The Reserve Bank of India’s (RBI) recently released Report on Currency and Finance (RCF) spells out the climate challenge in great detail — the nature of the problem, the money required to deal with it and the way in which it can be raised. Despite the RBI’s repeated focus on climate finance — following the July 2022 paper on the subject and the subsequent issue of ₹16,000 crore sovereign green bonds — this report is a first of sorts. The central bank is indeed very serious about ensuring that the financial sector picks up the climate finance ropes fast.

Banks and NBFCs should be able to recoup losses arising out of climate events (‘physical risk’) and shifting the energy, transport and industry towards cleaner technologies (‘transition risk’). The capital requirements and screening systems need to be put in place. The money required by India, in terms of banking capital and new investment in an array of socio-economic infrastructure, has been estimated at 5-6 per cent of annual GDP ‘at the lower end’ or upwards of $170 billion a year till 2030. With no multilateral finance in sight, it is not clear how this order of funds will materialise, although the RCF talks about funds transfer systems such as emissions trading and carbon taxes, besides CSR, which seem like a drop in the ocean.

That said, the RCF focuses on what banks and NBFCs can do to protect their funds from risk and lend better. With respect to NBFCs, it says that they extend about half of their gross credit to the power and vehicle/auto segments. “Any large-scale default arising on account of physical or transition risk in any of these segments might translate into macro financial instability,” the report says. Conventional power, transport, operators, automobiles and metals account for 15 per cent of outstanding bank credit. Owing to technology transition, there could be risks related to credit, liquidity, markets and banking systems. The crux here is to develop a taxonomy or robust classification system that classifies green and brown industries, so that raising funds for the former does not turn into ‘greenwashing’. The RCF concedes that unlike China, Russia, Japan, South Africa and Indonesia, “India is yet to publish a formal taxonomy”. If the issue of corporate and green bonds is to grow (China leads here with a corporate and government green bonds issued of $700 billion), what constitutes green must be crystal clear.

The RCF rightly suggests expanding banks’ stress-testing framework to include climate-related events. It is, however, wary of entertaining the idea of relaxing capital requirements for green funding. Above all, it is clear that green financing is uncharted territory; the rules are very different from what the banking sector has been used to so far. But it simply has to adapt, because there’s no escaping the green transition — never mind even if India proceeds down this road on its own terms.