Microcredit as insurance: Evidence from Indian Self-Help Groups

Timothée Demont

No 1410, Working Papers from University of Namur, Department of Economics

Abstract: In developing countries, most poor households experience extremely variable in-come because of a large exposure to climatic, economic and policy shocks, combined with a lack of appropriate insurance devices. Extreme weather events, in particular, are projected to become more frequent in a warming climate, leaving rainfed agriculture and large populations in developing countries at risk. In this context, reliable access to finance in general and credit in particular can potentially bring welfare-improving opportunities to smooth household consumption. This paper documents the extent and the nature of the reactions to rainfall shocks that can be attributed to the participation to informal savings and credit groups in villages of Northern India. I exploit first-hand panel data measuring the living standards of member and control households, coupled with meteorological data at the district-level. I find that agricultural production and income are very dependent on the monsoon quality. Interestingly, while the access to credit collapses for control households after a bad monsoon, Self-Help Groups (SHGs) appear to be robust credit sources that offer to member households the possibility to increase borrowing in order to cope with shocks, even when those are largely covariate within the village. This in turn implies a higher degree of food security over the year and a lower need for temporary migration following a large negative shock. Finally, I review some noteworthy features that allow SHGs to withstand covariate shocks, though potentially at a cost in terms of longer-term insurance.

Keywords: Microfinance; climate shocks; income smoothing; risk-coping strategies (search for similar items in EconPapers)
JEL-codes: G21 O13 O15 Q54 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-10
New Economics Papers: this item is included in nep-agr, nep-dev, nep-ias, nep-iue and nep-mfd
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