Latest News | Climate Change May Lead to Increased Probability of Defaults: RBI DG Rao
Get latest articles and stories on Latest News at LatestLY. Climate change would lead to additional operational costs for borrowers with an increased possibility of a loss of their assets, leading to an increased probability of default by borrowers, RBI deputy governor M Rajeshwar Rao has said.
New Delhi, Apr 28 (PTI) Climate change would lead to additional operational costs for borrowers with an increased possibility of a loss of their assets, leading to an increased probability of default by borrowers, RBI deputy governor M Rajeshwar Rao has said.
Speaking on the topic 'Building a robust ecosystem for Green and Sustainable Finance in India', he said climate change risks impact the financial institutions, financial system and real economy through the traditional risk categories and one risk factor that prominently stands out is credit risk.
"Climate change would lead to additional operational costs for the borrowers with an increased possibility of loss of their assets, leading to increased probability of default by the borrowers," he said at Credit Summit 2025 organised by the Bharat Climate Forum here on April 17.
The real economy is also impacted through various means such as direct property losses, crop losses, loss of employment and livelihood losses, according to his speech posted by the RBI on Monday.
"Another facet of credit risk in climate change emanates from the need to promote green and sustainable financing. The fact that the net-zero technologies driving the transition to decarbonisation, are at various developmental and evolving stages, itself signifies a significant increase in credit risks," Rao said.
Thus, there is a dichotomy wherein on one hand there is a need for incentivising green and sustainable finance and on the other there is an increase in inherent risks from encouraging such financing.
"So, the key issue is how to manage this dichotomy. While the prudential aspect, i.e., the risk management consideration, is the prime concern for any regulator, the flow of credit is generally market determined albeit mandated at times through specific directed lending policies," he said.
Therefore, a delicate balancing act needs to be performed by the regulators to avoid any imbalance from the broader financial stability perspective, the senior RBI official said.
He further said challenges to green and sustainable finance are many and can be broadly categorised into two specific buckets – one is structural issues while the other relates to the quantum of financing available.
"The inherent risks in the green and sustainable finance, skews the risk-reward considerations leading to increased cost of credit. This leads to demand by private sector investors/ lenders for appropriate derisking mechanisms through grants/ guarantees/ philanthropic capital/ financial incentives, etc," Rao said, and added mobilising such capital on scale, would be a challenge.
The deputy governor further said that India occupies a unique position in the context of global climate.
As one of the world's fastest-growing economies, it faces the dual challenge of fostering and sustaining economic development while addressing climate change. On the one hand, it is highly vulnerable to climate risks while on the other hand, it has the potential to lead the global green transition.
"While we have made a fair start, there are several challenges that remain to be addressed," he said.
The risk management architecture in regulated entities for climate-related financial risks is still evolving and further concerted efforts are required.
In his speech, Rao also stressed that for the purpose of climate-related financial risk, assessment and related facets of green and sustainable finance, be it transition or adaptation finance, data is very crucial.
One of the limitations of climate risk assessment at this juncture is the need for technical expertise coupled with unique data requirements. Climate-related data, understanding nuances of climate patterns and the impact on account of climate change, is a highly technical and skilled job.
He said climate scientists across the world use supercomputers to study climate and weather patterns and its related aspects. It involves complex modelling and is resource-intensive.
"If we depend on a financial sector expert, who uses financial modelling for assessing quantitative estimates and then arrive at the financial sector impact, this expertise alone may not suffice," the deputy governor said.
The two skill sets needed for climate scenario analysis and climate finance risks are completely different in that as climate scientists are not experts in financial modelling and financial modellers have limited expertise in area of climate science, he said.
This makes the job of assessment of impact of climate change risks on financial sector more difficult and would therefore require collaboration amongst the two, Rao said.
The Reserve Bank has included sustainable finance and climate risk mitigation as a topic under the Theme Neutral “On Tap” application facility under the Regulatory Sandbox which could help develop and test innovative solutions.
(This is an unedited and auto-generated story from Syndicated News feed, LatestLY Staff may not have modified or edited the content body)