Introduction

State Bank of India (SBI) is in talks with the Reserve Bank of India (RBI) to reduce the cash reserve ratio (CRR) requirement on green deposits.

What are Green Deposits?

Definition: Green deposits are fixed-term investments tailored for individuals and entities seeking to support environmentally friendly initiatives.
ESG Investing: These deposits align with the principles of Environmental, Social, and Governance (ESG) investing, reflecting a growing trend towards sustainable finance.
Utilization: Funds from green deposits are directed towards projects promoting renewable energy, clean transportation, pollution control, green infrastructure, and sustainable water management.

Preventing Greenwashing: The RBI’s framework ensures transparency in environmental claims associated with green deposits.
Deposit Options: Banks offer green deposits denominated in rupees, with choices between cumulative or non-cumulative options.
Applicability: Scheduled commercial banks, small finance banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) must comply with this framework.
Eligibility: Both corporate entities and individual customers can invest in green deposits, contributing to environmentally sustainable initiatives.
Allocation: Funds mobilized through green deposits are directed towards sectors such as renewable energy, waste management, and afforestation.
Restrictions: Lenders are prohibited from channelling green deposit funds into sectors like fossil fuels, nuclear power, or tobacco.
Verification: Independent Third-Party Verification is conducted annually to assess the allocation and impact of funds raised through green deposits.
Oversight: Lenders are required to review the impact of funds lent for green finance activities on an annual basis.
Penalties: There are no penalties for underutilization of funds raised through green deposits, providing flexibility to financial institutions.

Project Allocation: Green deposits allocate funds to specific environmentally friendly projects, unlike regular deposits.
Interest Rates: Interest rates on green deposits are determined by lenders and are currently comparable to those offered on conventional deposits.

Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.
Incremental-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
It came into effect from the fortnight starting August 12, 2023.
ICRR is employed during periods characterized by excess liquidity in the financial system.