RBI green deposit insurance plan an attractive proposition for banks

The Reserve Bank of India (RBI) is believed to be exploring appropriate coverage for green deposits, climate risk-based differential premiums and ex-ante funding needs for climate sustainability, and experts feel this could make such deposits lucrative for banks.

A green deposit is a fixed-term deposit for those who want to invest in environmentally friendly projects. Just like a regular FD, the green deposit pays interest to its investors and has a fixed term. The proceeds that a bank gets from deposit holders get earmarked for allocation to green finance.

Last April, the RBI floated the Green Deposit Framework to enhance transparency and ensure that the money goes to its intended cause. As per the central bank’s notification, banks that accept green deposits will have to apprise the central bank about the activities and companies they are investing the funds in.  

Suranjali Tandon, Associate Professor at the National Institute of Public Finance and Policy (NIPFP), says banks may find it more attractive to take green deposits with deposit insurance.

He says it is normal to have some kind of insurance, to safeguard against a bank run. “Tomorrow, if these green deposits are by companies investing in renewable energy and they get cash strapped, then you are going to have a situation where you need to provide insurance which acts as a backstop. It (RBI) hasn’t said much but that there may be differences in coverage and premium. If this happens, banks may find it more attractive to take green deposits,” Tandon tells Business Today.

Speaking at the 79th Executive Committee Meeting of the International Association of Deposit Insurers (IADI) in Rome in mid-June, RBI Deputy Governor Michael Debabrata Patra said the evolution of the deposit insurance function is likely to confront more complex challenges amidst heightened uncertainty.

“For instance, climate change is emerging as an overarching risk to the global economy and financial systems. According to the IADI’s surveys, 60% of DIs have formalised Environmental, Social, and Governance (ESG) policies and some are members of the Network for Greening the Financial System (NGFS),” he said.

Leveraging deposit insurance for green deposits, Patra further said that framing a comprehensive ESG policy incorporating elements of climate sustainability, investment in sovereign green bonds, measuring the impact of climate change on default risk and contingency planning for climate-related extreme events via actuarial analysis is key focus areas.

Sagar Asapur, Head, Sustainable Finance, Climate Risk Horizons, India says that to strengthen the Deposit Insurance and Credit Guarantee Corporation (DICGC) response to climate change, framing a comprehensive ESG policy is crucial.

“This policy should include key concepts like additionality, permanence, measurability, verifiability, uniqueness, and avoiding social and environmental harms. Enhancing regulations through a Green Taxonomy is urgent to define green investments clearly. Climate risk-based differential premiums, supported by ex-ante funding, can incentivise green finance but may initially discourage banks without proper mechanisms,” he adds.

According to Asarpur, a detailed ESG policy will enable granular climate risk analysis, stress testing, and scenario planning, ensuring long-term benefits and banks without an ESG policy should face higher premiums to mitigate climate risks effectively.

Climate change also figures among the listed series of aspirational goals by RBI in the June bulletin released last week.  

On dealing with climate change, the list includes guidance for Regulated Entities (REs) to stress test their asset portfolio to assess the impact of climate change; strengthening payment systems’ resilience to climate risks; developing climate risk disclosure norms for Res and publishing a risk management framework for managing climate-related financial risks.

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