Banks Request CRR Reduction on Green Deposits to Boost Climate Financing

#GS-3 #Economy #Banking #Monetary Policy #Environment #Climate Change #Green Deposits

Key takeaways

Public sector banks have urged the RBI to cut the Cash Reserve Ratio (CRR) on green deposits by up to 100 basis points (1%) to encourage clean energy lending.
Green deposit collection stood at only Rs 4,000-5,000 crore in 2025-26, falling short of funding requirements.
A NITI Aayog report states that India needs USD 22.7 trillion in cumulative investments to reach its net-zero targets.
Regulated by the RBI Green Deposit Framework 2023, these earmarked funds are dedicated to sectors like renewable energy, waste management, and energy efficiency.

Public sector banks have requested the RBI to lower the Cash Reserve Ratio (CRR) on green deposits to speed up India's transition toward a net-zero economy.
Banks want an initial CRR reduction of up to 100 basis points (1%) on these specialized green deposits.
Lowering the reserve requirement will make green credit cheaper for borrowers and encourage sustainable projects.
During 2025-26, banks gathered only Rs 4,000-5,000 crore through green deposits, which falls far short of the scale required to fund national climate targets.
A NITI Aayog report titled 'Scenario towards Viksit Bharat & Net Zero - Financing Needs' estimates that India requires USD 22.7 trillion in cumulative investments for its net-zero transition.
Reducing the CRR will lower funding costs and release capital, compensating banks for the high costs of evaluating projects to prevent greenwashing.

A green deposit is a fixed-term, interest-bearing deposit accepted by regulated institutions like commercial banks and NBFCs.
Banks must reserve all money collected through green deposits specifically for pre-approved environmentally friendly projects.
Under the RBI Green Deposit Framework 2023, eligible sectors include renewable energy, waste management, clean transportation, climate change adaptation, and energy efficiency.
Green deposits differ from green bonds, which are tradable debt instruments sold in capital markets to fund sustainable activities.

The CRR is the specified percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be parked as cash reserves with the RBI.
Commercial banks do not earn any interest income on the cash reserves maintained under the CRR mandate.
A high CRR absorbs excess cash from the banking sector and reduces overall lending capacity, whereas a lower CRR releases liquidity to support credit growth.

India needs to finalize its climate finance taxonomy to create clear rules for sustainable investment across the financial sector.
Building a coordinated regulatory system will ease compliance burdens on banks and NBFCs and help attract long-term global capital.