India’s banking sector is integrating climate risk into core risk governance, aligning with Basel principles and emerging RBI frameworks on disclosures and green finance to safeguard stability and accelerate sustainable development.
Climate in India
India faces high exposure to physical climate risks—extreme heat, floods, cyclones, and erratic monsoons—with systemic implications for credit, liquidity, and operational resilience across regions and sectors.
Policy momentum is building through RBI-led initiatives on climate risk disclosure and green deposit frameworks, complementing national green bond efforts to mobilize capital for resilience and mitigation.
Basel and climate risk
The Basel Committee’s 18 principles set a global baseline for banks and supervisors to govern, manage, and disclose climate-related financial risks proportionately and promptly.
Guidance spans governance, internal controls, risk assessment, capital and liquidity adequacy, scenario analysis, and supervisory expectations for consistent, comparable practices.
Defining climate risk
Climate risk encompasses physical risks from acute and chronic climate events, and transition risks from policy, technology, and market shifts affecting carbon-intensive activities.
Banks must embed material climate risk drivers into strategy, risk appetite, underwriting, pricing, provisioning, and ICAAP/ILAAP where relevant and material.
Unique characteristics
Climate risk is non-linear, path-dependent, and characterized by deep uncertainty, long horizons, and geographic concentration, challenging traditional risk models.
Data gaps and scenario complexity require iterative capability building, conservative assumptions, and transparent governance over model risk and judgments.
Financial risk channels
- Credit risk: Asset quality pressure in vulnerable geographies/sectors; collateral impairment and migration risks.
- Market risk: Repricing from policy shocks and stranded asset risk; valuation volatility in high-emitting portfolios.
- Liquidity risk: Funding stress from market sentiment shifts and deposit behavior under climate events.
- Operational risk: Business disruption from extreme weather; third-party and supply chain vulnerabilities.
- Reputational and legal risk: Greenwashing exposures and litigation on disclosure quality or financed emissions claims.
Management framework
- Governance: Board accountability for climate strategy, risk appetite, oversight of capabilities, data, and disclosure integrity.
- Strategy: Sectoral pathways, portfolio alignment choices, and transition plans calibrated to domestic realities and proportionality.
- Risk processes: Integrate climate drivers into origination, due diligence, collateral valuation, pricing, limits, and early warning.
- Capital and liquidity: Reflect material climate risks in ICAAP/ILAAP and stress programs, with disclosures on methods and limitations.
- Data and models: Build taxonomies, sectoral metrics, and scenario toolkits with strong model risk governance and audit trails.
- Disclosure: Phase-in TCFD-aligned governance, strategy, risk, metrics/targets reporting under RBI’s proposed framework.
India’s policy trajectory
RBI’s draft disclosure framework proposes phased, TCFD-style reporting on governance, strategy, risk management, and metrics/targets for SCBs, AIFIs, Tier‑IV UCBs, and upper-layer NBFCs.
The Green Deposits Framework operationalizes green funding with board-approved financing frameworks, eligible categories, exclusions, external reviews, and robust reporting.
Green finance enablers
- Sovereign Green Bonds: Government framework channels proceeds to eligible green projects aligned with SDGs and national priorities.
- Bank initiatives: Green deposits and lending frameworks finance renewable energy, energy efficiency, and resilience projects at scale.
- Market infrastructure: SEBI’s sustainability disclosures and emerging RBI climate disclosures improve data quality and capital allocation.
Practical playbook
- Board and CRO alignment on climate risk appetite, sector heatmaps, and quarterly dashboards with leading and lagging indicators.
- Sector-level guardrails for high-emitting or high-exposure portfolios; conditionality in covenants; collateral haircuts reflecting physical risk.
- Scenario analysis across short, medium, and long horizons; incorporate physical and transition shocks; disclose assumptions transparently.
- Green finance pipeline development via clear taxonomies, external reviews, impact reporting, and fraud/greenwashing controls.
Outlook
Supervisory expectations are converging on implementation of Basel climate principles with proportionate timelines, while India’s frameworks emphasize practical transition paths and resilience.
Banks that integrate climate into core risk governance and mobilize green finance early will strengthen balance-sheet resilience and support India’s sustainable growth ambitions.
Operational Risk Articles related to Model ‘D’ of CAIIB –Elective paper:
