The materialization of climate-related risks has become a relevant issue since it is directly affecting the economic sectors. The Colombian banking sector is no exception, as it is exposed to climate-related financial risks. By combining information on bank portfolio and loan provisions by municipality, with quarterly rainfall records from more than 2,000 weather stations located across the country, I examine the relationship between climate variability (rainfall and rain shocks) and credit dynamics by type of loans. I find that during episodes of heavy rainfall the consumer and microcredit portfolio, as well as the consumer loan provisions, increase. On the contrary, heavy rainfall shocks have a negative impact on housing portfolio and housing loan provisions. These results illustrate that, during an episode of heavy rainfall, individuals could face a negative income shock. To cope with this, households resort to consumer loans, and small and medium enterprises resort to microcredit loans. Furthermore, since buying a house may not be a priority as it is to satisfy basic needs, housing loans decrease. Finally, I also examine whether the effect of the rainfall shocks on the commercial loan portfolio varies with banks exposure to different economic sectors. I find a positive effect of episodes of heavy rainfall on commercial loans for banks with high loan concentrations in the agricultural, services, and health sectors.
