GREEN DEPOSITS

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Context: The Reserve Bank of India (RBI) has clarified its stance on green funds, stating that banks and Non-Banking Financial Companies (NBFCs) do not need to raise green funds. However, if they choose to do so, they must adhere to the prescribed framework.

Details

• Green deposits are a type of financial product that allows investors to support environmentally friendly projects and initiatives. They are similar to regular deposits, except that the bank or financial institution guarantees that the funds will be used for green purposes, such as renewable energy, sustainable agriculture, or waste management.
• Green deposits are attractive for investors who want to align their money with their values and contribute to the fight against climate change. They also offer competitive interest rates and tax benefits in some countries.
• The RBI had previously issued detailed guidelines in April 2023 for the acceptance of "green deposits" by banks and NBFCs. These funds are intended to finance activities such as renewable energy, green transport, and green buildings.

Key points from the RBI's clarification

• Green Deposit Framework: The framework for the acceptance of green deposits came into effect from June 1, 2023.
• Interest Payments: RBI-regulated entities (REs) are required to pay interest on green deposits to customers as per agreed terms and conditions, irrespective of the allocation or utilization of proceeds.
• Premature Withdrawal: There is no restriction on the premature withdrawal of green deposits. However, REs must adhere to existing guidelines.
• Impact of Withdrawals: Premature withdrawals will not impact activities or projects undertaken using the proceeds of green deposits.
• Temporary Parking of Proceeds: REs can temporarily park proceeds of green deposits, pending allocation towards green activities or projects, in liquid instruments with a maximum maturity of up to one year.
• Foreign Banks: Foreign banks can have a common global policy on green deposits, but they must comply with the framework for green deposits raised in India after June 1, 2023.
• Currency Denomination: Green deposits can only be denominated in Indian rupees if they are raised in India after June 1, 2023.

Conclusion

• The RBI emphasizes the role of the financial sector in mobilizing resources for green activities/projects, and the framework aims to encourage REs to offer green deposits. This initiative is expected to contribute to the flow of credit to green projects, protect the interests of depositors, and address concerns related to greenwashing.

Must Read Articles:

GREEN DEPOSITS: https://www.iasgyan.in/daily-current-affairs/green-deposits#:~:text=What%20are%20green%20deposits%3F,deposits%20towards%20environment%2Dfriendly%20projects.

FRAMEWORK FOR ACCEPTANCE OF GREEN DEPOSITS: https://www.iasgyan.in/daily-current-affairs/framework-for-acceptance-of-green-deposits

PRACTICE QUESTION Q. What are the primary environmental benefits of investing in green deposits, and how do financial institutions ensure the credibility and impact of these sustainable investment vehicles?