Considering the threat that climate change poses globally, the Reserve Bank of India (RBI) issued a comprehensive framework for lenders to accept green deposits in April last year. The regulator’s intent was noble: to enable lenders and customers to further the green cause. However, over 20 months later, lenders have made little to no progress in garnering green deposits.

Green deposits are essentially interest-bearing deposits, received by the lenders for a fixed period, with proceeds earmarked for green finance. Lenders shall issue green deposits as cumulative/non-cumulative deposits. On maturity, the green deposits can be renewed or withdrawn at the option of the depositor. According to RBI norms, these deposits shall be denominated in Indian Rupees only.

Capital raised via green deposits can fund projects related to solar, wind, biomass and hydropower energy that integrate energy generation and storage. Further, these funds can be used in sectors which enable energy efficiency, clean transportation, climate change adaptation, and sustainable water and waste management.

Green deposits also can be used for funding green buildings, coastal and marine environment projects, certified organic farming, among others.

To ensure compliance, the RBI mandates that allocation of funds raised through green deposits during a financial year must undergo an independent third-party audit annually.

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Little progress made

CS Setty, chairman of country’s largest lender State Bank of India (SBI) told businessline that while there is some interest in green deposit, it is not very significant. He noted that currently there is not much traction in green deposits and the price differential on them will take some time to grow.

“Philosophically, somebody should align. As we go forward, people are trying to create awareness but currently the attraction is not there. Green deposits at our bank are currently less than ₹100 crore.

I think we need to see various ways of engaging with GenZ on this product,” he said.

Meanwhile, the country’s largest private lender HDFC Bank has not raised green deposits on or after June 1, 2023, based on the RBI’s framework for the acceptance of green deposits, according to its FY24 annual report. While most public sector banks have started accepting green deposits, private banks have been slow adopters.

Challenges

During the SBI Banking & Economics Conclave held in Mumbai last month, Department of Financial Services (DFS) Secretary M Nagaraju was asked about steps the government is taking to promote green deposits.

He responded by saying that the demand is not lower just for green deposits, but for a country the size of India, bond issuances too have minimal volumes. Accordingly, mobilising higher green deposits is “some time away”, he said.

“We need a framework to measure which industry and activity is green, and how to account for that... Moreover, we also have our own priorities, every year we have millions of people coming for jobs, and small and medium businesses also need funds. I think we need to prioritise our lending,” he said.

Another core challenge bankers face in mobilising green deposits is the lower interest rate. For instance, SBI offers a 7 per cent interest rate for the general pubic on 2-3 year tenor retail domestic term deposit, whereas a green deposit with similar tenor has 6.65 per cent rate of interest.

“Customers usually do not consider the nature of deposit; they seek higher returns,” said a senior official at a mid-sized bank. The bank is yet to launch a comprehensive green deposit product.

Waiting to Bloom
Funds raised via green deposits are earmarked for being allocated towards green finance
Banks, especially private sector ones, see little to no progress on mobilising green deposits
Core challenge in garnering green deposit is lower returns; India also has own priority sectors to lend to
Reduction in CRR on green deposit can boost growth, bankers say
Corporates with long term ESG requirements can park funds in green deposits; customer awareness can boost green deposits
Way ahead

Bankers suggest that a reduction in cash reserve ratio (CRR) requirement for green deposit will help garner more customers.

“We have asked (the regulator) for a reduction in CRR for green deposits and second, if possible, to incorporate it as a policy,” former SBI Chairman Dinesh Khara said earlier this year. He added that while there has been an early start from the regulator, it may take 2-3 years to see an impact on pricing.

CRR is the percentage of a bank’s deposits that must be kept with the central bank at a zero interest rate. Currently, the CRR rate for banks is at 4 per cent.

Besides, increased customer awareness is required to boost the volumes of green deposits. Apart from returns, customers must be informed that funds they park with bank as green deposits are used for financing renewable energy projects, projects that lower carbon emission, and enable clean transportation.

“All large corporates have medium to long term environmental, social and governance (ESG) commitments to fulfil. By placing their ESG funds in green deposits with banks, lenders can on-lend to green field projects which will further the green cause, and help corporates meet their ESG requirements,” a senior public sector banker said.