Green Deposits - Will it take off?

 Green  Deposits: Not yet bankable!

Introduction: Green Deposit Scheme, introduced by Reserve Bank of India (RBI/regulator) last year, was in the news recently, when State Bank of India disclosed that it has approached the regulator to reduce the Cash Reserve Ratio requirements for such deposits. Probably, SBI might have highlighted the accounting and audit costs involved to  ensure that the said deposits are used for financing green projects only. It will be worthwhile to see a brief of the scheme, before looking into how such deposits are marketed at present and also whether green deposits will see a decent traction in future.

Brief of the Scheme: With a view to fostering and developing a green finance ecosystem in the country, RBI has put in place a framework, effective from 1st June 2023, for acceptance of Green Deposits by the Regulated entities (REs). All scheduled commercial banks, deposit taking NBFCs including Housing Finance Companies (HFCs) were covered. 

• As per the definition, Green Deposit means an interest-bearing deposit, received by the RE for a fixed period and the proceeds of which are earmarked for being allocated towards green finance. So demand deposits of the banks are outside the purview of such deposits. 
• It can be cumulative/non cumulative and is open to resident individuals, non-individuals, and NRI (Non-Residents)*
• The deposit is accepted in Indian Rupees only.  
• As regards interest rate, REs are not permitted to differentiate the rate on Green Deposits (except bulk deposits), from other regular deposits of the same size and tenor. 

Use of Proceeds: 

1. Green Deposits are to be used for lending to and/or investing in the activities/projects that contributes to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives - including biodiversity management and nature-based solutions. The eligible activities is a long list and includes renewable energy projects, construction of low-carbon buildings/energy-efficient retrofits to existing buildings, electric vehicles, sustainable farming activity, pollution prevention and control projects, etc.

2. Unallocated proceeds of green deposits can be invested in Level 1 High Quality Liquid Assets, with maximum maturity up to one year.

3. REs cannot reconcile the green activities/projects financed in the past with future deposits accepted under green deposit scheme.

Popularity of the scheme: While a few major banks have raised senior unsecured green floating rate notes with different pricings last year, attracting green deposits as retail/bulk deposit is engaging the attention of the banks only recently. Majority of the banks have included green deposit schemes as part of their regular fixed deposit schemes (cumulative and non-cumulative).  Two or three banks have offered the green deposits  separately, by accepting the deposits for a specific number of days and offering different interest rates. The said banks appear to have relied on section 4 of the master direction on interest rates, which allows the banks the freedom to vary the interest by defining specific tenor for such deposits. 

For example, SBI offer Green deposits for periods of 1111, 1777 and 2222 days and Central Bank of India (CBI) extends the deposits of 1111, 2222 and 3333 days . In the case of SBI, the interest on Green Deposits is lower by 10 bps as compared to its regular 3-5 year and 5-10 year period fixed deposits. However, the interest rates on Green Deposits of CBI is higher by 20-25 basis points of the bank's interest rates for the said periods of  3-5 years and 5-10 years. 

(SBI might have chosen the lesser interest route for Green Deposit on account of the accounting/audit costs to be in place to ensure that the deposits accepted are (i) used for financing green projects only and (ii) that no project marketed as 'green', but in reality do not satisfy the requirements of a green activity/project (defined as greenwashing), gets sanctioned at any point of time.  Central Bank of India appear to have found the Green Deposit as an attractive tool to increase their deposit base)

Whether CRR should be reduced for Green Deposits?: If a bank offers interest rate for a deposit at 7% p.a., the effective cost goes up by 30 bps due to the need to maintain CRR with RBI at 4.5% at nil interest rate.  If the CRR is waived for Green Deposit, the effective increase in cost due to maintenance of CRR can be passed on to the customer. In that way, in addition to morally coercing the  customer to contribute for a 'healthy green environment tomorrow', he can be compensated with higher interest rates for making his contribution to a better ecosystem. Hence RBI might do well to consider waiver of CRR, with a rider that the effective incremental interest rate costs due to CRR shall be at least partially passed on to the customer. (after factoring in costs involved to ensure that proceeds lent satisfy the eligible criteria).

Is there a need to offer reduced interest rate for Green Projects/activities? Offering high interest rates for Green Deposits and low lending rates for Green Projects/Activities at the same time might not be viable. The government has already put in place measures that will help to reduce the cost of project/increase the rate of return in such projects. Hence, as of now, I do not offer any comment in respect of financing green projects/activities at cheaper rates.

Regards

V. Viswanathan

24th February 2024.

*While REs are allowed to raise deposits from NRIs, only banks are at present allowed to accept deposits from NRIs with repatriable facility.