Large Indian banks, NBFCs integrating climate risk in their portfolio

How prepared are Indian financial institutions to handle climate risk in their portfolios? In the last year, some of the large banks in India and non-banking institutions have started integrating climate risk in their portfolios, say banking officials wary of the financial challenges climate change poses. 

Rajendra Kumar Raigar, General Manager (RAM & Priority Sector Department), Punjab & Sind Bank says that 33% of the country’s GDP is exposed to climate risk and 20% is related to the agriculture sector.

Several reports have brought focus on how warming climate, changing rainfall patterns, delay in the onset and withdrawal of monsoons, and temperature changes have impacted crops across the country.

“Among major public sector banks, about 53% of a credit portfolio is exposed to climate risk and 17% is related to agriculture lending. Banks have been taking measures and recently we have included ESG (environment, social and governance) in the risk management committee,” said Raigar, speaking at a recent workshop on ‘Mainstreaming Nature and Climate-related Risks for the Finance Sector'.    

The workshop focused on two key sectors within the economy -- Agro-commodities Finance and Infrastructure Finance, aligning with the broader theme of integrating nature and climate-related risks into financial decision-making.

Bikash Narayan Mishra, Senior Advisor, Indian Banking Association (IBA), highlighted that nature-related risk awareness is still in its early stages, while climate-related risks have gained more attention. 

The participants mentioned that there is a growing momentum around sustainable finance in India, with the investors increasingly asking for non-financial disclosures and the regulator echoing the need for increasing the understanding of the banking sector professionals on climate and ESG impacts of financial decision-making. However, the availability of historical data and a missing green taxonomy remains a challenge.  

Deep Narayan Mukherjee, Partner and Associate Director, Data Science, BCG, mentioned that several large Indian banks and NBFCs in the last 12-18 months have integrated climate risk into their portfolios.
“Close to 50% of retail banking exposure as of March 2024 is highly sensitive to climate. The impact of ocean rise, rainfall change, a spike in temperature, and climate-related changes have become a yearend problem for Indian banking,” said Mukherjee.

He further mentioned that banks are now assessing climate risk at three levels – portfolio management, underwriting, and project management level – to hedge it.