India’s commitment to achieving net-zero emissions by 2070 presents both; a transformative opportunity, and a strategic challenge, for its banking sector. With an estimated USD 10.1 trillion required through 2070, most of it front-loaded, banks and NBFCs are central to mobilising the necessary capital. However, most Indian banks still treat climate alignment as a compliance issue rather than embedding it into their core. This article highlights the growing importance of transition finance, targeted funding for carbon - intensive sectors that are committed to decarbonising. Unlike green finance, which supports already sustain able sectors, transition finance serves as a critical bridge for hard-to-abate industries like cement and steel. Indian banks that embrace this shift can mitigate future risks, maintain key client relationships, and unlock new revenue streams.

To lead India’s low-carbon transition, banks must integrate climate risk into governance, build human capital, and develop portfolio-level strategies. The path for ward is not merely symbolic; it’s a strategic imperative to secure long-term financial resilience and climate alignment.

When banking meets the climate clock

In 2021, the government pledged that India would reach net-zero carbon emissions by 2070. The announcement sent ripples through ministries, boardrooms, and international markets. But for India’s banks, the ripples are gaining strength, and the opportunity to transform them into powerful waves of change is closer than ever. With regulatory momentum building and global investors increasingly aligning capital with climate goals, net-zero is emerging as a navigational map. The challenge now is to translate ambition into an actionable strategy, which positions Indian banks as architects of the country’s low-carbon transition. And yet, no sector is more vital or vulnerable in this journey than finance.

An independent study by CEEW reveals that India’s net-zero goal requires an estimated USD 10.1 trillion in investment through 2070, with the investment front-loaded over the next two decades. Of that, banks and NBFCs will have to contribute the lion’s share. They are not just passive financiers; they are the fulcrum on which the entire transition pivots. This article explores why India’s banking system still behaves like it’s financing yesterday.

The great disconnect: Emissions on paper, risk in practice

The RBI has taken admirable steps. India’s regulatory framework has indeed made commendable strides in aligning financial institutions with global climate reporting standards. The Green Deposit Framework (2023) provided guidelines for banks and NBFCs on how to channel deposit funds into green projects. The Draft Climate Disclosure Framework (2024) by the RBI pushed banks to disclose climate risks, aligning with frameworks such as the ISSB (International Sustainability Standards Board) and the TCFD (Task Force on Climate-related Financial Disclosures). Meanwhile, SEBI’s BRSR Core brought mandatory sustainability reporting to top-listed companies and is gradually extending to unlisted entities. Yet, these frameworks primarily focus on disclosure and reporting, not on fundamentally rethinking how banks price and assess climate risk. This creates a gap between what banks report on paper and how they actually manage those risks in practice.
Climate risks aren’t just new-they’re nonlinear. Carbon risk doesn’t show up like a liquidity squeeze or a rate hike. It manifests over time, across portfolios, in supply chains, and eventually, in NPAs. However, most credit models still treat carbon like compliance and not as a risk multiplier.

Nonlinear nature of climate risk

Climate risks do not behave like traditional financial risks. They evolve gradually but have sudden, severe impacts. For instance: