Funds from green deposits are intended to go to environmentally friendly and sustainable projects. (Included)
There has been a surge in news articles highlighting green deposits offered by SBI and some big banks. Designed for environmentally conscious investors, green deposits are simple and similar to traditional term deposits.
Funds from green deposits are intended to go to environmentally friendly and sustainable projects. India’s commitment to sustainable development has gained momentum in recent years, driven by international agreements such as the Paris Agreement and domestic policies promoting renewable energy and environmental protection.
The mandate from RBI is to promote projects that aim to “promote energy efficiency in resource use, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation, and improve natural ecosystems and biodiversity.” was to collect deposits for expansion.
There is a perception that customers are reluctant to use these products, and banks are struggling to raise deposits. But that doesn’t seem to be the case.
As with other directives, banks are adopting a risk-free approach as market forces are not in their favor. Environmental, social and governance (ESG) investing in India is just getting started. Most such investments rely on certification by third-party auditors before committing funds.
Also read: Loss of Damagdam forest will be tragic
Find a project
Clients who invest in green funds tend to be highly involved in green activities. The first problem is that green deposits appear to be collected from the public through trust in banks, rather than against specific independent certifications. Therefore, raising bank deposits based on green promises is insufficient and must be backed by independent sources of funding.
The second issue is how to implement a green deposit scheme and how banks will find suitable projects. First, these funds have a tenor of three to five years. Balancing the management of green deposit assets and liabilities will be difficult. Green projects and other climate resilience projects take more than five years.
For example, if a project involves the construction of a flood-resistant barrier, it will take more than five years for the project to reach its net present value. This will lead to a short-term concentration of financing for greenwashing projects. Banks could claim to have met their targets by prioritizing lending to existing businesses with lower pollution impacts, such as service companies. Therefore, the question is how banks interpret and implement this system.
A further problem with implementing this system is that it constrains borrowers to a higher level of stringency than other environmental regulations require. For example, SBI may prefer to provide financing to small and medium-sized auto parts manufacturers with higher environmental standards than other auto parts manufacturers.
This manufacturer sets the standards, but may lower them to match its competitors on price. In such a situation, will the loan be recalled or will the original repayment plan be maintained?The moral hazard problem lies with the banks and needs to be addressed by the lending arm of the system.
The fourth problem lies in the design of the scheme itself. All banks have priority sector lending targets. Several banks are struggling to meet these targets and are working on forward loans to players such as NABARD. In such situations, the design of duplicate deposit schemes is confusing.
Also read: Karnataka says no to leasing Sandur forest land for mining
The role of decarbonization
The highest priority areas of financing are aimed at improving lifestyles, a Sustainable Development Goal specified by the United Nations. For example, funding for SHGs is among the priority areas, with most groups working among vulnerable populations who are most likely to be affected by climate change.
A final issue relates to end-use monitoring and certification of green deposits. When lending to businesses, most banks include end-use clauses. To make deposits truly green, banks should have in-house credit assessment teams to go beyond environmental impact assessment statements to assess the quality of investments and their impact on climate change. . It would be better if banks could utilize independent environmental, social and governance auditors to evaluate their lending practices and certify their customers and lending practices.
Former Bank of England governor Mark Carney, writing in The Economist, stressed that transition funding “has to go where the emissions are.” The idea proposed is that finance plays a key role in decarbonization during the transition from the present to a green future.
However, in developing countries such as India, there are large gaps in policy measures, and finance alone cannot respond. So, while green deposits are a good step, lack of proper implementation and execution will haunt banks.
These challenges also present opportunities for innovation and collaboration. Financial technology (FinTech) can play a vital role in increasing transparency and efficiency in the management of green deposits. For example, blockchain technology can be used to track the flow of funds and ensure that they are being used for their intended purpose.
(Dr. Meera LB Aranha is Professor of Accounting, Economics and Finance at TAPMI. She has worked in the banking industry for over 30 years. Professor N Srinivasa Reddy is an Assistant Professor in Marketing Management and Co-Chair of Placement and Placement TAPMI’s corporate services are personal. Editor: Majnu Babu.
