- Extreme heat is disrupting loan repayments across India’s banking and microfinance sector, squeezing lenders’ cash flows and raising operating costs.
- Regulators are beginning to respond, but compliance remains voluntary.
- Scaling heat resilience finance will require a mix of parametric insurance, blended finance, and green bonds, supported by standardised heat risk data and city-level financing platforms to attract private capital.
- The views in the commentary are that of the author.
Extreme heat is emerging as a material and measurable risk category for India’s banking and financial sector. Heatwaves in 2025 reduced lender collection efficiency in the June quarter across field-dependent loan portfolios. There are similar projections for 2026 that suggest a further decline due to extreme heat across northern and central India.
Extreme heat cuts working hours and labour productivity, disrupts supply chains, raises operating costs for borrowers and ultimately, impacts repayment capacity.
When collection slows, lenders themselves face a cash crunch. It forces banks to seek costlier short-term funding to meet their own obligations. Branch closures, staff limitations in high-heat zones and increased pressure on physical assets add an operational layer to a substantive credit and liquidity problem.
The borrower segments most exposed to heat stress include microfinance clients, agricultural households, gold-loan borrowers and self-employed workers in the informal economy. They also happen to be the most financially vulnerable, given that their incomes depend heavily on physical mobility and outdoor labour, both of which are significantly constrained during periods of extreme heat.
Reduced interaction between borrowers and field agents, fewer site visits, and disruptions across local demand and supply chains together contribute to repayment delays, constrained access to credit, and rising borrowing costs across rural and informal markets. One happens at the household level where daily wage workers and farmers see their incomes fall when extreme heat forces them to work fewer hours or damages their crops, making it harder to keep up with loan repayments. Second, at the enterprise level, extreme heat damages physical infrastructure, increases operating costs, and can push already stretched enterprises closer to the edge.
Together, these effects elevate credit risk across lending portfolios, particularly in sectors with high exposure to agriculture, informal labour, and small enterprises.
Evidence from emerging-market banking systems increasingly demonstrates the scale of this relationship. Approximately 60% of India’s ₹3.81 trillion microfinance portfolio is concentrated in agriculture and allied activities, sectors whose incomes are directly vulnerable to rising temperatures. Eastern India, among the country’s most climate-vulnerable regions, accounts for roughly one-third of the total portfolio. The borrowers most exposed to climate risk are at the core of India’s microfinance system.
Additionally, emerging-market evidence shows that exposure to physical climate risks systematically constrains bank lending and weakens borrowers’ ability to repay, while adaptive capacity only partially offsets these effects.
The consequences are already becoming visible across India’s financial system. When borrower repayments slow, microfinance institutions experience liquidity pressures because they rely heavily on collections to service their own obligations to banks and other lenders. As repayment cycles become less predictable, funding costs rise, refinancing becomes more difficult, and pressure builds across lending networks.
Banks are also beginning to face a second-order set of costs associated with climate adaptation. Investments in digital collection systems, heat-adjusted operating models, staff training, and enhanced climate-risk assessment frameworks are becoming increasingly necessary to maintain the quality of their loan books.
Taken together, extreme heat is now affecting how well banks recover loans, how easily they manage cash, how much it costs to run their operations, and how much they need to set aside for bad debts. As heatwaves become more frequent and severe, these pressures are likely to grow into a serious concern for the health of India’s financial system.
Regulators are shifting, but not fast enough
India’s financial regulators have begun to acknowledge that extreme heat is a material financial risk. The Reserve Bank of India (RBI) now treats heatwaves as a prudential risk, noting that physical climate stress affects borrowers’ repayment and banks’ own cash flows.
The Draft Climate Risk Disclosure directions compel banks to map and stress-test heat exposure across credit, liquidity, and operations. However, compliance remains voluntary for some, and banks are still building the internal capacity to act on it.
These are necessary actions; however, addressing heat risk requires coordinated action across regulation, lending, and financial innovation. Regulators need to move beyond treating climate as a disclosure issue and recognise it as a core financial risk. This can be done by mandating climate-risk reporting, requiring heatwave stress tests, and integrating their results into supervisory and capital-planning frameworks.
At the same time, banks need to systematically incorporate heat exposure into credit decisions by assessing borrower vulnerability based on location, sector, and business model. For example, the Union Bank of India now treats heat as one of 13 key climate hazards. So far, risk assessments for only droughts and floods have been conducted. However, now, to tackle heat as a material risk, the bank is building a comprehensive climate risk system over the next six to nine months, along with sector-wise vulnerability assessment tools.
On the other hand, banks need to adapt operations through hybrid digital collection models, AI-enabled monitoring, UPI-based payments, and other technologies that reduce dependence on field-based interactions during extreme weather events. Risk-sharing instruments such as parametric insurance can further help absorb recurring heat-related shocks.
Over the longer term, the financial system needs to gradually shift from financing vulnerability to financing resilience. This needs to be done by directing more capital towards cooling infrastructure, climate-resilient agriculture, adaptive urban systems, and climate-proofed livelihoods. Additionally, this needs to be supported by blended and green finance mechanisms, where appropriate.
