The Reserve Bank of India (RBI) on Wednesday issued a consultation paper for banks and financial institutions, suggesting ways to cope with financial risks arising from climate change. Banks and financial entities can give their comments on the recommendations by September 30, the central bank said in a press release.
Some of the major risks for banks identified by the RBI due to extreme weather changes include devaluation of assets held as collateral, borrowing entities becoming insolvent, sudden demand of liquidity, change in market preferences, and operations of financial institutions being disrupted.
To that end, the RBI has suggested banks to formulate and implement policies at board level to identify and price-in risks while dealing with their customers, and also to maintain their operational continuity. The central bank has proposed that banks should make necessary disclosures to notify stakeholders and regulators of their exposure to such risks.
Prescribing training sessions for bankers, it has suggested that the board of directors should form committees to tackle climate-related financial risks and also sensitise senior management to such threats.
The Indian Banks’ Association (IBA) can set up a working group to that effect or banks can also tie-up with institutions such as the International Finance Corporation (IFC).
RBI governor Shaktikanta Das has recently said the objective of the central bank is not to compromise growth while prioritising climate-related risks. The RBI is looking to go ahead with the climate change issue in a collaborative manner, without being too prescriptive, he added.
The risk monitoring practices that banks need to put in place before issuing loans to borrowers vulnerable to extreme climate risks include placing a cap on loan repayment tenure, adjusting loan limits where collateral is in real estate, providing insurance to avoid losses arising out of impact on production and supply chain and demanding energy transition plan from sectors with heavy carbon footprint.
“Regulated entities (RE) may carry out substantial measures to mitigate or refrain from climate-related risks that are not in accordance with their risk appetite,” the RBI said in the consultation paper.
While estimating the short- and long-term investment cycles by businesses, banks should also consider climate change and policies undertaken by the government as factors, which will impact such investment decisions. In order to prevent banks’ operational disruptions arising out of such threats, lenders can distribute critical functions geographically.
They should disclose the significance of climate change on their operations and the material impact of their financial exposure to suck risks. Such disclosures can be made annually at an initial stage while taking guidance from the framework developed by an organ of the Financial Stability Board — an international body formed after G20 summit in London.
“Adapting the same would also help improve the consistency and comparability of the climate-related financial disclosures of the REs with their counterparts globally,” the RBI said.