Indian banks found wanting on the climate change challenge and green transition

A wind farm near Nashik, Maharashtra. Photo by SuyogJoshiPhotography/Wikimedia Commons.
  • India’s banking sector has a crucial role to play in tackling climate change and aiding green transition but a latest report finds that major banks in the country are unprepared to deal with the climate change crisis.
  • The report by think tank Climate Risk Horizons (CRH) found that most Indian banks have not even begun to factor climate change into their business strategies.
  • The report said banking institutions need to disclose the levels of financing for the renewable energy sector.

India’s energy transition is underway, but is India’s banking sector ready to address related challenges and tackle the financial impacts of climate change? A new report says major Indian banks are “unprepared” to address climate change even though the country’s banking sector has a critical role to play in responding to the climate crisis by “managing the risks that climate change poses to their operations” and “financing the energy transition”.

The report, Unprepared: India’s big banks score poorly on climate challenge released earlier this month by think tank Climate Risk Horizons (CRH), ranks the 34 biggest banks in the country (based on market capitalisation) and finds that barring a few, most Indian banks have not even begun to factor climate change into their business strategies even as the “rosiest projections indicate significant economic challenges for the Indian economy”.

It highlighted that so far “there has been little information in the public domain to gauge the way the sector is preparing itself”. The report said Indian banks need to “build their capabilities to undertake scenario analyses that test their resilience to climate-related changes, either due to physical risks caused by the climate crisis, or transition risks caused by economic changes in response to the climate crisis”.

According to the report, besides a “few notable exceptions”, the bulk of India’s banking sector “has not even started to put in place the most rudimentary mechanism to address the climate threat.”

“The fact that even large, media-savvy public and private sector institutions such as SBI (State Bank of India), Union Bank, ICICI Bank, etc., are performing so badly should be extremely worrying for investors, and something that the regulators (the Reserve Bank of India and the SEBI) must address,” it noted.

The report said YES Bank, IndusInd Bank, HDFC Bank and Axis Bank are the top-ranking Indian banks overall and have started to consider the climate issue while noting that public sector giant SBI is in distant 6th place. In general, the ranking shows that public sector banks, despite their influence and dominance, are lagging behind private-sector financial institutions, the study says.

It highlighted that only seven Indian banks have policies that “exclude lending/services to entities credibly involved in deforestation, human rights violations, and biodiversity loss, etc.” and “only two banks have excluded new financing for coal mines and coal power plants”. The report, however, acknowledged that on the positive side, “27 banks have issued green loans/bonds/financing towards climate change mitigation/adaptation”.

Ashish Fernandes, CEO of Climate Risk Horizons and one of the authors of the report, said the “main point is that the Indian financial system is so far lagging when it comes to adapting to the climate crisis” as a result of which “there is the risk of significant financial impacts to stakeholders (financial institutions, companies, investors and by extension the economy at large)”.

“And there is the other side of the coin, which is that the necessary transition to a low carbon economy will be delayed, again with both physical and financial impacts,” he told Mongabay-India.

Asked about the risk to the investments due to this, Fernandes said “any new fossil fuel investments going forward, especially coal, and in a short order new oil and gas as well, would pose a risk … but there are also other infrastructure projects that are at risk – example, coastal roads, large dams, developments in floodplains”.

He emphasised that “banks need to have a transition plan for their investment portfolio that takes this reality on board” considering the reality that “India has to wean itself off all fossil fuels over the coming 2-3 decades.”

What the report talks about the transition is also in line with what a recent report by a committee of India’s parliament wanted when it suggested to the government of India to consider imposing a “Renewable Finance Obligation for banks and financial institutions” to ensure they invest a specific percentage of their investment in the renewable energy sector.

The CRH report observed that some international banks have taken a sector-based decarbonisation approach in assessing their climate-related risks, “by using climate transition scenarios to cover oil and gas, power generation/utilities, transportation and metals and mining sectors.”

“Examples of this approach are Caixa Bank, Intesa Sanpaolo, Danske Bank, Mitsubishi UFJ Financial Group (MUFG), KBC Group, UBS, Banco Bradesco, and ABN AMRO,” said the report.

Read more: Will making banks obligated to invest in renewables help India’s energy transition?

India needs to set a clear target for phasing out fossil fuel investments

The CRH report notes that India has adopted aggressive targets for renewable energy, rooftop and agricultural solar, electrification of transport and green hydrogen for the industry and thus meeting these targets will be essential to deliver India’s larger climate neutrality goals. “Banking institutions need to disclose the levels of financing for these and other climate mitigation and adaptation sectors,” said the report.

It said India’s current goal of carbon neutrality by 2070 implies that ‘easier to transition’ sectors (electricity, transport, industrial power) must start moving now, and make rapid progress.

Reserve Bank of India, in its latest bulletin, highlighted how green transition poses risks to Indian banks. Photo by Soham Banerjee/Flickr.
A 2007 photo of the Reserve Bank of India. The central bank in its latest bulletin, highlighted how the energy transition poses a risk to Indian banks. Photo by Soham Banerjee/Flickr.

The report stressed that setting clear target dates to phase out fossil fuel investments and exposure to high carbon sectors is key to “managing longer-term financial impacts as the global economy decarbonises” because without a clear strategy in place “raising global capital will increasingly become more difficult (and probably more expensive)”.

In fact, in the March 2022 bulletin, the Reserve Bank of India, while talking about the “Green Transition risks to Indian banks”, says that “transition to a net-zero carbon emission target will entail adjustment in the production processes of industries that are directly or indirectly exposed to excessive use of fossil fuel” and “concomitantly, due to the exposure of Indian banks to these industries, there can be spillover effects on them.”

The central bank of India observes that three sectors with direct exposure to fossil fuels – electricity, chemicals, and automobiles – account for around 24 percent of credit to the overall industrial sector, but only 10 percent of total outstanding non-retail bank credit, which implies a limited spillover to the banking system. “Several other industries, however, indirectly use fossil fuels and therefore any transition to green energy can have implications for their income … therefore, the gross non-performing assets (GNPA) ratio of such industries may be sensitive to green energy transition, and their impact on overall banking system need to be monitored closely,” the RBI bulletin held.

On the role of India’s central bank, Fernandes said it seems that the “RBI is slowly waking up to this issue”.

“It has signalled that it will be communicating with banks on this, but we are yet to see any concrete action or regulations. Obviously, the faster the RBI can move on this, the better,” he said.

The CRH report said the RBI has not yet issued any climate-related guidelines on assessing or managing these risks for scheduled and commercial banks, though, according to the 2022 Economic Survey, the banking regulator is in the process of assessing banks’ progress in managing climate risks.

Meanwhile, Sonali Gokhale, a renewable energy sector finance specialist, who is with Pune-based Prayas, an organisation working on energy issues, explained that “currently, India’s banking sector is saddled with a legacy of non-performing loans from various sectors, of which the power sector is a large contributor.”

“The resolution of the fundamental, often interconnected issues in the sector are rightfully the policy priority for the regulators. However, recently there have been steps taken by RBI & SEBI to initiate discourse on the greening of financial systems in the form of consultative papers and research,” she told Mongabay-India.

“RBI has also joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a Member on April 23, 2021, and is understood to be in the process of publishing a consultative discussion paper to assess climate risks for its regulated entities. We expect that in due course of time, appropriate frameworks for climate risk assessment will be developed by regulators in line with India’s financial markets’ maturity and future growth plans,” Gokhale said.

Read more: India’s renewable energy industry is up against financial challenges


Banner image: A wind farm near Nashik, Maharashtra. Photo by SuyogJoshiPhotography/Wikimedia Commons.

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