RBI calls for balance between promoting green finance and managing transition risks

Mumbai: Regulators need Regulators and policymakers need to perform a "delicate balancing act" to successfully navigate the dual challenges of promoting green finance while managing heightened credit risks arising out of the transition to green technology that could threaten financial stability M.Rajeshwar Rao, Deputy Governor of RBI said speaking on green finance.
"The fact that the net-zero technologies driving the transition to decarbonisation, are at various developmental and evolving stages, itself signifies a significant increase in credit risks. Thus, there is a dichotomy wherein on one hand there is a need for incentivising green and sustainable finance and on the other there is an increase in inherent risks from encouraging such financing.," he warned during his valedictory address at the Credit Summit 2025, organised by the Bharat Climate Forum in New Delhi.
Speaking to an audience of industry stakeholders and policymakers, Rao outlined that building a national taxonomy for green finance was a necessary "first building block" to ensure alignment across the ecosystem. He said, "A national level taxonomy is crucial as it serves as the first building block that aligns the entire ecosystem, be it the government, regulators, other policy makers, financial institutions and borrowers/investors." He stressed that this framework would bring consistency to regulatory approaches and facilitate the mobilisation of both domestic and international capital for climate initiatives.
Cautioning against over-reliance on public funds, Rao called for creating a self-sustaining green finance market. He said, "Climate change risks and financing needs to be viewed also as an opportunity," encouraging financial institutions to innovate and actively participate in building a resilient financial ecosystem for India’s green transition.
Highlighting current efforts, Rao mentioned that the Reserve Bank had published a draft “Disclosure Framework on Climate-related Financial Risks” in Feb 2024 and that it is being finalised after extensive feedback. "Transparency and related checks and balances that provide assurance on end use of the funds related to green and sustainable finance is extremely important," he said, underlining the necessity for a robust assurance and verification mechanism to counter greenwashing risks.
He also addressed the gaps in technical expertise within financial institutions, noting that financial modelers and climate scientists often operate in separate spheres, complicating effective climate risk assessments. "Climate change risks impact the financial institutions, financial system and real economy through the traditional risk categories," he said, pointing particularly to rising credit risks from emerging green technologies.
Rao stressed the importance of blended finance models, collaboration between DFIs, MDBs, and innovation in financial instruments to scale up sustainable finance. "Tools like guarantees, sustainability-linked loans, and climate-resilient bonds could be explored to further enhance private sector involvement," he suggested.