Innovative Financial Services for Rural India: Monsoon-Indexed Lending and Insurance for Smallholders

This paper outlines an integrated crop loan insurance and risk management product for Indian rural finance and agriculture. This, combined with the risk management account, could significantly improve farmers' access to crop loans and their capacity to manage risk.

The paper is organized in the following sections:

• The first defines the problem of access to financial services, how monsoon risk affects that access and how the Indian government is currently addressing the problem;
• The second describes the concept of monsoon-indexed lending and risk management accounts for smallholders;
• The final describes the findings of a modeling exercise applying the service in India.

The paper concludes that the crop loan insurance and risk management scheme can help banks significantly increase their lending volumes, especially in rain-fed areas while bringing down the default rates as well as transaction costs. This could help farmers stabilize their incomes and access a greater credit line.