Page 37 - Banking Finance August 2024

ARTICLE

Key Findings newable energy and energy efficiency can render
traditional energy investments obsolete, creating
1. Inadequate Preparedness: Despite the accelerating
impacts of climate change, significant gaps remain in the risk of stranded assets.
the Indian banking sector's ability to handle climate 3. Financial Stability and Asset Quality: The Reserve
risks. This includes a lack of clear policies and implemen- Bank of India (RBI) has expressed concerns over the fi-
tation plans for funding climate-related areas. nancial stability risks posed by climate change. As the
frequency of climate-related events increases, so does
2. Discrepancies in Performance: Yes Bank, HDFC Bank,
the potential for widespread defaults, affecting the
and Axis Bank are the top performers in climate-risk
asset quality of banks. A surge in NPAs can strain banks'
preparedness, with some banks beginning to disclose
capital reserves, reducing their ability to lend and im-
emissions indirectly caused by their activities. However,
pacting overall economic growth.
Yes Bank is the only bank to measure its financed emis-
sions, but only for the electricity sector. 4. Operational Risks: Operational risks also emerge as cli-
mate change affects the day-to-day functioning of
3. Lack of Scenario Analysis: No bank has undertaken cli-
banks. Branches in flood-prone areas face physical dam-
mate-related scenario analyses, despite the increasing
age, leading to interruptions in banking services. Addi-
frequency of extreme weather events.
tionally, banks must invest in resilient infrastructure to
4. Public Sector Challenges: Public banks are particularly safeguard their operations, incurring additional costs.
failing to finance India's energy transition adequately,
with public sector banks accounting for less than 8% of Strategic Responses and Risk Mitigation
total financing for the renewable energy sector. Only
10 banks have disclosed their green financing activities. Indian banks are increasingly recognizing the need to inte-
grate climate risk into their risk management frameworks.
Risks Posed by Climate Change Key strategies include:
1. Physical Risks: These arise from direct impacts such as 1. Enhanced Risk Assessment: Developing sophisticated
extreme weather events, rising sea levels, and shifts in models to assess climate risk exposure, including stress
precipitation patterns. India's diverse geography and testing and scenario analysis.
large agricultural sector make it particularly vulnerable. 2. Green Financing: Financing sustainable projects and
Extreme Weather Events: Increased frequency businesses, with green bonds and loans for renewable
and intensity of events like floods, droughts, and cy- energy projects gaining popularity.
clones cause extensive damage to property and in-
3. Policy Advocacy and Collaboration: Engaging with
frastructure, leading to higher default rates on
policymakers to shape regulations supporting climate
loans.
Agricultural Sector Vulnerability: Climate variabil-
ity directly affects crop yields, impacting the repay-
ment capacity of farmers and increasing the risk of
non-performing assets (NPAs) in banks with signifi-
cant exposure to agricultural loans.
2. Transition Risks: These involve economic and policy
shifts needed to mitigate climate change and transition
to a low-carbon economy.
Regulatory Changes: Evolving regulatory frame-
works promoting sustainability can impact the fi-
nancial viability of carbon-intensive sectors like coal,
oil, and gas.

Technological Disruption: Advancements in re-

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