Green finance: Give the market a green signal
GoI has announced that it will raise green bonds worth ₹20,000 crore this financial year. Earlier, RBI published a paper on green deposits outlining a framework. While the purposes are clear, three aspects must be examined: the product's price, the deployment of funds, and the system of incentives provided to enable successful issuances.
Pricing: This is foremost for a successful issue.
When funds are garnered through green deposits, the savers would want a higher return or at least equivalent to an ordinary deposit. There is little reason to accept a lower rate. Banks could argue that since these funds will be deployed in socially relevant green projects, they need to pay less on such deposits.
Only then can they lend at a lower cost. This is so as the borrower needs to be rewarded (a lower interest rate) for doing social good. Hence, a solution will always be challenging unless there are people driven by philanthropy who will accept a low return.
Let us look at green bonds.
If issued by an institution to finance green projects, the yield can be kept low on similar grounds. But the investor, and not saver, will look for some benefits to accept a lower return. Some fund houses have been mandated to invest only in green projects, which will ensure interest in such bonds.
Hence, a bond issued for financing an RE plant qualifies for green business. But when a government issues green bonds, as was done last year, the cut-offs were only marginally lower than those on regular bonds. The market was not willing to accept a lower yield.
Deployment of funds: When credit is given by a bank or a bond is used to lend for a specific activity, there is a one-to-one correspondence.
