RBI to set up ‘on Tap’ cohort on climate change risks

Under its regulatory sandbox initiative, the Reserve Bank of India (RBI) will set up a dedicated ‘on Tap’ cohort on climate change risks and sustainable finance.

Speaking at the Policy Seminar on Climate Change Risks and Finance organised by the RBI in New Delhi on Thursday, RBI Governor Sanjay Malhotra said the bank has been encouraging and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives in the Fintech space.

He said the RBI has proposed 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,” Malhotra said.

He said there are two dimensions to climate change-related risks that regulators, policymakers and practitioners have to be aware of – the first is facilitative involving capacity building, development of the ecosystem and financing of green and sustainable transition; and the second is the prudential aspect, which is related to risk management.

Malhotra said the role of the Central banks in managing risks posed by climate change to the financial system is increasingly being recognised, their role in facilitating the financing of green and sustainable transition has been a matter of debate and has varying dimensions to it.

“Central banks in advanced economies have traditionally followed an asset-neutral approach,” the RBI Governor said. He noted that Central banks in emerging markets and developing economies (EMDEs), on the other hand, have adopted directed lending policies to channelize credit to certain sectors of their economies, given their individual country circumstances and developmental objectives.

Noting that in the Indian context, the priority sector lending guidelines facilitate credit to be channelled to specific sectors, including renewable energy, Malhotra said: “On the prudential aspect, there are several channels through which climate change risks impact the financial system. All the major types of financial risks — be it credit, market, or operational risk — are influenced by climate change.”

He said as a Central bank, the RBI is mindful of its role in addressing and mitigating risks to the financial system from climate change.

Malhotra said, “In this context, our 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”.

“One important aspect of green financing/lending for sustainable finance is the higher credit risk due to borrowers' use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness,” he mentioned.

The RBI Governor noted that the regulated entities, therefore, need to develop suitable capacity and technical know-how to better appraise risks in financing projects which use such green technologies.

Emphasising that the impact of climate change risks is not limited to the financial system alone but extends to the real economy, Malhotra said, “Be it the corporates or the MSMEs or the agricultural sector, climate change risks are ubiquitous. This calls for a cohesive co-ordination and harmonisation in approach, among not only the financial sector regulators and the regulated entities but also various government agencies.”

He added that the RBI remains committed to continue adopting a constructive and consultative approach towards supporting the various initiatives being undertaken towards management and mitigation of financial risks related to climate change.