Banks must monitor cos with fossil fuel links: RBI – Times of India


MUMBAI: The RBI has said that lenders need to be watchful of industries that are subject to green transition risks as countries across the world move towards decarbonisation targets.
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 report ‘Green transition risks to Indian banks’ has been published in RBI’s monthly bulletin. A transition to green energy and shifts in input mix could put pressure on costs to these sectors in the short term, the report said. If the increase in costs cannot be passed on to users, it will reduce their margins, which in turn could lead to a rise in gross non-performing assets (NPAs) in the sector. The report is in the wake of the 2021 global climate change summit (COP26) where all countries agreed on carbon reduction goals.
Electricity, chemicals, and automobiles have direct exposure to fossil fuels and account for around 24% of credit to the overall industrial sector. But their share in total outstanding non-retail bank credit is only 10%. This limits the risks to the banking system. Basic metals absorb a significant proportion of total credit disbursed by the banking sector but have moderate exposure to fossil fuels. Cement has a large exposure to fossil fuels but a relatively lower share of bank credit.
The sectors having high input intensities of fossil fuel through indirect exposure are cement, basic metals, paper products, 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 said.
Green transition risks for India are seen to be much higher because of the lower penetration of automobiles. India currently ranks quite low in terms of domestic transport kilometres powered by zero-emission fuels among the major 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 said.


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