INTEGRATING CLIMATE PHYSICAL RISK INTO THE CREDIT ASSESSMENT MODELS OF INDIAN BANKS: A NOVEL STRESS TESTING FRAMEWORK FOR FINANCIAL STABILITY

The escalating frequence and alertness of climate-related strong-arm eventschronic (sea-level rise) and acute (cyclones, floods)-represent a non-linear, systemic snow to the Indian financial system.Conventional credit risk models, predicated on historic fiscal data, are shortsighted to these advanced, non-financial threats, leading to a critical mispricing of risk.This paper constructs a pioneering geospatially-aware stress-testing framework to quantify the impact of physical climate hazards on the probability of default (PD) and loss given default (LGD) within key economic sectors of India.By fusing IPCC Representative Concentration Pathway (RCP) scenarios with granular, state-level banking data, we project material increases in non-performing assets (NPAs) and identify a marked vulnerability gap among public sector banks (PSBs).Our findings necessitate an urgent substitution class shift in credit underwriting, advocating for the regulatory development of exchangeable, climateadjusted risk models to fortify the Indian banking sector against impending climate volatilities and ensure a stable transition to a resilient economic system.