RBI Announces ‘on Tap’ Cohort within Regulatory Sandbox
RBI Governor Sanjay Malhotra recently outlined plans for a dedicated ‘on Tap’ cohort within the RBI’s Regulatory Sandbox. This initiative aims to encourage innovation in the financial sector related to climate change and sustainability.
Regulatory Sandbox and Innovations
The RBI’s Regulatory Sandbox allows fintech companies to test new products in a controlled environment. This initiative has facilitated various innovations. The new ‘on Tap’ cohort will specifically focus on climate change risks and sustainable finance.
Dimensions of Climate Change Risks
There are two main dimensions of climate change-related risks. The first is facilitative, which involves building capacity and developing an ecosystem for green finance. The second is prudential, focusing on risk management in the financial sector. Both dimensions are crucial for effective regulatory oversight.
Central Banks’ Role
The role of central banks in managing climate change risks is increasingly acknowledged. In advanced economies, central banks typically adopt an asset-neutral approach. However, emerging markets and developing economies (EMDEs) often implement directed lending policies. These policies aim to channel credit towards sectors like renewable energy, which are essential for sustainable development.
Prudential Risks in Finance
Climate change poses several risks to the financial system, including credit, market, and operational risks. These risks can affect financial stability. The RBI aims to mitigate these risks by enhancing the regulatory framework and supporting capacity building among financial institutions.
Green Financing Challenges
Green financing involves higher credit risk due to the adoption of new technologies. These technologies often lack a proven track record, making it challenging for lenders to assess their reliability. Financial institutions need to develop the necessary expertise to evaluate these risks effectively.
Impact on the Real Economy
The effects of climate change extend beyond the financial sector. Corporates, micro, small, and medium enterprises (MSMEs), and the agricultural sector are all impacted. This puts stress on the need for coordinated efforts among financial regulators and government agencies to address these challenges comprehensively.
Month: Current Affairs - March, 2025
Category: Economy & Banking Current Affairs