In July 2021, the Reserve Bank of India's Financial Stability Report carried a new section — climate risk. Not buried in an appendix, but positioned as an emerging systemic concern alongside credit risk and liquidity risk. Three months earlier, the RBI had quietly joined the Network for Greening the Financial System (NGFS), a coalition of over 120 central banks and supervisors founded in Paris in 2017. The message was clear: the institution that had spent decades focused on inflation targeting and bank supervision was now treating rising sea levels and stranded coal assets as threats to India's financial stability.
The pivot was not ideological. It was actuarial. Banks that financed thermal power plants, coastal real estate, and rain-dependent agriculture were sitting on portfolios whose risk profiles were changing faster than their models could capture. The RBI's engagement with climate risk is about preventing the next wave of non-performing assets.
Why Did the RBI Join the NGFS?
The NGFS membership announcement on April 23, 2021 marked a formal commitment. The NGFS had been operating since December 2017, and by the time the RBI joined, over 90 central banks were already members. India was late — but the timing aligned with a broader recalibration.
"The Reserve Bank of India has joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a Member on April 23, 2021... The Reserve Bank expects to benefit from the membership of NGFS by learning from and contributing to global efforts on Green Finance which has assumed significance in the context of climate change." (RBI Press Release, April 2021)
The reason was institutional pressure from two directions. The Basel Committee on Banking Supervision had begun publishing guidance on climate-related financial risks, signaling that climate stress testing would become a supervisory expectation. And India's own commitment at COP26 — net-zero by 2070, 50% non-fossil energy capacity by 2030 — meant transition risks would cascade through the financial system regardless.
A companion press release made the stakes explicit: the RBI was committing to "support greening India's financial system." Membership carried obligations — participation in workstreams on scenario analysis, supervisory practices, and data gaps.
What Makes Climate Risk a Financial Risk?
Central bankers divide climate risk into two categories, and both are already materializing in India.
Physical risk is the direct damage from extreme weather. When cyclones hit coastal states, collateral backing bank loans — warehouses, farmland, properties — is destroyed overnight. When monsoon patterns shift and droughts hit agricultural belts, crop loan portfolios suffer. Physical risk turns performing assets into NPAs through events no borrower can control.
Transition risk is subtler but potentially larger. As India moves toward net-zero by 2070, coal-fired power plants anchoring the loan books of public sector banks may become uneconomic as renewable energy costs fall below thermal generation. The RBI's Discussion Paper on Climate Risk and Sustainable Finance (July 2022) surveyed banks on their preparedness — most had no formal framework for assessing climate-related credit risk, and fewer still had attempted scenario analysis.
"The Reserve Bank also released on its website the results of a Survey on Climate Risk and Sustainable Finance undertaken in January 2022. The survey was carried out to assess the approach, level of preparedness of banks and the challenges they face in dealing with climate risk." (RBI Press Release, July 2022)
The survey revealed a fundamental gap: banks understood climate risk conceptually but had no tools, data, or governance structures to manage it. The RBI's subsequent regulatory actions all trace back to closing that gap.
How Do Green Deposits Work?
On April 11, 2023, the RBI issued its Framework for acceptance of Green Deposits (since withdrawn), effective June 1, 2023. The framework applies to all scheduled commercial banks (excluding RRBs, LABs, and payments banks) and all deposit-taking NBFCs including housing finance companies.
The logic is straightforward: if banks can raise earmarked deposits specifically for green projects, they create a visible pipeline between savers who care about sustainability and borrowers who need climate-aligned capital. The framework defines eligible sectors — renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings, and pollution prevention.
"Climate change has been recognised as one of the most critical challenges faced by the global society and economy in the 21st century. The financial sector can play a pivotal role in mobilizing resources and their allocation thereof in green activities/projects." (Green Deposits Framework, RBI/2023-24/14) (since withdrawn)
The safeguards matter as much as the product. Banks must obtain third-party verification of their green deposit allocation and publish an annual impact assessment. Proceeds cannot fund fossil fuel extraction, nuclear energy, tobacco, or weapons. The framework is designed to prevent greenwashing — a concern the RBI took seriously enough to join the Global Financial Innovation Network's Greenwashing TechSprint in May 2023, partnering with 12 international regulators to develop tools for detecting misleading sustainability claims.
