Indian banks are pushing for a reduction in the cash reserve ratio (CRR) applicable to green deposits, arguing that a lower reserve requirement could reduce funding costs and encourage lenders to provide more credit to environmentally sustainable projects. The proposal was discussed during the recent Public Sector Banks (PSB) Confluence as banks and policymakers look for ways to expand climate and transition finance in India.
The CRR is the portion of a bank’s deposits that it is required to maintain with the Reserve Bank of India (RBI). The current CRR for banks is 3%. Since money maintained as CRR cannot be freely deployed for lending, banks argue that applying a lower ratio to green deposits would release additional funds that could instead be directed towards renewable energy, clean transportation, energy efficiency and other eligible green projects.
Why banks want a lower CRR for green deposits
The banking industry believes green lending needs stronger financial incentives because it involves additional costs compared with conventional lending. Banks have to evaluate whether projects genuinely qualify as green, continuously monitor the use of funds and take measures to prevent greenwashing.
According to industry estimates cited by The Economic Times, Indian lenders raised around ₹4,000–5,000 crore through green deposits during 2025-26. Banks believe this remains far below the scale needed to create a significant impact on India’s climate-financing requirements.
A lower CRR could therefore improve the economics of these deposits. Banks would have more funds available for lending while potentially reducing the cost of financing green projects. This could make environmentally focused loans more competitive and encourage both banks and customers to participate more actively in green finance.
Green deposits have struggled to reach critical scale
Green deposits are designed to channel money raised from depositors into projects that provide environmental benefits. Eligible areas can include renewable energy, energy efficiency, clean transportation, sustainable water and waste management and other environmentally beneficial activities.
However, banks have argued that demand for these products has not yet reached the scale required to significantly expand green lending. Public-sector lenders had already raised concerns earlier this year that the existing framework did not provide enough incentives for either banks or customers.
Banks have also asked for greater clarity around India’s climate-finance taxonomy. A clear taxonomy is important because it establishes which economic activities can be classified as green or climate-aligned. Without clear definitions, lenders face difficulties deciding which projects qualify for green financing and how they should be monitored.
Lower costs could support India’s green transition
The banking industry’s proposal comes as India attempts to mobilise significantly more capital for its long-term climate and energy-transition goals. The country has set a net-zero emissions target for 2070, requiring large investments across renewable energy, infrastructure, transportation and other sectors.
Banks are expected to play a major role because commercial lending can provide a substantial source of financing for projects that may require significant upfront investment.
A lower CRR for green deposits could give banks an additional incentive to build these portfolios. If implemented carefully, the measure could allow lenders to offer more competitive financing to qualifying projects while also making green deposits more attractive as a funding source.
However, the proposal would also require safeguards. Banks already face additional compliance requirements for green finance, including project evaluation, reporting and monitoring. The RBI’s climate-finance framework requires banks to establish policies and financing frameworks covering eligible activities, transparency and governance.
RBI faces a balancing act
For the RBI, any reduction in CRR would have to balance the benefits of encouraging green lending against the role of reserve requirements in maintaining banking-system liquidity and financial stability.
A targeted reduction could potentially be designed specifically for qualifying green deposits rather than applying a broad CRR cut across the banking system. Such an approach would allow policymakers to support climate finance without providing the same benefit to conventional deposits.
The proposal is therefore likely to remain part of the broader discussion around India’s climate-finance regulations. Banks want the regulatory framework to make green lending commercially viable, while policymakers will need to ensure that incentives do not weaken safeguards against misallocation of funds or greenwashing.
For India’s banking sector, the central argument is straightforward: if green finance carries additional compliance and monitoring costs, regulatory incentives could help offset those costs. A lower CRR on genuine green deposits could become one such incentive, potentially freeing more bank capital for India’s clean-energy and climate-transition ambitions.
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