RBI takes climate risk seriously

RBI’s active recognition of climate change as a risk that threatens the safety, soundness and resilience of individual banks and, in turn, the stability of the overall financial system is welcome and necessary. Over the last two years, RBI has periodically engaged with the issue of climate change in a limited manner. The July 27 discussion paper is important as it puts climate risk back in the RBI’s mandate, thereby bringing to close a debate on the issue.

The discussion paper is only the first step in the process of building a financial system that acknowledges, addresses and attempts to mitigate climate risk on an integral part of the economy usually overlooked as being affected. It outlines climate-related risks and how it is applicable to banks and financial institutions under its remit or to similar regulated entities. However, the paper is focused on disclosures as the way to manage risks. This is evident in the ‘three lines of defence’ model it sets out, as well as in the detailed discussion on the Task Force on Climate-Related Financial Disclosures (TCFD) framework. It is silent on other areas and instruments that are part of RBI’s mandate also important to addressing climate risk such as capital adequacy norms, credit guidance, and prudential regulations to limit and address true climate risk.

The paper fails to provide a sense of the next steps RBI will take in terms of developing the rules and support for commercial banks. Rather, it seems to put the onus on individual entities. The other missing element is that it does not create any landing zone for financial institutions outside its remit (e.g., NBFCs) despite their impact on the stability of the financial system. RBI must follow up this first effort.


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