The Reserve Bank of India (RBI) conducts biannual reviews of the stability of India’s financial system. The latest report indicates a positive trend in the proportion of non-performing loans, which is at a multiyear low and expected to decrease further
Systemic Risks and Climate Change
However, the report also highlights a significant concern regarding systemic risk. Market participants, in response to a survey, have identified climate change as the greatest source of systemic risk to the Indian financial system, surpassing traditional concerns such as asset quality and interest rate risk. This is a notable shift in perception and reflects the growing recognition of the impact of climate change on financial stability.
Regulatory Response and Challenges
Despite the acknowledgment of climate-related risks, Indian regulators have been slow to respond. The RBI released a draft framework earlier this year, requiring financial institutions to devise and disclose their strategies to mitigate climate-related risk. However, the timeline for adopting these new rules is notably generous, with full implementation expected by the end of the financial year in March 2028.
The delay in regulatory action can be attributed to bureaucratic inertia and challenges in defining “green” investment, as different regulatory bodies and ministries have differing perspectives on this matter. Additionally, there is a perception that Indian policymakers may be hesitant to learn from global efforts to address similar challenges in financial regulation.
Financial Sector Vulnerability and Climate Stress Tests
The preliminary results of climate stress tests conducted by the RBI in 2023 revealed that India’s public sector banks are particularly vulnerable to climate-related risks, possibly due to their significant exposure to the energy sector. This vulnerability underscores the urgency of addressing climate risks within the financial sector.
Conclusion and Call to Action
In conclusion, the RBI’s Financial Stability Report underscores the critical need for proactive measures to address climate-related risks within the Indian financial system. While there are challenges and delays in regulatory responses, the report provides a clear roadmap for action, emphasizing the importance of aligning with global standards and learning from international experiences in addressing climate risks.
Overall, the report serves as a call to action for Indian policymakers and regulators to prioritize the development of transparent criteria, disclosure requirements, and climate stress tests to enhance the resilience of the financial system in the face of climate change.
