By Katy Lee|Reserve Bank of India
Climate change could reduce the ability of Indian borrowers to repay their loans amidst a credit boom in the country’s fast-growing economy, a deputy governor of the Reserve Bank of India (RBI) has warned, creating risks for the overall financial sector.
In a speech to business leaders in Mumbai, M Rajeshwar Rao issued a staunch defence of the argument that central banks must pay close attention to climate change, given its impact on their key mandates of maintaining price stability and the stability of the financial system more broadly.
“At times, there is a debate regarding the role of financial sector regulators, especially central banks vis-à-vis issues on the climate front,” Rao said, according to a transcript of the 19 July speech published on the RBI’s website on Thursday.
“I, for one, do believe that there are clear linkages of climate events on growth and inflation – the two macro variables which most of the central banks are deeply concerned about.”
India’s “diverse topography, with snow-clad mountains, fertile plains, deserts and a long coastline with different temperature and precipitation patterns, generates a diverse set of risks with attendant challenges for growth and inflation”, he noted, particularly for an agricultural sector that is “heavily reliant on monsoon rains”.
And at a time of “sustained growth in credit expansion, primarily driven by personal loans and loans to services sector”, Rao warned that extreme weather events linked to climate change could “adversely impact the credit quality and loan-repayment capabilities of the borrowers”.
“They can wipe out the assets created from institutional finance, thereby impacting the health of financial institutions,” he said at the event, which was organised by JP Morgan.
Rao also asked whether “the traditional ways of risk management” need a rethink when it comes to climate risks, which “impact collectively in a region or industry” rather than affecting individual companies.
“We have to acknowledge that risk emanating from climate change cannot be handled by one set of actors alone,” he said. “It needs a buy-in from all stakeholders and to ensure a successful transition to a sustainable future, we need a multi-faceted approach that involves governments, private sector entities, financial institutions, civil society organisations and the public.”
He added: “Proposals for tackling climate change and containing global temperature sometimes give rise to contradictory views as pro-climate actions are perceived to compromise on economic growth and employment. However, the need to act is immediate and in a calibrated manner. We cannot afford to procrastinate. The rising temperatures and climate events are already inflicting huge financial costs and causing irreparable damage to the ecosystem.”
Rao underlined the need for a just transition, with up to US$2tn a year of transition financing required to help developing economies shift towards a low-carbon economy without bearing a disproportionate burden of the costs involved. India, which is seeking to reach net zero by 2070, requires transition finance equivalent to an estimated 2.5% of GDP annually, he noted.
He also stressed the need for “credible transition plans” from banks and financial institutions to accompany the influx of transition finance to developing economies, with “detailed plans across operations, products, services, and policies to mitigate specific risks”.
The RBI has made climate resilience a key priority as part of a strategic rethink ahead of its centenary in 2035.
It released a draft climate-related risk disclosure framework for financial institutions and non-banking financial companies earlier this year, and is working on final guidance for regulated entities on scenario analysis to allow for more standardised stress testing.
