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The Reserve Bank of India (RBI) is set to launch a dedicated ‘On Tap’ cohort focusing on climate change risks and sustainable finance as part of its Regulatory Sandbox initiative. RBI Governor Sanjay Malhotra announced this during a Policy Seminar on Climate Change Risks and Finance organised by the central bank.
The move comes amid growing concerns about the impact of climate change on financial stability and the economy. The RBI has been actively fostering innovations in the fintech sector through initiatives like the Regulatory Sandbox and Hackathons. The newly proposed cohort will provide a structured platform for developing solutions that address climate-related financial risks and promote sustainable finance.
“We propose to set up a dedicated ‘On Tap’ cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative. We are also planning to conduct a special ‘Greenathon’ on climate change and related aspects,” said Malhotra.
RBI’s Dual Approach to Climate Risks
The Governor highlighted two key dimensions of climate change risks that regulators, policymakers, and financial institutions must consider:
1. The Facilitative Role includes capacity building, ecosystem development, and financing green and sustainable transitions.
2. Prudential Risk Management: Climate risks affect credit, market, and operational risks within the financial system. Addressing these requires robust risk management frameworks.
Malhotra noted that central banks globally are increasingly crucial in managing financial risks linked to climate change. However, the extent of their involvement in financing the green transition varies.
“While the role of central banks in managing financial risks posed by climate change is widely recognized, their role in actively financing the green transition remains a topic of debate,” he stated.
India’s Strategy for Green Finance
Central banks in emerging economies like India have historically adopted targeted lending policies to support specific economic sectors, unlike the asset-neutral approach in advanced economies.
The RBI has been instrumental in directing credit to priority sectors, including renewable energy, through its Priority Sector Lending (PSL) guidelines. The latest initiative seeks to strengthen this framework further by integrating climate risk management into financial regulations.
“All major financial risks—credit, market, and operational—are influenced by climate change. Our endeavor is to facilitate capacity building and create a conducive regulatory environment for green and sustainable finance,” Malhotra explained.
Challenges in Green Financing
While green finance is essential for a sustainable future, it presents unique challenges, notably higher credit risks. Emerging green technologies often lack a long-term performance track record, making lenders cautious.
Malhotra stressed the need for financial institutions to enhance their technical expertise in assessing and mitigating risks associated with financing green projects.
Climate Risks & Economic Impact
The impact of climate change is not limited to the financial system—it extends to the broader economy, affecting corporations, micro, small and medium enterprises (MSMEs), and the agricultural sector. Addressing these risks requires a coordinated approach among financial regulators, banks, and government agencies.
“Climate change risks are ubiquitous. We need cohesive coordination and harmonisation in approach among financial regulators, banks, and government agencies,” Malhotra emphasised.
The RBI remains committed to facilitating climate finance and supporting initiatives that mitigate financial risks arising from climate change. Introducing the ‘On Tap’ cohort and the upcoming ‘Greenathon’ are steps toward a greener, more resilient financial ecosystem.
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