India’s Banking Sector Prepares for Climate Finance and Risk Management with New Draft Directions from the RBI. ESG Broadcast Shares Key Takeaways.
Key Extract:
The Reserve Bank of India (RBI) has released the “Draft Reserve Bank of India (Commercial Banks – Climate Finance and Management of Climate Change Risks) Directions, 2025.” The draft outlines new guidelines for commercial banks regarding climate finance and the acceptance of green deposits. The primary goal is to empower commercial banks to comprehensively assess climate change risks, integrate these risks into their existing risk management systems, and optimize the flow of credit towards genuine green activities/projects. A critical focus of the directions is to address and overcome greenwashing challenges, thereby protecting depositors’ interests and supporting customers in achieving their sustainability goals. These directions apply to all commercial banks, excluding Small Finance Banks (SFBs), Local Area Banks (LABs), Payments Banks (PBs), and Regional Rural Banks (RRBs).
The framework introduces specific requirements for issuing green deposits, defined as interest-bearing deposits whose proceeds are earmarked for allocation to green finance. Key conditions dictate that green deposits must be denominated only in Indian Rupees and be subject to the same interest rate and tenor guidelines as other deposits, meaning banks cannot offer a differential rate of interest on them. Furthermore, banks must adhere to a strict financing principle: they cannot raise green deposits after a green activity has been financed; the funds must be raised prior to allocation. The Board-approved Financing Framework (FF) must clearly define the eligible green activities, the project evaluation process, and the rules for temporary allocation of unspent proceeds. These unspent proceeds can only be parked in Level 1 High Quality Liquid Assets for a maximum tenure of one year.
To ensure genuine environmental commitment and maintain transparency, the RBI has established a detailed list of eligible activities alongside explicit exclusions. Eligible categories include Renewable Energy, Clean Transportation, Green Buildings, and Sustainable Water and Waste Management. The directions prohibit the use of green deposit proceeds for projects involving the extraction, production, or distribution of fossil fuels, nuclear power generation, or hydropower plants larger than 25 MW. This dual approach aims to channel capital specifically towards climate-positive sectors while ring-fencing funds from environmentally harmful activities.
Accountability and disclosure are central to the framework, mandating robust oversight mechanisms. The allocation of funds raised through green deposits must undergo an annual independent third-party verification/assurance. This verification is required to confirm the correct use of proceeds and the adequacy of internal controls. In addition, banks must conduct an annual Impact Assessment of the financed activities, quantifying their effects using metrics such as GHG emissions avoided or Energy generated per year. The reports from both the third-party verification and the impact assessment must be publicly disclosed on the bank’s website.
Strategic significance lies in establishing a regulatory standard for sustainable finance in India, positioning the banking sector as a key driver of the nation’s climate goals. By mandating specific exclusions and rigorous verification, the RBI is directly tackling the risk of greenwashing, building market integrity and investor trust in Indian green products. The requirement for board-level review and public disclosure ensures governance and accountability. The framework’s detailed categorization provides the necessary clarity to mobilize private capital effectively towards genuine climate mitigation and adaptation projects.
