Analyzing the Green Deposit Framework in India

[By Mahim Raval]

The author is as student of Gujarat National Law University.

 

Introduction

Recently, on 11 April, 2023 Reserve Bank of India (RBI) issued guidelines for Green Deposit framework for Scheduled Commercial Banks (SCBs), Non-Banking Financial Companies (NBFCs), & Housing Finance Companies (HFCs) excluding Regional Rural Banks (RRBs), Local Area Banks (LABs), and Payments Banks, which have now become effective from 1st June, 2023 onwards. This comes in the backdrop of RBI’s joining the Central Banks and Supervisors Network for Greening the Financial System (NGFS) in April, 2021. NGFS is a consortium of central banks of various countries which aims to green the financial ecosystem and sharing their experience and best trade-practices. It is in line with the release of discussion paper titled, ‘Climate Risk & Sustainable Finance’ by RBI in July, 2022 and also the speech of the deputy governor wherein he emphasized upon the role of banking institutions towards national environmental commitments.

Green deposits are mainly interest-bearing deposits which aims to fund green ventures and activities. This helps to channel the depositor’s funds towards green initiatives which are still in nascent developmental stage and needs external funding to survive.

However, for successful implementation of such initiative in Indian Financial system which needs necessary regulatory guidelines as well as an formal green taxonomy to address the concerns and apprehensions.

This move can be seen as a pioneering one to making provisions for voluntary disclosures and third-party inspections for safeguarding depositor’s interests.

Green deposits are no different than regular deposits, however the primary aim of ‘green’ deposit is to fund green projects and entice individuals and corporates to venture into green projects and activities. Before this framework, the green deposits were already in existence and offered by companies like HDFC Green & Sustainable Deposits and Federal bank.

The eligibility criteria to classify a particular activity or project as a green one is listed out in the framework under different heads.

This will be applicable on the ‘regulated entities’, and they will have to disclose their deposits and money raised in a particular financial year annually.

In this article, the author will discuss upon the existing green deposits (GD Framework), greenwashing and other concerns, and potential solution for effective implementation of it in India.

Framework

  1. Financing Aspects

Various eligible activities and project enumerated in Para 7 can be financed with help of funds raised through such green deposits. RBI mentions that allocation of funds shall be done on the basis of introduction of formal green taxonomy however, since it is not yet functioning, it should be utilized for reduction of carbon emissions, incorporating energy efficiency in resource utilization as well as promoting preservation of natural ecosystem and biodiversity. To ensure that funds are utilized for these activities only, allocation & distribution of funds shall be approved by Board of directors of the regulated entity (RE) only.

  1. Supervision

RBI has mandated that there should be a supervisory as well as advisory role of the board of directors of the RE. Every RE shall submit a comprehensive report about the implementation to its board of director in the initial 3 months of the new financial year. The board of directors shall be held responsible for overseeing the overall apprehended risks and controls, and it shall appoint the requisite experts to ensure that financial risks posed by climate change & degradation can be mitigated. Senior management and key managerial personnel shall also be updated about national & international policy initiatives and developments. In long term, such supervision will serve as a crucial aspect in effective implementation & enforcement of policy guidelines and it shall be also responsible for hiring the necessary workforce and training them to implement green policies.

  1. Disclosures

REs shall disclose the amount & details of raised funds through green deposits while submitting their annual financial statements.

The policy adopted and modified as per the need of the RE, framework related to raised funds, the report and suggestions of the third-party auditor as well as impact assessment report shall be disclosed and uploaded on the website of RE. The objective of such disclosure is to keep the depositors informed about the allocation of funds and investments in green initiatives done by the RE. This disclosure will help to keep a check on greenwashing and other concerns. Although, it seems that third-party auditing and reporting will help to provide authenticity and legitimacy of channeling of funds. However, it is not a complete solution and apprehensions related to integrity and accountability of such independent auditors are raised. Further, it could lead to a false sense of complacency. There is no regulation exists as of now to monitor those aspects however, RBI as an interim measure may implement stringent auditing system for these. One potential solution can be implementation of TFCD guidelines which will help the REs to disclose information in a better way.

