The recent devastation caused by Hurricane Milton in the United States and a series of extreme weather events (EWE) closer to home – from landslides and floods in Kerala and Assam to heat waves in northern India to urban flooding in major cities of of India – points out the increasing frequency and severity. of climate-related disasters. These events highlight the urgent need for robust climate risk management, both globally and domestically. According to Germanwatch’s latest Global Climate Risk Index, India is the seventh most vulnerable country to climate change globally.

In this context, the recent Climate Risk Information System (RB-CRIS) initiative of the Reserve Bank of India (RBI) is a significant and timely step. The initiative addresses a fundamental challenge in climate risk management – the lack of standardized, high-quality data. The fragmented nature of climate information – with varied sources, formats and values ​​– has long been a stumbling block for financial institutions in quantifying climate risk exposure. RB-CRIS seeks to bridge this gap by providing a centralized repository of processed and standardized climate data. This initiative aligns with global regulatory trends emphasizing the integration of climate risks into financial supervision and macroprudential policy.

As reported, RB-CRIS will comprise two components – first, a publicly accessible web directory of data sources, including meteorological and geospatial information, and second, a data portal with datasets processed in formats standardized to be made available to regulated entities. in phases. On the one hand, the open access platform will benefit not only regulated entities, but also other stakeholders, including the general public. On the other hand, targeted access to processed data sets will equip financial institutions with the necessary tools to conduct thorough climate risk assessments.

The implications of RB-CRIS for the Indian banking sector are likely to be profound. Banks with exposure to sectors vulnerable to climate change, such as agriculture, infrastructure and energy, face increased credit risks. Access to standardized climate data will enhance banks’ ability to conduct stress tests and scenario analyzes – critical components of effective risk management. Banks can assess the potential impact of different climate scenarios on their loan portfolios, capital adequacy and overall financial health. This, in turn, will inform strategic decisions about lending practices, asset allocation and capital reserves. Institutions that effectively integrate climate risk assessments can gain a competitive advantage by better assessing risks and identifying opportunities for green finance and sustainable investment.

However, the success of RB-CRIS will depend on addressing several policy imperatives. First, the effectiveness of this system will depend critically on the quality and reliability of the data provided. Ensuring data accuracy requires robust methodologies for data collection, processing and verification. There is also the issue of interoperability – how well will data from RB-CRIS integrate with banks’ existing risk management systems? Banks will need to upgrade their technology infrastructure to use this data effectively.

Second, the initiative will put a significant burden on Indian banks in developing the capacity to interpret and act on climate data. Many institutions, particularly smaller regional banks, may not have the expertise to translate this information into meaningful risk assessments and strategic decisions. This could lead to a widening of the gap between large, well-resourced banks and their smaller counterparts, potentially exacerbating systemic risks rather than mitigating them. Concerted efforts will therefore be needed to strengthen the capacities of all banking institutions – especially the smallest – through targeted training and resource support, ensuring that the entire sector can effectively manage climate risks and contribute to financial stability.

Third, the central bank needs to provide clear guidance on how to effectively use RB-CRIS data in forward climate scenario modeling. This is particularly urgent and important given the RBI’s indication in its draft disclosure framework that from the next financial year, regulated entities such as scheduled commercial banks will be required to disclose information on governance parameters , strategy and risk management in accordance with international standards such as IFRS S2, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Such guidelines will help banks align their practices with global best practices and regulatory expectations.

Fourth, the government and the RBI should explore ways to use this data to develop policies in risk-prone areas and sectors. For example, the government could launch incentives for climate adaptation or mitigation actions, such as investing in resilient infrastructure, such as underground power grids, in cyclone-prone regions to reduce the risk of outages. Similarly, the RBI could introduce macroprudential measures, such as a countercyclical carbon capital buffer, which would require banks to accumulate more equity capital during periods of carbon-intensive lending exposure, thereby enhancing the robustness of the financial system .

Fifth, there is a risk that RB-CRIS may inadvertently encourage a tick-box approach to climate risk management. Banks could focus on meeting the letter of any new regulations rather than truly integrating climate considerations into their core business strategies. This could lead to a situation where climate risks are isolated within risk departments rather than being treated as a fundamental business issue. To address this potential challenge, the RBI should develop a comprehensive climate risk governance framework that mandates board-level oversight, implement climate stress tests that assess business model resilience, and introduce a disclosure regime that emphasize the qualitative aspects of banks’ climate strategies.

Finally, there is the wider economic impact to consider. Supported by RB-CRIS, as banks adjust their risk assessment models to account for climate change, there may be an uncalibrated shift in lending away from carbon-intensive industries. While this supports environmental goals, it raises concerns about the economic transition for the sectors and communities that depend on these industries. Policymakers need to develop strategies to support a just transition, ensuring that efforts to mitigate climate risks do not inadvertently exacerbate social and economic inequalities.

(Nandy is Assistant Professor, Economics Area, IIM Ranchi and Anand is Executive Director, BSNL. Opinions are personal.)