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Collateral‐free lending with risk‐contingent credit for agricultural development: indemnifying loans against pulse crop price risk in India |
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| Authors: | Apurba Shee Calum G. Turvey |
| Affiliation: | 1. Department of Agricultural, Environmental, and Regional Economics, The Pennsylvania State University, 311 Armsby Building, University Park, PA 16802, USA;2. Charles H. Dyson School of Applied Economics and Management, 237 Warren Hall, Cornell University, Ithaca, NY 14853, USA |
| Abstract: | This article addresses the problem of collateral‐free lending in the context of agricultural development. We investigate a viable alternative to traditional credit products through the development of risk‐contingent credit for operating loans and farm mortgages and apply the concept to agricultural loans for pulse crops in India. Risk‐contingent credit mitigates business and financial risk by reducing debt obligations depending on the embedded commodity options whose payoffs are linked with commodity price fluctuations. We analyze daily commodity spot prices for pulse crops in India and show how risk‐contingent structured financial instruments can be priced in practice. |
| Keywords: | G13 O53 Q12 Q14 India Commodity‐linked loans Interlinked credit Credit rationing Development finance Agricultural finance Commodity price risk Pulse crops in India |