Financial innovation in bundling crop insurance and credit in India: an impact assessment using propensity score matching

What the paper says

Purpose This study explores the innovative bundling of crop insurance and credit and its impacts on economic outcomes. This article first presents a theoretical model for “bundlization” of credit and crop insurance. Propositions of such a model are tested in the light of evidence from a nationally representative survey in India. Specifically, this study identifies the correlates of crop insurance access (or bundling of crop insurance and credit) and its impacts on farm income and outstanding debt. Design/methodology/approach A unit-level dataset of 34,946 observations related to 31,784 cereal-producing households is compiled from the Situation Assessment Survey of Agricultural Households in Rural India (2019). Econometric methods (Logistic regression, Multinomial logit model, Propensity score matching and Sensitivity analysis) are used in this study. Findings The survey reveals that only 8% of farmers have access to insurance. Credit-linked insurance has a higher uptake than voluntary insurance. Out of 92% of uninsured farmers, nearly 43% are unaware of the existence of a crop insurance scheme. Most insured farmers who experience crop failure are denied claims without explanation. Logistic regression suggests that higher age, higher yield, greater landholding, formal training, working in an employment guarantee scheme, possession of a Kisan Credit Card and experience of loss increase crop insurance access. Multinomial logit regression findings suggest the positive relationship between yield and crop insurance access is limited to loanee farmers. Finally, propensity score matching results suggest that crop insurance significantly improves farm income and mitigates downward risk during crop failure. Bundling crop insurance and credit provides no additional benefits. Practical implications The results of this study find no economic rationale for bundling crop insurance and credit; therefore, policymakers can delink the compulsory provision of crop insurance in credit contracts. However, considering the positive impact of crop insurance in increasing farm income and safeguarding against crop failure, policymakers should consider strategies to increase crop insurance access by making farmers aware of the crop insurance scheme. Originality/value This article made a novel contribution in the extant literature on two counts. First, this study develops atheoretical framework to compare payoffs of different categories of farmers, i.e. insured vis-à-vis noninsured farmers, and loanee vis-à-vis nonloanee farmers. Secondly, following the framework's propositions, the determinants of crop insurance access are identified by considering these categories of farmers. Additionally, this study estimates the impact of crop insurance in the event of crop success and crop failure.