Severe natural disasters can lead to a rise in non-performing loans in the overall banking system and keep them elevated for a sustained period of time, the RBI said in its financial stability report. The gross non-performing loan ratio is estimated to rise by 0.37 percentage points during the year immediately after disasters. On an average, the bad loan ratio will increase by 0.56 percentage points and 0.60 percentage points, respectively, in the second and third years in the event of multiple disasters, the report said.
As far as financial stability is concerned, banks may face physical risks from severe weather events like floods, storms, heatwaves and fires. Banks can also face transition risks like those associated with adjusting to a low-carbon economy, driven by government policies, technological developments and change in consumer preferences.
“Physical risks affect banks directly by increasing credit, market, operational and liquidity risks which, in turn, can impact their profitability and solvency. The effect of transition risks will vary depending upon whether the transition is orderly or disorderly,” the report said.
“A disorderly transition will result in significant adjustment costs for all economic agents, leading to stranded financial assets and increasing probability of default by borrowers.”
Globally, it would require a massive investment to transition to net-zero emissions by 2050. The average yearly investment needed to complete the transition so that emissions hit net zero by 2050 is projected at $ 5 trillion for the next three decades, the report said.
As far as transition risks are concerned, the central bank sees two main challenges for the financial sector. These are recalibrating operations and business strategies to support green transition, and strengthening resilience in the face of rising vulnerability to adverse climate change.
“Global efforts are intensifying for collecting reliable data to identify the channels through which climate-related events affect the financial sector with a focus on rigorous stress-testing for climate risks,” the report said.
