Macroprudential and Microprudential Perspectives on Implementing the Basel Principles on Climate-Related Financial Risks: Considerations for the Reserve Bank of India

The report examines the application of the 2022 Basel principles for climate-related financial risks (CRFRs) in India, noting that their microprudential focus may create systemic risks. It proposes two macroprudential principles for the Reserve Bank of India (RBI): incentivising credible transition plans and supporting transition and adaptation finance. The document also details practical hurdles faced by Indian banks, such as data gaps and capacity constraints, and aligns the Basel framework with the RBI's 2022 Discussion Paper and 2024 Draft Disclosure Framework.

• The Basel principles are primarily microprudential, focusing on individual bank exposures, which may lead to adverse systemic effects in India if many banks simultaneously reduce exposure to climate risks.
• Indian banks face a significant trade-off between engagement and divestment: while engagement supports the transition, it may increase borrower leverage and default risk; conversely, divestment could trigger a recessionary process and undermine socio-economic stability.
• The report proposes a new principle to incentivise credible transition plans, suggesting the RBI could impose financial penalties, such as fines or Pillar 2 capital add-ons, for banks that fail to meet targets.
• To support transition and adaptation finance, the report suggests the RBI introduce a separate green lending (GL) scheme for non-priority sector lending (non-PSL) loans, potentially starting with a 5% floor.
• The report recommends the RBI reduce haircuts for green sovereign bonds in its collateral framework to lower the cost of public green infrastructure spending.
• Indian banks report severe practical challenges in integrating CRFRs, specifically a lack of granular GHG emissions data for borrowers and a mismatch between long-term climate horizons (20-100 years) and short-term capital adequacy assessments (3-5 years).

APA

Dafermos, D. Y., Volz, P. U., Kumar, N., Meiyypan, S., Hari, S., & Valia, R. (2025). Macroprudential and Microprudential Perspectives on Implementing the Basel Principles on Climate-Related Financial Risks: Considerations for the Reserve Bank of India. Climate Bonds Initiative. https://www.climatebonds.net/files/documents/publications/Macroprudential-and-Microprudential-Perspectives_Sept2025-01B.pdf

Chicago

Dafermos, Dr Yannis, Professor Ulrich Volz, Neha Kumar, Sudha Meiyypan, Smitha Hari, and Ritu Valia. Macroprudential and Microprudential Perspectives on Implementing the Basel Principles on Climate-Related Financial Risks: Considerations for the Reserve Bank of India. Climate Bonds Initiative, 2025. https://www.climatebonds.net/files/documents/publications/Macroprudential-and-Microprudential-Perspectives_Sept2025-01B.pdf.

Wikipedia

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BibTeX

@techreport{dafermos2025macroprudential, author = {Dafermos, Dr Yannis and Volz, Professor Ulrich and Kumar, Neha and Meiyypan, Sudha and Hari, Smitha and Valia, Ritu}, title = {{Macroprudential and Microprudential Perspectives on Implementing the Basel Principles on Climate-Related Financial Risks: Considerations for the Reserve Bank of India}}, institution = {Climate Bonds Initiative}, year = {2025}, month = sep, url = {https://www.climatebonds.net/files/documents/publications/Macroprudential-and-Microprudential-Perspectives_Sept2025-01B.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }