RBI exploring coverage for green deposits as climate change poses biggest risk to global economy
Stating that climate change poses the biggest risk to the global economy, the Reserve Bank deputy governor Michael Patra said the central bank is exploring offering appropriate coverage for green deposits, which will help garner more funds to fund greener opportunities.
"We are exploring appropriate coverage for green deposits, climate-risk based differential premiums and ex ante funding needs for climate sustainability," Patra told the 79th executive committee meeting of the International Association of Deposit Insurers (IADI) in Rome over the weekend. But he did not elaborate.
“New challenges arising from climate changes will inevitably require effective coordination and information sharing between domestic insurers and other national safety net participants as well as with those in other jurisdictions,” Patra said in the speech, which was released by the RBI Tuesday.
Patra urged deposit insurers to brace for more complex challenges amidst the heightened uncertainty especially from climate change impacts which are emerging as overarching risks to the global economy and financial systems.
In April 2023, the RBI had issued a framework for green deposits with a view to foster and develop a green finance ecosystem. The framework allows regulated entities to offer green deposits to customers, protect the interest of depositors, aid customers to achieve their sustainability agenda, address green-washing concerns and help augment the flow of credit to green activities/projects.
Deposit Insurance and Credit Guarantee Corporation (DICGC) of India offers insurance to bank depositors, which covers only marginal loss and up to Rs 5 lakh. It steps in when depositors’ money is at stake in the event of a bank collapse. The DICGC is a wholly owned subsidiary of the RBI.
The evolution of the deposit insurance is likely to confront more complex challenges amid heightened uncertainty, Patra said, adding, "For instance, climate change is emerging as an overarching risk to the global economy and financial systems.”
Citing an IADI survey, Patra said as much as 60 percent of deposit insurers have formalised environmental, social and governance (ESG) policies and some of them are members of the Network for Greening the Financial System (NGFS).
"Back home we are 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," the senior most deputy governor, who is in charge of the all important monetary policy department, said.
Some banks like SBI, which launched the first green deposits drive, are already taking a closer look at green financing after being nudged by the RBI. Also, Canara Bank, Bank of Maharashtra, IDFC First Bank, Federal Bank and HSBC India have partnered with different companies and service providers or built specific individual products.
The idea of deposit insurance was shaped by intermittent bank failures between 1948 and 1960 following which the government enacted the Deposit Insurance Act in 1961 to set up the Deposit Insurance Corporation, as a wholly owned subsidiary of the RBI. Later it was merged with the Credit Guarantee Corporation of India and renamed as the Deposit Insurance and Credit Guarantee Corporation in July 1978 with the mandate of “insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto.” But from April 2003, the credit guarantee function was discontinued and deposit insurance became and remains the principal function of the corporation now.
Today deposit insurance is mandatory for all banks in the country, including foreign banks. Currently, 1,997 banks are covered, comprising 140 commercial banks and 1,857 cooperative banks, making it the second largest in the world, after the US. On a by-account basis, the coverage ratio is 97.9.