‘Lenders funding emerging green projects at higher risk’

Reserve Bank of India (RBI) Governor Sanjay Malhotra flagged higher credit risks for lenders financing emerging green technologies with limited track record.

“One important aspect of green financing/lending for sustainable finance is the higher credit risk due to borrowers’ use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness,” he said at an RBI event in New Delhi on Thursday.

“Regulated entities, therefore, need to develop suitable capacity and technical know-hows to better appraise risks in financing projects which use such green technologies,” Mr. Malhotra emphasised.

Stating that the impact of climate change risks was not limited to the financial system alone, but extended to the real economy, he called for a “cohesive coordination and harmonisation” in approach among financial sector regulators, regulated entities and various government agencies. “There is a need to adopt a holistic approach towards mitigation of climate change risks considering the country specific requirements and circumstances,” he said.

“Capacity and expertise constraints limit the ability to appraise and thus finance climate change mitigation. It also enhances the risk of funding such projects,” he pointed out.

He urged regulated entities to ‘seriously consider’ setting up such a pool through an ‘appropriate institutional arrangement’ to deal with the issue.

Considering that technology and finance had a critical role in the transition towards a low-carbon economy, he said there was a need to build innovative solutions and capabilities in these areas.

“The Reserve Bank has been encouraging and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives in the Fintech space. We propose to set up a dedicated ‘on Tap’ cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative,” he said. 

He said the RBI was also planning to conduct a special ‘Greenathon’ on climate change and related aspects.

Pointing out that risk management framework in regulated entities for climate related financial risks was still evolving, he said there was a need for concerted efforts in developing the risk management framework; building technical expertise and competencies for comprehensive assessment and mitigation of climate related financial risks as also on the extent of losses due to such risks.

“The Reserve Bank’s approach with respect to climate related financial risks is oriented not just for the short-term, but also the medium-term. Over the short-term, our goal is to be able to make a realistic estimation of the impact of climate related risks not just on individual institutions but also on the financial system as a whole,” he said.

“This would involve scenario analysis and stress testing exercises, using both bottom-up and top-down approaches,” he emphasised.

Quoting Albert Einstein, he concluded, “The world will not be destroyed by those who do evil, but by those who watch them without doing anything.”