The Reserve Bank of India, through a circular dated 11 April 2023, issued the Framework for Acceptance of Green Deposits, establishing a regulatory structure for banks and non-banking financial companies to accept deposits specifically earmarked for financing environmentally sustainable activities. The framework, effective from 1 June 2023, applies to all scheduled commercial banks (excluding regional rural banks, local area banks, and payment banks) and deposit-taking NBFCs (including housing finance companies).
Background
The green deposits framework represents the RBI's entry into sustainable finance regulation, positioning India's central bank among a small number of financial regulators globally that have established formal structures for green deposit products. The initiative aligns with India's commitments under the Paris Agreement and the broader national policy objective of achieving net-zero carbon emissions by 2070.
Prior to this framework, while banks could voluntarily label certain deposit products as green, there was no standardised regulatory definition of what constitutes a green deposit, which sectors qualify for deployment of green deposit proceeds, or what disclosure obligations attach to such products. The absence of regulation created risks of greenwashing, where deposits could be marketed as environmentally friendly without genuine allocation to sustainable activities.
Key Provisions
The framework establishes the following regulatory architecture:
Board-approved financing framework: Regulated entities must adopt a Board-approved Green Deposit Financing Framework that outlines the strategy, allocation, and impact assessment methodology for green deposit proceeds.
Eligible green sectors: Proceeds from green deposits may only be deployed in specified sectors, including renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings, and biodiversity conservation.
Exclusions: The framework explicitly prohibits deployment of green deposit proceeds in projects involving fossil fuel extraction, production, or significant consumption, nuclear energy, direct waste incineration, alcohol, weapons, tobacco, gaming, or palm oil industries.
Third-party verification: An independent third-party verification or assurance of the allocation of funds raised through green deposits to eligible green activities must be conducted on an annual basis, and the verification report must be made available to depositors.
Disclosure and transparency: Regulated entities must disclose on their websites the amount of green deposits raised, the list of green activities or projects to which the proceeds have been allocated, and the impact assessment report.
Deposit terms: Green deposits may be offered as cumulative or non-cumulative deposits, denominated in Indian Rupees only, with renewal or withdrawal at the depositor's option on maturity. Interest rates and other terms are at the discretion of the regulated entity.
Implications for Practitioners
Banking and finance practitioners advising regulated entities must ensure Board-level governance structures are established for green deposit products. The requirement for a Board-approved financing framework means that product launches cannot be delegated to operational teams without Board oversight.
The third-party verification requirement creates a new compliance cost and an audit trail that practitioners should factor into product economics. Entities offering green deposits will need to engage independent auditors or verifiers with expertise in sustainable finance standards.
For corporate borrowers seeking green financing, the framework creates a new source of funding. Companies in eligible sectors should engage with their banking partners to explore green deposit-funded lending at potentially preferential rates, as banks may price green loans competitively to attract ESG-conscious depositors.