Federal Bank to soon come up with a policy on green deposits

Green deposits are primarily used for funding environment-friendly projects promoting energy efficiency, reducing carbon emissions and greenhouse gases, etc.

Private sector lender Federal Bank will soon come up with a policy on green deposits, sources aware of the development said.

“We are working on a policy on green deposits and in a few weeks our policy will be ready after the approval from the board,” a source said.

Other than this, the policy will be reviewed by a third-party consultant company, which will give clarity on working around green deposits, sources said.

The decision to create such a policy comes after the Reserve Bank of India (RBI) in April 2023 brought in a framework for green deposits for banks under which they should have a board-approved policy for mobilising and allocating funding to projects under green deposits.

“Earlier, banks used to offer green deposits but did not have a policy for those. With the RBI’s framework, banks may work on a policy for green deposits," the source said.

These deposits are primarily used for funding environment-friendly projects promoting energy efficiency, reducing carbon emissions and greenhouse gases, etc.

These fixed-term deposits attract investors wanting to park their funds in projects and initiatives focusing on environmental, social and governance (ESG) objectives.

The funds collected from green deposit schemes are mainly used to fund projects that fall under the United Nations’ Sustainable Development Goals (SDGs).

The only difference between green deposits and other deposits is that banks and other financial institutions like deposit-taking non-banking financial companies (NBFCs) garner green deposits specifically for projects related to ESG and other green activities.

“Green deposits are only used for projects, which cater to the betterment of the environment,” sources said.

Other than Federal Bank, several other banks have different green deposit schemes. These include IndusInd Bank, HSBC, Union Bank, DBS Bank, HDFC Bank, etc.

For example, if you invest in HDFC green and sustainable deposit schemes, you may earn an interest rate of 7.2 percent per annum for a tenure of 61 to 120 months and 7.3 percent per annum for a tenure of 36 to 60 months.

Green deposits of up to Rs 5 lakh are insured under Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.

However, the existing green deposits cannot be considered under the new green deposit framework as they have different operational facilities.

“After the RBI’s framework, banks which already offered green deposits cannot consider those under the new green deposit framework as these are different from the new ones,” a source said.

The RBI on April 1 announced the framework for acceptance of green deposits to foster and develop a green finance ecosystem in the country.

The framework that came into effect from June 1, 2023, is intended to encourage banks and NBFCs to offer green deposits to customers, protect the interest of the depositors, aid customers to achieve their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities projects.