RBI’s Regulatory Measures on Climate Risk and Sustainable Finance

The Reserve Bank of India (RBI) has taken a major step towards addressing the challenges posed by climate change to the financial sector. In a recent announcement, the RBI revealed regulatory measures on climate risks and sustainable finance. The guidelines were created based on the public feedback received for the discussion paper on climate risk and sustainable finance. These guidelines were announced by the RBI governor while revealing the key policy decisions of the Monetary Policy Committee (MPC).

The new guidelines focus on creating a broad framework for promoting the acceptance of green deposits, a disclosure framework on financial risks associated with the climate crisis, and guidelines for climate scenario analysis and stress testing. The RBI has become the first central bank in the world to release these guidelines.

Promoting Green Deposits

The RBI has laid down guidelines for banks to promote the acceptance of green deposits. These deposits will be used for funding environmentally sustainable activities. Banks will have to formulate a green deposit scheme and obtain prior approval from the RBI. The scheme should clearly outline the eligibility criteria for projects, the manner of deployment of funds, and the monitoring mechanism. The banks will also have to report to the RBI on the utilization of funds and its impact on the environment.

Disclosure Framework on Financial Risks Associated with the Climate Crisis

The RBI has emphasized the importance of disclosure on financial risks associated with the climate crisis. Banks will have to disclose their exposure to climate risks in their annual reports and other regulatory filings. The RBI has provided a framework for such disclosures, including the identification and assessment of climate risks, and the strategies for managing these risks.

Guidelines for Climate Scenario Analysis and Stress Testing

The RBI has also laid down guidelines for climate scenario analysis and stress testing. Banks will have to assess the impact of various climate scenarios on their loan portfolios. This will help banks to identify the potential losses that could arise due to the impact of climate change on their borrowers. The stress testing will also help banks to assess their resilience to such losses and take necessary measures to strengthen their balance sheets.

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