Identifying, Managing and Disclosing Climate-related Financial Risks: Options for the Reserve Bank of India

This groundbreaking joint report from ODI, auctusESG and Climate Bonds Initiative quantifies the extent of lending by Indian banks to fossil fuel assets and examines the risks to the Indian financial system. It reviews the Reserve Bank of India’s (RBI) current approach to managing these risks and explores international examples and case studies. It also offers a suite of options for the RBI to consider in mitigating climate transition risks to Indian financial system stability.

The study finds that fossil fuel extraction and other high-carbon sectors account for around 12% of all domestic currency bank lending and 40% of bank lending to large corporations. Bonds issued by Indian power and oil sectors account for over one-third of the domestic market, with fossil fuel electricity utilities accounting for another third.

In addition, the 10 largest borrowers in emission-intensive sectors account for 52% of bank lending in foreign currency. These exposures represent a considerable climate-related transition risk to the Indian financial market, say the authors.

The report then reviews the RBI’s mandate and identifies key milestones in its sustainability journey, and concludes that most of its efforts to date have focused on encouraging opportunities in green finance, rather than on managing climate and other environmental risks.

Following an outline of policies that other central banks are adopting to reduce financial-sector exposure to climate risk, the analysis concludes with six policy recommendations for the RBI tailored to its specific mandate and the wider Indian context.

Indian banks should be required to identify and disclose their exposure to transition risks as well as the extent of their green lending, the authors advise. Banks should also tag individual loans and assets to track lending to green and transition risk activities.

The report recommends that the RBI develop physical and transition risk scenarios tailored to India and use these to undertake stress tests. It should also work with the Basel Committee to revise capital adequacy ratios in order to incentivise financial institutions to reduce their exposure to transition risks.