Central bank in India warns banks to monitor cos with direct fossil fuel links

According to an RBI report, while banks have relatively small exposure to companies that have direct links to fossil fuels, there are hidden risks in the form of companies that have indirect exposure. The RBI has said that lenders need to be alert of industries that are subject to green transition risks as countries across the world moving towards decarbonisation goals.

 ‘Green transition risks to Indian banks’, a recent report by RBI has been unveiled in its month-to-month bulletin. A transition to green energy and shifts in enter combine might put stress on prices to those sectors within the brief time period, the report mentioned. If the rise in prices can’t be handed on to customers, it can scale back their margins, which in flip might result in an increase in gross non-performing belongings (NPAs) within the sector. The report is within the wake of the 2021 world local weather change summit (COP26) the place all nations agreed on carbon discount targets.

Electricity, chemical compounds, and vehicles have direct publicity to fossil fuels and account for round 24% of credit score to the general industrial sector. But their share in whole excellent non-retail financial institution credit score is just 10%. This confines the dangers to the banking system. Basic metals soak up a big proportion of whole credit score disbursed by the banking sector however have average publicity to fossil fuels. Cement has a big publicity to fossil fuels however a comparatively decrease share of financial institution credit score.

The sectors having excessive enter intensities of fossil fuel by means of oblique publicity are cement, primary metals, paper merchandise, and textiles.

“On the whole, there is a need to closely monitor all such industries that have low-interest coverage ratio, high gross NPA ratio and high energy input intensity to prevent spill-over to the broader banking sector,” the report mentioned.

Green transition dangers for India are seen to be a lot greater due to the decrease penetration of vehicles. India at present ranks fairly low by way of home transport kilometres powered by zero-emission fuels among the many main emitters. “A significant effort would also be required to bring down the emission intensity for emerging countries like India, Indonesia, Brazil and also for developed countries like Japan,” the report mentioned.