Climate risk, informal lending default, and financial risk spillovers: A dual perspective of physical and transition risks

Informal lending has long operated outside formal financial regulation, emerging as a key source of risk in the financial system. However, its role as a potential transmission channel for climate risks has rarely been explored in existing literature. Based on a dual perspective of physical and transition risks, this study systematically examines the impact of climate risks on informal lending default and their spillover effects on the formal financial system. The results show that climate risks exhibit significant heterogeneity in their impact on informal lending default: physical risk significantly increases default risk, serving as the primary climate threat faced by informal lending; transition risk, by contrast, presents a nonlinear impact characterized by short-term inhibition and long-term promotion, which is associated with its short-term boosting effect on return on capital (ROC). The core transmission mechanism is as follows: climate risks erode ROC, exacerbate operational risks, and drive a shift in financing channels toward informal lending, thereby increasing default risk. Heterogeneity analysis reveals that the aforementioned impacts are more pronounced among individual borrowers, in eastern China, and in scenarios affected by extreme low temperatures and heavy rainfall shocks. Furthermore, this study confirms that climate risks can be transmitted to the formal financial system via the informal lending channel, exhibiting significant cross-market spillover effects. This study expands the research scope of climate risks to the informal financial sector, offering new insights into the critical function of informal lending in climate risk transmission.