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Voluntary green finance targets for banks suggest by RBI

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Voluntary green finance targets for banks suggest by RBI

Recently the Reserve Bank of India has released a discussion paper on ‘Climate Risk and Sustainable Finance’.

There is increasing uncertainty about the timing and severity of climate-related and environmental risks. This uncertainty has increasingly emerged as a source of financial risk for banks. Thus, its impact on the stability of the overall financial system has also been acknowledged.

Climate related threats can affect the financial sector through the following:

  • Physical hazards: The economic cost and financial loss can increase due to floods, heat wave etc.
  • Transitional hazards: Such hazards may arise in the course of adopting a low carbon economy.

Possible effects of such hazards:

  • Credit Risk: Depreciation of the value of assets held by customers of banks, or it affects supply chains. This has an impact on the customer’s ability to act and make a profit.
  • Market Risk: Falls in valuations and increases volatility in economic activity.
  • Liquidity (cash) risk: There is an increase in the demand for cash to meet climate-related extreme events.
  • Operational Risks: The impact on the bank’s infrastructure, processes, etc., hinders the continuance of business.

Suggestions of Reserve Bank of India-

  • Governance: Identify threats and opportunities related to climate and environment. At the same time, the actual and potential impact of these hazards should also be assessed.
  • A strategy should be developed to deal with the threats posed by climate change through proper planning and implementation of climate and environmental strategies.
  • The importance and benefits of green finance should be included in the financial sector of India through capacity building, training etc.

Source – The Hindu

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