The instruments that work
No single financing instrument is likely to address these challenges on its own. The evidence instead points to the need for a combination of approaches. This includes concessional grants and guarantees to reduce project risk for private investors. It also includes green and sustainability-linked bonds, credit lines and partnerships between governments and private players to fund resilience projects at scale. Within this broader mix, three instruments are particularly relevant.
First, parametric insurance is the most urgently needed layer. It is particularly critical for informal workers and smallholder farmers with no buffer against heat-triggered income loss. SEWA’s parametric heat insurance product, launched in 2023 for informal women workers across Gujarat, Rajasthan, and Maharashtra, triggers automatic payouts when temperatures cross 40°C. By 2024, it covered 50,000 women across 22 districts. Scaling such interventions requires standardised heat-risk data, defined temperature triggers, and formal recognition of heatwaves in India’s notified disasters list, a step the 16th Finance Commission has recommended, but which is yet to be implemented.
Second, blended finance can be particularly useful in sectors where upfront costs are high, and financial returns may take time to materialise. The International Finance Corporation (IFC)’s Inclusive Agri-tech Facility illustrates this approach. IFC deployed $12.8 million in equity in Arya.ag, a technology-led platform connecting Indian smallholders to near-farm storage, logistics, commodity finance, and market linkages, alongside British International Investment (BII), Proparco, and Swedfund, mobilising nearly $48 million in total towards climate-smart agricultural infrastructure across 21 states. The relevance to heat resilience is direct. Extreme heat increases post-harvest losses, accelerates spoilage, disrupts market access, and often forces farmers to sell immediately at distressed prices. Arya.ag’s storage and logistics infrastructure reduces exposure to heat-related crop deterioration, allows farmers to defer sales until market conditions improve, and helps stabilise farm incomes during heat-affected harvest periods. By absorbing higher risks and longer investment horizons, IFC helped crowd in commercial capital for infrastructure that reduces the economic losses associated with extreme heat.
Third, green and resilience bonds, often combined with public-private partnership (PPP) structures are another set of instruments. Indonesia’s sovereign Green Sukuk programme has raised over $10 billion since 2018 to finance climate-resilient infrastructure, including public buildings, transport systems, water infrastructure, and urban resilience projects. While not designed exclusively for heat adaptation, many of these investments directly reduce exposure to extreme temperatures. Cooling-oriented public buildings, improved water systems that support urban cooling, and heat-resilient public infrastructure can reduce heat-related health risks, productivity losses, and service disruptions in densely populated urban areas. The significance of the Green Sukuk model lies in its ability to channel large volumes of institutional capital towards long-lived assets that strengthen resilience to extreme heat while delivering broader development benefits.
The enabling infrastructure
Scaling heat-resilience finance will require coordinated improvements in data infrastructure, financial incentives, and project delivery mechanisms. First, lenders need access to standardised and decision-useful heat-risk information. India’s RBI-Climate Risk Information System (RBI-CRIS), which provides standardised meteorological, geospatial, and climate-risk data, offers a strong foundation for developing heat-risk assessment tools. By enabling location-specific analysis of asset exposure and resilience, such tools can reduce due diligence costs and improve the bankability of investments in resilient buildings, urban cooling systems, and other adaptation measures.
Second, sustainability-linked finance needs to evolve beyond broad ESG metrics toward measurable heat-resilience outcomes. Loan pricing and financing terms can be linked to clearly defined performance indicators such as reductions in indoor temperatures, cooling-energy demand, peak electricity loads, or expansion of cool-roof coverage. Established green-building certification frameworks, including Leadership in Energy and Environmental Design (LEED), Indian Green Building Council (IGBC), and Green Rating for Integrated Habitat Assessment (GRIHA), can provide credible and verifiable benchmarks for monitoring these outcomes.
Third, scaling investment will require city-level financing platforms capable of aggregating and financing portfolios of resilience projects. Under such models, Development Finance Institutions (DFIs) can provide concessional capital, guarantees, and technical assistance. On the other hand, municipalities develop pipelines of cooling-efficient buildings, cool roofs, and district-cooling projects. Banks and institutional investors can then finance these pre-vetted project portfolios through green bonds, sustainability-linked bonds, or pooled lending structures. Experience from municipal rooftop-solar bond initiatives in Surat and New Delhi demonstrates how aggregating smaller projects into larger investment vehicles can improve access to capital, reduce financing costs, and enhance scalability.
Together, these measures can help create a more investable pipeline of heat-resilience projects and mobilise greater volumes of private capital toward climate adaptation in India. More fundamentally, they can reposition heat resilience from a growing source of financial risk to a viable investment opportunity.
As heatwaves become more frequent, intense, and prolonged, the costs of delayed action will increasingly be reflected in weaker borrower repayment capacity, deteriorating asset quality, higher operating costs, and growing pressure on financial institutions. Building the enabling infrastructure for heat-resilience finance today is therefore increasingly a prerequisite for maintaining financial stability, protecting economic productivity, and sustaining long-term growth in a warming climate.
Banner image: A vendor selling helmets rests at a bus stand on a hot summer day in Ahmedabad, Gujarat. (AP Photo/Ajit Solanki)
Namita Vikas is the Founder & Managing Director of auctusESG, a sustainable finance and ESG advisory firm.
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