CLIMATE FINANCE IN INDIA: WHAT RBI’S NEW DIRECTIONS MEAN FOR BANKS

The Reserve Bank of India’s Reserve Bank of India (Commercial Banks – Climate Finance and Management of Climate Change Risks) Directions, 2025 issued on 28 November 2025 (“Climate Finance Directions”), provide the current regulatory framework specifically applicable to commercial banks in relation to climate finance.

The Climate FinanceDirections came into force with immediate effect. The significance of the framework lies not merely in the regulatory classification of ‘green finance’, it has practical implications for the manner in which commercial banks structure, conduct diligence, document, monitor and report certain financing transactions.

Green finance is now a defined regulatory concept

The Climate Finance Directions define ‘green finance’ as lending to and/or investment in green activities or projects meeting the requirements prescribed under the Climate Finance Directions. Importantly, the definition is broader than financing renewable energy alone. Green finance may contribute to climate risk mitigation, climate adaptation and resilience, as well as other climate related or environmental objectives, including biodiversity management and nature based solutions.

The Climate Finance Directions contain a detailed framework for acceptance of green deposits. The banks are required to lay down board approved policy on green deposits which shall contain all aspects, in detail, for the issuance and allocation of green deposits. A copy of the policy on ‘Green Deposits’ shall be made available on the website of the bank. A foreign bank having a common global policy on green deposits may use the same for issuance of green deposits in India. In such cases, the foreign bank shall make available the green deposit policy on its website. A bank can finance any green activities / projects irrespective of raising green deposits for the same. However, a bank cannot finance green activities / projects first and raise green deposits thereafter for the same.

Green deposits do not change ordinary deposit economics

The Climate Finance Directions provide that green deposits may be cumulative or non-cumulative and must be denominated in Indian Rupees. Their tenor, size, interest rate and other terms are governed by the applicable Reserve Bank of India (RBI) directions on interest rates on deposits. The Climate Finance Directions expressly states that a bank cannot offer a differential rate of interest on green deposits.

The bank must also pay interest in accordance with the agreed terms and applicable directions irrespective of the allocation or utilisation of the green deposit proceeds. Premature withdrawal does not affect activities or projects undertaken using the proceeds.

The Financing Framework places responsibility on the bank

A bank seeking to raise green deposits must establish a board approved financing framework. Among other matters, the framework must identify eligible green activities/projects, prescribe the process for project evaluation and selection, provide for monitoring and validation of information supplied by borrowers, and address allocation of proceeds, reporting, disclosures, third party verification/assurance and impact assessment.

The bank is not merely required to identify an eligible project at origination. It must also have processes for evaluating the project and validating relevant information provided by the borrower. Accordingly, borrower representations, information undertakings and monitoring provisions become more significant where the financing is intended to qualify within the bank's green finance framework.

Use of proceeds

The Climate Finance Directions provide that allocation of green deposit proceeds is to be based on the official Indian green taxonomy. Pending finalisation of the taxonomy, an interim list of eligible green activities/projects applies. The interim categories include renewable energy, energy efficiency, clean transportation, climate-change adaptation, sustainable water and waste management, pollution prevention and control, green buildings, sustainable management of living natural resources and land use, and terrestrial and aquatic biodiversity conservation.

Where a facility is represented as being financed through a green finance framework, the documentation should identify the relevant project or purpose with sufficient specificity to permit subsequent verification.

Certain activities are expressly excluded

The Climate Finance Directions exclude a number of activities from eligibility. These include new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; projects where the core energy source is fossil-fuel based; nuclear power generation; direct waste incineration; and specified activities involving alcohol, weapons, tobacco, gaming and palm oil. The Climate Finance Directions also excludes renewable-energy projects generating energy from biomass using feedstock originating from protected areas, landfill projects and hydropower plants larger than 25 MW.

Borrower information becomes more important

The third party verification requirements specifically contemplate validation of information provided by the borrower, together with review of the bank's project evaluation, selection, management of proceeds and reporting processes. Depending on the transaction, the lender may consider requiring the borrower to provide information relating to the eligible project, utilisation of proceeds, relevant certifications, project implementation, information required for verification and information necessary for impact assessment.

Greenwashing

The Climate Finance Directions define ‘greenwashing’ as marketing products or services as green when they do not meet the requirements for classification as green activities/projects.

The risk is not confined to external marketing. It can arise from the manner in which a financing product, project or deposit programme is described to customers and investors. Where appropriate, financing documents should avoid undefined terms such as “environmentally sustainable” or “climate-positive” and instead refer to identifiable regulatory criteria, project categories or agreed metrics.

The next phase

Climate finance should not be viewed solely through the lens of whether a project qualifies as ‘green’. The longer term question is how climate related factors affect the creditworthiness of borrowers, the resilience of financed assets and the bank's overall risk exposure. The Climate Finance Directions mark an important shift from broad encouragement of green finance towards a more structured framework governing the classification, allocation, verification, impact assessment and disclosure of green finance activities. For banks, the immediate practical focus should be on governance, internal controls, project eligibility, use of proceeds, borrower information and monitoring. As climate-related considerations become increasingly embedded in banking risk management, that distinction is likely to become central to the next generation of financing transactions in India.