Climate Change

Access to financial services can help rural India cope with climate risks: Study

Over half the Indian households surveyed who faced climate shocks used their own savings to cope 

By Rohini Krishnamurthy
Published: Wednesday 17 May 2023
Photo: iStock_

Access to financial services such as bank accounts can help Indian rural households cope better with climate risks, a new study has found. 

Financial inclusion through banks and other financial solutions reduces the need to keep liquid assets — commodities such as gold, livestock that can be converted into cash quickly — as a buffer to respond to climate risk, the study published in the journal Scientific Reports stated.

“Almost all rural households have limited access to liquidity. The way to improve liquidity is through financial inclusion. Access to formal financial institutions like banks releases resources for productive investments, which would otherwise need to be kept in liquid forms,” Ashwini Chhatre, executive director at the Indian School of Business, told Down To Earth.

Without access to liquid assets, rural households take high-interest loans from informal sources.

Chhatre and his colleagues analysed data from the International Crop Research Institute for the Semi-Arid Tropics-Village Dynamics in South Asia.

The dataset covered 1,082 rural households from 30 villages in the semi-arid tropics in India from 2010-2014.

Their analysis showed that 59 per cent of the households experienced climate shocks in at least one of the five years and 13 per cent faced them in more than two years.

As many as 353 (57 per cent) out of the 633 households that faced climate shocks reportedly used their own savings to cope with the issue.  

The survey also found households rely on financial assistance from kin and relatives followed by friends, village communities, money lenders, banks, in this order. 

Households, on average, hold 15.6 per cent of their assets in liquid form. But those that use banks hold 1–13 percentage points fewer assets in liquid form when exposed to higher climate risks, compared to those who do not have bank accounts.

With higher rainfall and temperature risks, the financially excluded households are predicted to hold nearly 50 per cent in liquid assets, compared to 20 per cent held by banked counterparts.

“In regions facing high climate risk, financial inclusion will reduce the resources that households need to keep in liquid form and therefore make them available for productive investments to address climate risk,” the researchers wrote in their study.

Further, the researchers also highlighted issues with centralised planning of adaptation. “There is no way a central planner will be able to create a plan that benefits everyone equally,” Chhatre explained.

Climate adaptation, he added, requires putting resources in the hands of people because they are best placed to understand climate impacts and also the most suitable strategy at the household level, he highlighted.

“It is best to create systems that allow these households to exercise their judgement on what is the best course of action,” the expert noted.

The researchers plan to study how frequently people go back to banks and if the trust in the banking system has improved over time.

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