper at a coupon rate of 7.10 per cent, five basis points (bps) below the sovereign yield of like maturity; and 96 bids were received for Rs 13,525 crore, of which 32 bids for Rs 3,993.124 crore were accepted.

The hammer on the 10-year Rs 4,000-crore tranche came down at 7.29 per cent, six bps below the comparable government security; 170 bids for Rs 19,367 crore was seen (almost five times the notified amount of Rs 4,000 crore) and 57 bids for Rs 3,948.646 crore was taken on board.

But subscription to green debt at the institutional level may not be mirrored at the retail deposit level.

Again, beyond a point, raising such deposits may turn problematic. The RBI has made it clear that allocation of funds raised through green deposits during a financial year will be subject to an independent third-party verification/assurance; this is to be done on an annual basis. The third-party assessment would not absolve the RE of its responsibility regarding the end use of funds, for which the laid-down procedures of internal checks and balances would have to be followed as in the case of other loans.

Now step back. For years now, fund diversion by companies has been an area of concern. Which agency is to vouch that green-washing has not been done?

The RBI is of the view that if REs are unable to quantify the impact of their lending/investment, they should disclose, at the minimum, the reasons, the difficulties encountered, and the time-bound future plans to address these issues. But it is pragmatic too when it noted that “Considering the fact that impact assessment is an evolving area, it shall be undertaken on a voluntary basis for FY24. REs shall have to mandatorily make an impact assessment from FY25 onwards”.

Mint Road has gone about green finance in a calibrated manner. The report of its “Survey on Climate Risk and Sustainable Finance” (July 27, 2022) done by the Sustainable Finance Group in its Department of Regulation (DoR) has not got the attention it deserves. In response to the question, “Has the bank introduced green deposits for its customers? Please elaborate”, only six out of 34 surveyed banks responded in the affirmative. Only one out of a dozen state-run, two out of 16 private, and three out of six foreign banks had introduced green deposits for their customers. This is set to change.

Few are aware that the RBI issued its first notification on what is now referred to as sustainable finance on December 20, 2007, (“Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting — Role of Banks”). It observed that banking and finance’s immediate environmental and social impacts are relatively indirect because these are delivered through the activities of other businesses that rely on financial institutions. Nevertheless, “despite the relatively indirect nature of their environmental and social impacts, banks need to examine the effects of their lending and investment decisions”.

Banks were to put in place an appropriate plan of action to further the cause of sustainable development with the approval of their boards, keeping in view the Equator Principles, which provide a due diligence framework for banks to manage the social and environmental risk of financing large projects. Signed off by the late Vijaya Bhaskar, then the RBI’s chief general manager, it was a 26-page guidance note on climate-related financing — perhaps the first by any central bank in the world.

The RBI green deposit framework must be read along with the Securities and Exchange Board of India’s guidelines on Business Responsibility and Sustainability Reporting (BRSR) or the top 1,000 listed companies (by market capitalisation) from FY23. The disclosures under BRSR incentivise green financing and help banks and financial institutions in estimating their climate-related exposure to these listed companies.

Sectors outside the green zone

·         New or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil fuel-based

·         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

·         Hydropower plants larger than 25 Mw