  1. Third Party Audits

In addition to the board’s primary obligation for adhering to the GD framework, including the end-use of funds authorized for green deposits, the RBI has added an extra check by subjecting REs to an objective third-party verification/assurance, which will be performed annually. Given that effect assessment is a developing field, the RBI has taken a flexible approach, as evidenced by its prescription enabling voluntary impact assessment for the fiscal year 2023-24. However, beginning with the fiscal year 2024-25, the same will be required. Furthermore, the RBI has established specific effect metrics for each category of qualifying project, such as ‘energy savings per year’ in the case of clean transport. If REs are unable to measure the impact of their lending/investment, they must explain the causes, the problems came across, and the time-bound future plans to remedy the same. The RBI’s ‘comply and explain’, solution-oriented, flexible, and forward-thinking approach allows some flexibility to REs. However, depositors face a problem. Because their funds are ostensibly being invested in green initiatives, there will be a need to ensure alignment between the pledge and actual investment, as well as investment protection and regular review and monitoring.

Concerns & Considerations:

  1. Greenwashing Concerns

One of the biggest concerns observed across almost all jurisdictions in the world is that the funds will not be utilized for the purpose they were raised for. Greenwashing is defined as “the practice of marketing products/services as green, when in fact they do not meet requirements to be defined as green activities/projects.”

a)Vague or Unsubstantiated Claims: Companies may use phrases like “green,” “eco-friendly,” or “natural” without giving precise data or proof to back up their claims.

b) Labels that are irrelevant or misleading: Placing irrelevant environmental labels or certifications on items might provide the idea of sustainability. These designations might be deceptively general or self-created with no reliable verification.

c) Lack of Transparency: Greenwashing occurs when businesses suppress or disclose minimal information about their environmental practices, making it harder for consumers to make educated judgements.

d) Incomplete or altered data: Emphasizing favorable environmental qualities while neglecting or downplaying negative elements might provide an inaccurate impression of a product’s overall impact.

A potential solution can be involvement of Deposit Insurance and Credit Guarantee Corporation (DICGC) providing insurance on Green Deposit up to some particular amount.

  1. Tracking & Monitoring Funds:

Another important concern is the tracking of the funds raised and deposited. Although, the guidelines are comprehensive in nature and will ensure that the funds are properly utilized. Although, in the framework the guidelines provides that the independent auditors as well as the board of directors will be responsible to ensure that the fund is utilized where it is needed.

  1. Low Returns

As this is a new emerging area, the returns are not higher. It will be beneficial for the borrower as he will get funds at a lower interest rate, however the lender is not adequately incentivized.

Generally, Corporates only deposit if the returns are attractive enough. Some regulatory set-offs may be provided, for instance funds qualifying under Corporate Social Responsibility (CSR) or some tax concessions by the government will effectively attract the corporates to deposit in bulk.

Same concern was seen with the green bonds, where government laid down the framework but the market was inclined to invest into it.

  1. Asset-Liability Mismatch

Banks may offer higher interest rates on green deposits to incentivize individuals and corporate to invest. However, as this is still a grey area lacking effective legal framework to regulate green finance market. There is an imminent threat of maturity transformation and asset-liability mismatch, provided that there is a very long time period of investments and deposit period is much shorter.

Also, there is very less demand, for such financing, hence this will create an asset-liability mismatch. It can be the first instance where banks may put cap on number and amount of deposits.

  1. Issues related to Non-Compliance

Although, the guidelines and the framework issued by the RBI is to protect and safeguard depositor’s interest and to channel the funds to specified green activities only. However, India currently lacks the required legal framework to legally enforce those guidelines. There are no penal provisions to deal with the breach of guidelines. There is a need for grievance mechanism wherein the depositor can submit and escalate their grievances pertaining to end-usage of funds to the level of board of directors.

Conclusion

With the advent of 22nd Century, many investors, consumers and corporate are becoming aware about the long-term ill effects of climate change and are eager to invest their funds towards businesses incorporating green practices. Even though after introducing Priority Sector Guidelines (PSL), small and medium scale businesses were concerned about jeopardizing their employees’ livelihoods by conforming to them. With introduction of these green deposit guidelines, it gives a potential stable and low interest rate fund generation for these businesses.

Inflow of funds from individual investors will fund new and emerging sectors like green hydrogen, electric vehicles etc. This will overall help REs to grow their green finance portfolio and long-term financial plans for carbon-zero targets.

However, for success of this concept it will need the RBI to enforce more stringent guidelines and introduce new penal provisions for effective implementation. Introduction of formal green taxonomy by the government is also awaited for enabling uniform disclosures, scaling up of green and sustainable finance and to mitigate the concern of greenwashing.

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