Here’s why RBI is pressurizing banks and NBFCs to make climate risk disclosures

On Wednesday, the Reserve Bank of India (RBI) recommended that financial institutions—including banks and significant non-bank financiers—disclose their exposure to climate change concerns. The central bank thinks that by taking this action, investors, depositors, customers, and regulators will everyone have a better understanding of the risks.

While current regulations require lenders to report material risks as part of their Pillar 3 disclosures, the RBI recommended that the disclosures also include information on governance, strategy, risk management, and targets in relation to four different themes.

One of the biggest risks facing lenders today, according to the RBI, is climate change. The recommendations are included in the draft disclosure framework on financial risks associated with climate change. With the exception of local area banks, payments banks, and regional rural banks, the proposed standards will only be applicable to scheduled commercial banks.

Based on their size, activity, and perceived risks, NBFCs are divided into four tiers under RBI’s scale-based regulations: base, middle, upper, and top layers. The top tier consists of fifteen NBFCs, such as LIC Housing Finance, Shriram Finance, and Tata Sons.

The new policies will be implemented gradually. Beginning in FY26, banks, all-India financial institutions, and both kinds of NBFCs will implement new governance, strategy, and risk management practices. Metrics and target disclosure will take effect in FY28. These guidelines will be implemented by urban cooperative banks a year after banks and NBFCs.

“Regulated entities (REs) should disclose information about their climate-related financial risks and opportunities for the users of financial statements,” it mentioned.

Domestic lenders are required by RBI to provide information separately, rather than on behalf of the consolidated organization. Foreign banks should also only reveal this information in relation to their business in India.

The ability of a regulated entity to adjust to changes, developments, or uncertainties associated to climate change is referred to the RBI as climate resilience. The third subject is risk management. Organizations should describe how they identify, evaluate, prioritize, and keep track of financial risks and opportunities associated to climate change.