 "Reserve Bank of India RBI Governor Sanjay Malhotra")
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The Reserve Bank of India (RBI) is close to finalising disclosure norms for regulated entities to outline their climate risk management plan, and a guidance note for lenders to analyse climate scenarios and stress test for those risks, Governor Sanjay Malhotra said on Thursday.
Stressing the need for regulated entities to consider creating a common pool of bankable projects for climate related finance, Malhotra said: “One of the oft-cited constraints to adequate flow of climate related finance has been the lack of bankable projects… Thus, creation of a common pool of such bankable projects will have multi-fold benefits for the entire ecosystem.”
“Regulated Entities with experience of such projects can contribute to the pool for the benefit of others, while also benefiting from such information shared by other Regulated Entities,” he said.
Noting that the impact of climate change risks is not limited to the financial system alone but extends to the real economy, be it the corporates, MSMES or the agriculture sector, Malhotra said this calls for a cohesive co-ordination and harmonisation in approach, among financial sector regulators, regulated entities as well as various government agencies.
“Over the short-term, our goal is to be able to make a realistic estimation of the impact of climate related risks not just on individual institutions but also on the financial system as a whole,” Malhotra said at a policy seminar on Climate Change Risks and Finance organised by RBI in New Delhi. “This would involve scenario analysis and stress testing exercises, using both bottom-up and top-down approaches,” he said.
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Apart from emphasising the need for collaboration on climate financing, the governor also urged financial sector players to develop suitable capacity and technical know-how to better appraise risks in financing projects that use green technologies. Arguing that technology and finance have a critical role in the transition towards a low-carbon economy, Malhotra said there is a need to build innovative solutions and capabilities in these areas.
“We propose to set up a dedicated “on Tap” cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative. We are also planning to conduct a special “Greenathon” on climate change and related aspects,” he said.
In February 2024, the RBI had issued draft guidelines on Disclosure Framework on Climate related Financial risks for public comments. The draft norms said regulated entities should detail the governance processes, controls and procedures used to identify, assess, manage, mitigate and monitor climate-related financial risks and opportunities.
Malhotra said that the RBI is now in the process of finalising the guidelines after receiving valuable feedback. In this context, he also said a guidance note on Climate Scenario Analysis and Stress Testing is also being developed for the regulated entities.
RBI’s endeavour has been to play the role of a facilitator, including supporting capacity building and fostering a conducive regulatory framework for promoting green and sustainable finance, he pointed out.
RBI’s willingness to facilitate green financing is also evident from the fact that it has issued the Framework on acceptance of Green Deposits with the objective of enabling banks to augment the flow of credit to green activities and projects, Malhotra noted. To promote green finance, funding to small renewable energy projects are now part of priority sector loans.
The RBI, he said, remains committed to continue adopting a constructive and consultative approach towards supporting the various initiatives undertaken towards management and mitigation of financial risks related to climate change.
“We will continue to work steadfastly to realise our vision to build a financial system that can not only withstand future climate shocks, but also actively contribute to India’s journey towards a sustainable and resilient future,” the governor said.
“We will collaborate and coordinate with the government and other regulators to ensure that there is harmonisation and consistency in rules, regulations and our approach towards mitigating the impacts of climate change,” he underlined.
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