Amid alarming heatwaves across the country, the Reserve Bank of India (RBI) has flagged climate related financial risks and said it was take several regulatory and supervisory measures in 2024-25 to respond to it.
“Climate-related financial risks and the consequent micro and macro-prudential concerns necessitate a robust framework to identify, assess and manage such risks. Accordingly, the RBI is striving to make its regulations more principle-based, activity-oriented and proportionate to the scale of systemic risk, rather than entity-oriented,” RBI said in its Annual Report.
The measures
Several regulatory and supervisory measures will be undertaken in 2024-25 to further strengthen financial intermediaries. They would include:
(a) a comprehensive review of the extant IRACP10 norms and the prudential framework for resolution of stressed assets across REs
(b) harmonised set of prudential guidelines for all REs undertaking project finance
(c) a comprehensive review of the extant regulatory instructions on interest rates on advances across REs
(d) move towards adopting a forward-looking expected credit loss (ECL) approach
(e) issuance of Securitisation of Stressed Assets Framework
(f) efforts towards enhancing awareness, building capacity, and fostering collaboration among stakeholders to address effectively the multifaceted challenges of climate change for the financial system
The increasing incidence of climate shocks, however, imparts considerable uncertainty to the food inflation and overall inflation outlook. Low reservoir levels, especially in the southern states and the outlook of above normal temperatures during the initial months of 2024-25 need close monitoring.
The Indian economy would also have to navigate the medium-term challenges posed by rapid adoption of AI/ML technologies and recurrent climate shocks.
“Even so, it is well placed to step-up its growth trajectory over the next decade in an environment of macroeconomic and financial stability so as to achieve its developmental aspirations by reaping its demographic dividend and exploiting its competitive advantages that have placed it as the fastest growing major economy of the world,” it said.
The increasing incidence of extreme climate events and lingering global geopolitical uncertainties pose risks to the inflation outlook, the RBI annual report said.
Steps taken
A draft disclosure framework on climate-related financial risks, 2024 was placed on the Reserve Bank’s website on February 28, 2024 for public consultation, which includes guidelines to the REs for climate-related financial disclosures under four thematic pillars – governance, strategy, risk management, and metrics and targets. The framework aims to foster an early assessment of climate-related financial risks and opportunities and facilitate market discipline.
Further, a dedicated section was also created on the Reserve Bank’s website, containing the Reserve Bank’s communication on climate risk and sustainable finance.
According to the Climate Change Performance Index (CCPI) Report 2024, India’s climate action performance improved, making India the fourth best performing nation among 63 countries analysed. Strong progress was made towards nationally determined contributions in terms of key indicators like reduction in the emission intensity of GDP and an increase in the installed capacity of non-fossil fuel-based energy resources. Among major climate initiatives, India notified the carbon credit trading scheme (CCTS) while also launching the National Green Hydrogen Mission.
