A study conducted on villagers staying in semi-arid tropical regions sheds light on the pivotal role of financial inclusion in mitigating climate risks in rural households.
Researchers found that farmers and households in rural and semi-arid regions are the best at managing finances. Also, climate change and finances play a crucial role in their income.
Prof Ashwini Chhatre, Executive Director, Bharti Institute of Public Policy, Indian School of Business (ISB), told The New Indian Express that the report will be submitted to the government to help it chalk out the action plan.
Buffer against climate stocks
Researchers noted that access to formal financial institutions in regions with high-climate risks increases households’ access to liquidity that they need to buffer against climate shocks. Using longitudinal data from 1,082 rural households located in the semi-arid tropics in India, they found that households facing high-climate risks hold a higher proportion of assets in liquid form.
Access to formal financial services, however, reduces the need to keep liquid assets to be able to respond to high climate variability. The results suggest that expanded financial inclusion in regions with high climate variability can reallocate resources held in unproductive liquid assets to invest in climate adaptation.
In the research, titled Financial Inclusion Mitigates Climate Risks for Rural Households: A Study in Semi-Arid Tropics, the teams studied 15 villages in India. The research has been published in Nature — a multidisciplinary science journal.
The study was conducted across nine districts in Maharashtra, Karnataka (Tumkuru and Vijayapura), Odisha, Bihar, Jharkhand, Gujarat Telangana, Andhra Pradesh and Madhya Pradesh by researchers from Indian School of Business and collaborators from Australia and the UK. They examined the relationship between climate risk, financial inclusion, and household liquidity, using household-level panel data from 1,082 rural households.
The study finds that households facing higher climate risks tend to hold a larger proportion of their assets in a form that can be easily converted to cash. This strategy forces households to reduce investments in productive assets, which typically can’t be easily converted to cash at short notice. However, access to formal financial institutions, such as banks, reduces this need for liquid assets.
Households with financial inclusion hold a smaller share of their assets in liquid form compared to those without such access. This suggests that financial inclusion enables rural households to allocate resources more efficiently towards addressing climate risks, as they do not need to rely as much on liquid assets, Chhatre said.
