Globally climate finance is increasingly becoming a case of too little, too late. Longstanding disagreements over what qualifies as climate finance have been accompanied by a persistent shortfall in capital to address climate risks. India’s experience has been no different.
Beyond the money lies a deeper challenge: how a banking-dominated financial system, shaped by mandates developed over decades, can adapt to a risk it was never designed to assess. This challenge is acute for regulators. Its resolution is essential if climate finance in India is to move at the pace required by the country’s climate commitments.
The Reserve Bank of India (RBI) operates under a broad mandate that includes maintaining monetary and financial stability while supporting economic development. Central to this role is ensuring that banks, as custodians of depositors’ funds, remain solvent, prudently managed and resilient to systemic shocks. At the same time, climate change is increasingly recognised as an economy-wide risk with potentially significant implications for financial stability.
Integrating climate considerations into prudential regulation is therefore not a simple policy choice. It is an institutional transition that must be carefully embedded within existing regulatory frameworks.
One reason this transition is difficult is the gap between climate science and financial regulation. Banking supervision has evolved through decades of experience in assessing credit, market and operational risks. Climate science, by contrast, deals with hazard projections, emission pathways and probabilistic assessments of physical risk.
Translating a heatwave projection, flood scenario or transition pathway into measures such as credit impairment or probability of default requires bridging disciplines that have historically had little overlap. This calls for new institutional capabilities within banks, within the regulator and across a wider ecosystem of data providers, analysts and model developers.
The Reserve Bank Climate Risk Information System (RBCRIS) is a data and analytics platform proposed to be developed by the Reserve Bank of India to help financial institutions better understand and assess climate-related risks. The idea is to create a common repository of climate information — such as hazard maps, weather and disaster data, emission metrics, transition scenarios and other climate indicators — that banks and other financial institutions can use in their risk assessments. The standardised and credible datasets are meant to reduce information gaps and enable a consistent evaluation of how climate change could affect borrowers, assets and financial stability.
RBCRIS will also support the development of climate-risk modelling and stress-testing frameworks across the financial sector. Instead of requiring each bank to independently gather and process complex climate data, the platform would provide a common foundation for analysing risks arising from floods, heatwaves, droughts, extreme weather events and the transition to a low-carbon economy. The broader objective is to help banks, regulators and policymakers incorporate climate considerations into financial decision-making in a systematic and evidence-based manner, while strengthening the resilience of India’s financial system to long-term climate-related shocks.
In this context, the RBI’s proposed Reserve Bank Climate Risk Information System (RBCRIS) represents an important first step. By providing standardised climate datasets — including hazard maps, transition scenarios and emission factors — in formats that can be integrated into financial models, RBCRIS seeks to establish a robust evidence base before more prescriptive regulation is considered.
Without measuring, consistently and comparably, climate-related financial risks across institutions, imposing capital buffers or provisioning requirements could prove premature.
Yet data alone will not be enough. The next challenge is in developing stress-testing frameworks that can translate climate variables into financial risk metrics, particularly in India’s diverse banking system. While some large institutions may be able to build sophisticated climate-risk models, many smaller banks may not.
The regulator therefore faces a choice: allow institutions to develop their own approaches, or facilitate more standardised tools that ensure comparability and a level playing field. The latter may prove more practical, though it will require investments in analytical capabilities that have traditionally remained outside the regulator’s core remit.
The question climate advocates often ask is why regulators cannot simply incentivise green lending. Here, it is a question of prudence rather than indifference. Many low-carbon technologies are still evolving, with uncertain cash flows and limited operating histories. India’s experience with solar power illustrates the challenge. Early lending decisions based on expectations of high tariffs were later tested by oversupply, grid constraints and falling prices. Banks are still dealing with some of the consequences.
At the same time, excessive caution carries its own risks, potentially slowing the funding needed for clean transition. Financial history offers a parallel lesson: loosening standards too quickly can lead to mispriced risk, asset bubbles and painful corrections.
The way forward may therefore lie less in direct incentives and more in building the ecosystem that enables capital to flow efficiently. This includes reducing information gaps between borrowers and lenders, standardising monitoring and verification processes, strengthening disclosure practices, and creating the institutional infrastructure needed to mobilise capital at scale.
None of this suggests that action can be postponed indefinitely. Climate risks are already accumulating in financial portfolios, whether or not they are formally measured. The challenge is not to dilute prudential standards but evolve them — applying the same rigour to climate-related risks that regulators apply to conventional financial risks, while distinguishing speculative enthusiasm from well-structured climate investments.
India’s central bank faces a delicate balancing act. It is expected to be both a cautious guardian of financial stability and an enabler of transition finance. Getting that balance right may not attract headlines. But it could prove crucial not only for financial stability, but also India’s broader climate ambitions.
(Leena Nandan is a former secretary, Ministry of Environment, Forest and Climate Change; Sidharth Sinha is Senior Fellow, Earth Science and Climate Change, TERI)
Published on June 22, 2026
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