Inadequate scrutiny hampers Indian banks' withdrawal from coal investments

The Reserve Bank of India (RBI) is taking steps to support India's broader energy transition goals, aiming to reduce banks' dependence on the coal sector and promote a more sustainable future.

By 2025, the RBI plans to encourage policies that increase domestic coal production efficiency and sustainability, foster green technologies like hydrogen-based steelmaking and carbon capture, and encourage investments in non-fossil fuel energy sources. The target is to reach 500 GW of renewable capacity by 2030, through solar and wind power expansion initiatives and regulatory reforms to ease financing for cleaner energy projects.

Recognising the need for a just transition, the RBI is encouraging financial institutions to develop inclusive transition strategies. These strategies should support worker retraining, community resilience, and regional development in coal-dependent areas.

To manage risks associated with coal-related lending, the RBI is considering setting portfolio-level exposure limits, similar to other risk-prone sectors. The RBI also plans to require banks to disclose their exposure to high-carbon sectors, including coal, with a current lack of distinction between coal, renewables, or gas in disclosures.

Incentives for banks that adopt coal exclusion policies or direct finance towards green infrastructure are also being explored. The RBI aims to lead the energy sector out of the past and into a resilient, renewable future, maintaining public confidence and protecting the financial system.

The RBI also plans to incorporate transition risk analysis into its supervisory assessments. This includes climate stress testing and scenario analysis to ensure a comprehensive understanding of the risks involved.

Coal dependence is not just a climate liability, it's also an economic one. Potentially causing long-term shocks to the financial system if not addressed, the RBI is taking action to guide all regulated entities to adopt clear, time-bound coal phaseout plans as part of credible transition strategies.

The RBI's role extends beyond policing risk. It must act as the financial steward of a just transition, creating regulatory incentives and disincentives to direct capital away from coal. This could involve differentiated capital requirements based on climate risk or targeted lending frameworks for clean energy and transition finance.

In conclusion, the RBI is taking significant steps to support India's energy transition, aiming to reduce banks' dependence on the coal sector and promote a more sustainable, resilient, and economically viable future.