Banking Central | RBI sounds the climate alarm. Are the banks listening?

RBI report warns about climate change risks to banks

How real is the threat posed by climate change to the Indian banking sector? The Reserve Bank of India’s recent financial stability report lists out the risks.

The central bank, leaning on global frameworks such as the Financial Stability Board’s (FSB) analytical toolkit, has sounded the alarm on how physical and transition risks can ripple through banks, insurers and markets, threatening financial stability.

Ignoring this for a country like India, where economic growth hinges on a robust financial backbone, would come with a huge cost.

What does the RBI say?

Physical risks — think floods submerging factories or droughts crippling agriculture — are no longer just environmental concerns; they’re business disruptors.

Transition risks, driven by tighter regulations, technological shifts or consumers shunning carbon-heavy industries, are equally menacing.

The RBI highlights how these shocks can exploit existing vulnerabilities in the financial system, amplifying losses through complex transmission channels.

The FSB’s framework, with its proxies, exposure metrics and risk indicators such as carbon earnings at risk or the European Central Bank’s CRISK, offers a roadmap to gauge these threats.

Then there’s the FSB’s focus on transition plans — strategic blueprints that can help banks and firms align with climate goals. These are critical for closing information gaps, guiding investor decisions, and helping regulators monitor systemic risks.

Flying blind into a storm

But, as the RBI points out, these plans are still in their infancy, limited to a handful of firms, and plagued by inconsistent methodologies, signalling a red flag.

In short, without standardised, robust transition plans, banks would be risking flying blind into a storm of climate-induced losses. The International Association of Insurance Supervisors’ paper, cited in the report, doubles down on this, warning that climate risks could render assets uninsurable while disrupting insurers’ own operations.

On the other hand, there is an opportunity as well for insurers, as risk managers and investors who could lead the charge in mitigating climate impacts if they get their act together.

Climate proofing

The report is also a nod to the International Auditing and Assurance Standards Board’s new ISSA 5000 standard, a global push to strengthen sustainability disclosures. This is a big deal. Transparent, reliable reporting on climate risks isn’t just about compliance, it’s about building trust and resilience in a system that’s only as strong as its weakest link.

But India’s financial sector, while making strides, is nowhere near ready to fully integrate these standards. Hence the RBI’s message — banks, insurers, and regulators need to move beyond lip service and embed climate risk into their DNA, from governance to scenario analysis to public disclosures — is important.

In other words, this isn’t about saving the planet alone, it’s about saving the bank balance sheets. Over the years, India’s banks have fought hard to clean up their NPA mess, but climate risks could undo that progress faster than a monsoon flood.

Banks must invest in climate risk metrics, align with global standards, and push for consistent transition plans. Regulators need to tighten the screws, ensuring firms don’t just pay lip service but act with urgency.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)