How Does Renewable Energy Fit Into Priority Sector Lending?
The connection runs through the Priority Sector Lending framework. When the RBI revised PSL guidelines in September 2020, renewable energy received expanded treatment. Loans for solar power plants, agricultural pump solarisation, and compressed bio-gas plants were classified as priority sector lending — counting toward the mandatory 40% target every domestic bank must meet.
The March 2025 revision went further, "broadening of the purposes based on which loans may be classified under 'Renewable Energy.'" This is how the RBI channels climate policy through existing infrastructure: instead of creating new mandates, it expands the definition of what counts under existing ones. A bank that finances a solar rooftop installation in rural Rajasthan simultaneously meets its PSL agriculture sub-target and contributes to India's renewable energy capacity. The incentive alignment is deliberate.
What Will Banks Have to Disclose About Climate Exposure?
In February 2024, the RBI released draft guidelines on climate-related financial disclosures. The scope is deliberately broad — every systemically significant financial entity must report its climate exposure.
"These guidelines shall be applicable to all Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks and Regional Rural Banks), All Tier-IV Primary (Urban) Co-operative Banks, All All-India Financial Institutions... and All Top and Upper Layer Non-Banking Financial Companies." (RBI Press Release, February 2024)
The disclosures draw on the TCFD framework, now absorbed into the ISSB standards. Banks will need to report governance structures for climate risk, strategies for managing transition and physical risks, and quantitative metrics and targets. The reason this matters is concentration risk: if multiple large banks have heavy exposure to the same carbon-intensive sectors — thermal power, steel, cement — a coordinated transition shock could become a systemic banking crisis. Disclosure is how regulators see the buildup before it becomes a bailout.
What Do Sovereign Green Bonds Mean for the G-Sec Market?
India's first sovereign green bonds were announced in the Union Budget 2022-23 and auctioned in January 2023 for Rs 16,000 crore. The issuance calendar and auction results confirmed strong demand. Proceeds are earmarked for public sector projects reducing the economy's carbon intensity.
The bonds were included in the Fully Accessible Route for non-resident investment, allowing foreign investors to buy without quota restrictions — reinforced in November 2023 and November 2024. By August 2024, the RBI established a scheme for trading sovereign green bonds in GIFT City's IFSC, opening the bonds to international settlement.
For the government securities market, sovereign green bonds create a distinct yield curve for climate-linked instruments. They trade at a slight premium — the "greenium" — reflecting earmarked proceeds and the growing pool of ESG-mandated capital seeking sovereign-quality green assets.
Where Is This Heading? The 2025 Climate Directions
The regulatory arc reached its most comprehensive point on November 28, 2025, when the RBI issued the Climate Finance and Management of Climate Change Risks Directions for Commercial Banks, with parallel directions for Small Finance Banks and NBFCs. These Master Directions consolidate the green deposit framework, climate risk governance requirements, disclosure obligations, and third-party verification standards into a single regulatory instrument.
"The objective is to enable commercial banks to carry out comprehensive assessment of climate change risks, integrate climate change risk considerations into their extant risk management frameworks and structures and optimise flow of credit to green activities / projects overcoming greenwashing challenges." (Climate Finance Directions 2025, RBI_13138)
The directions mandate board-level oversight of climate risk. Banks must approve a financing framework for green deposits, review impact assessments, and ensure that climate risk is embedded in overall risk appetite — not treated as a compliance sideshow.
The chain runs clearly: NGFS membership (2021) led to the climate risk survey (2022), which informed the green deposit framework (2023) and sovereign green bonds (2023), followed by draft disclosure rules (2024) and comprehensive Master Directions (2025). Each step built on the last. Each responded to what the Financial Stability Reports kept flagging — that climate risk was growing, banks were unprepared, and supervisory expectations needed to match the threat.
The RBI cares about climate risk now because it has no choice. The collateral is flooding, the coal plants are stranding, and the balance sheets are exposed. Regulation follows reality — and reality arrived.
Last updated: April 2026