Climate risk still missing from lending strategy at India’s top banks: Analysis

India’s largest banks are still failing to adequately integrate climate risks into their lending and risk-management practices despite rising threats from floods, heatwaves and droughts, according to a new analysis by Bengaluru-based think tank Climate Risk Horizons.

The report, which assessed 35 Indian banks with a combined market capitalisation of around Rs 50 trillion, found that while disclosures related to climate change have improved sharply in recent years, most lenders are still not using climate-related information to shape credit decisions, portfolio exposure or long-term business strategy.

According to the study, 92 per cent of Indian banks now disclose at least some climate-related data, compared with just 40 per cent in 2022. However, researchers said this progress appears largely compliance-driven and influenced by regulatory pressure from the Reserve Bank of India rather than a deeper recognition of financial risks posed by climate change.

“The economic impacts of physical climate risks such as floods, heat and drought are worsening,” the report’s co-author Sagar Asarpur said, warning that climate risks directly affect borrower cash flows, collateral quality and overall portfolio stability.

Few banks stress-testing climate risks

The report found that fewer than half the banks studied had initiated climate stress-testing exercises, and none publicly disclosed the impact of those stress tests on capital adequacy, asset quality or portfolio performance.

Only a handful of lenders have taken concrete measures such as measuring financed emissions, introducing coal phase-out policies or setting net-zero targets.

According to the analysis, only Federal Bank and RBL Bank have announced clear timelines for phasing out coal-sector financing, while Union Bank of India has made a more limited commitment.

Just six of the 35 banks surveyed have announced net-zero targets, and only State Bank of India and Punjab National Bank include Scope 3 emissions within those targets.

The report also noted that only five banks currently disclose financed emissions — the greenhouse gases linked to borrowers and financed projects — despite such emissions typically accounting for over 95 per cent of a bank’s total climate footprint.

Climate costs rising rapidly

The findings come amid increasing concern over the economic costs of climate-related disasters in India.

According to reinsurance giant Swiss Re, extreme weather events causing losses exceeding USD 1 billion are becoming increasingly common in India. Separate estimates cited in the report suggested climate-linked losses in 2023 exceeded USD 12 billion.

Researchers warned that delayed action by banks could increase the risk of stranded assets, rising non-performing loans and broader financial instability.

The report said Indian banks now need to move beyond disclosure-led compliance and integrate climate considerations directly into credit appraisal, pricing models, capital planning and portfolio limits.