The Reserve Bank of India (RBI) recently clarified that it is not mandatory for banks and Non-Banking Financial Companies (NBFCs) to raise green funds. However, if they choose to do so, they must adhere to the prescribed framework. This announcement was made in a set of Frequently Asked Questions (FAQs) regarding the ‘Framework for Acceptance of Green Deposits’.
The RBI had earlier, in April 2023, issued detailed guidelines for the acceptance of “green deposits” by banks and NBFCs. These guidelines are intended to guide the use of funds for financing activities that are environmentally friendly, such as renewable energy, green transport, and green buildings. The framework became effective from June 1, 2023.
The RBI’s FAQs outlined several key points, including:
- RBI-regulated entities (REs) must pay interest on green deposits to their customers according to agreed terms and conditions and prescribed directions, irrespective of the allocation or utilization of the proceeds.
- There is no restriction on the premature withdrawal of green deposits, but REs must adhere to existing guidelines.
- Proceeds from green deposits, pending allocation towards green activities/projects, can be temporarily parked in liquid instruments with a maturity of up to one year.
- Foreign banks can have a global policy on green deposits, subject to the provisions of the framework for green deposits raised in India post-June 1, 2023.
- Green deposits can only be denominated in Indian rupees.
The RBI highlighted the significant role of the financial sector in mobilizing resources for green activities and projects, noting the increasing traction of green finance in India. The framework aims to encourage REs to offer green deposits, protect depositor interests, aid customers in achieving their sustainability goals, address greenwashing concerns, and augment credit flow to green activities and projects.