Public Sector Banks May Seek RBI Changes in Climate Finance Rules

Public sector banks are lining up a pitch to the regulator to soften climate-finance rules, as green deposits stay niche and compliance costs keep rising.

India’s public sector banks (PSBs) may soon approach the Reserve Bank of India through the Indian Banks’ Association (IBA) to seek targeted changes in climate finance guidelines, after early green-deposit traction stayed muted. 

The key demand is incentive-linked: a carve-out on reserve requirements to make green deposits cheaper for banks to mobilise and deploy. 

Another ask is definitional clarity, since lenders say the “green” label still leaves room for interpretation and later disputes. The IBA’s note is expected by end-March 2026, according to reports.

What Is The Core Problem For PSU Banks?

Banks are saying the current rulebook does not reward them for raising green deposits. They still have to park part of deposits as cash reserves, which reduces deployable funds and pushes up cost. Reports peg the cash reserve ratio at 3%, and lenders want relief specifically for green deposits.
 

They are also uneasy about the “what qualifies as green” layer. In internal credit committees, this slows approvals, and raises reputational risk if an activity later gets tagged as greenwashing.

Inside The Ask: CRR Relief And A Cleaner “Green” Rulebook

The IBA is expected to move a formal representation by end-March 2026, seeking two practical changes. First, lenders want CRR easing for green deposits so that a larger share of these liabilities becomes usable for lending and investment.
Second, they want sharper taxonomy guidance so bankers and auditors are aligned on eligibility from day 1.
 

Below is what banks are trying to change, and why it is central to product uptake.
 

This push also ties into the bigger funding gap. India needs around $2.5 trillion (at 2014-15 prices) to meet its NDC targets till 2030, as stated in the government’s climate finance taxonomy document hosted on PIB.

How The Build-Up Happened: Liquidity Stress And Disclosure Reset?

The climate-finance debate is landing at a time when lenders are already strained on liquidity and compliance bandwidth. Reuters reported that banks have asked for regulatory leeway as loan growth outpaces deposit mobilisation. It also noted the policy-rate cycle, with the RBI having cut repo rates by 125 bps since February 2025, tightening margins for lenders hunting stable deposits.

The same Reuters report said revised liquidity coverage ratio norms kicking in from April 1 require a 2.5% buffer on digitally linked deposits, which treasury officials have suggested delaying.  Bloomberg also reported lenders seeking relaxation of liquidity rules to unlock more funds.

Here is the recent sequence that is shaping bank strategy.
 

Separately, the Reuters Jan 29 report underlined India’s climate exposure, citing Germanwatch data: 430 extreme weather events during 1995-2024, over 80,000 deaths and about $170 bn in losses. 

Banks see this as the macro risk case for climate finance, but want workable economics and clearer definitions to scale it.

What Stakeholders Are Signalling?

Banking officials quoted in The Economic Times and DebtCircle point to two pain points: no meaningful incentive for green deposits, and taxonomy ambiguity that can backfire later. 

On the disclosure side, Reuters sources cited cost burdens and misalignment with corporate disclosures as reasons for the pause, which lenders read as space to recalibrate. 

Conclusion

The IBA’s end-March 2026 note is now the key trigger point for climate-finance rule changes. If CRR relief and taxonomy clarity come through, PSBs could finally scale green deposits with confidence.