Managing Agriculture Finance Risk
In India, agriculture continues to be the major employment sector as more than 50% of the population do farming. The risks associated with the agriculture industry, specifically in India, are aggravated by various factors, ranging from weather variability, frequent natural disasters, uncertainty in crop production and market prices, lack of effective rural infrastructure, and market information asymmetry that reduces the efficacy of risk mitigation instruments like credit lending, insurance, and option markets. The above-mentioned factors not only possess the risk to the livelihood and income of the farmers but also hinder the whole agriculture sector in becoming part of the solution to the problems faced by agricultural labor.
The major problems lie in the complexity of agriculture sector in terms of farms size, mixed crop plantation, and drastic climatic changes among others, which has led to the disengagement of banks and other financial institutions towards rural finance, since there is lack of profitability. The remoteness of the rural clients and poor financial networks increases the cost of doing business in these types of areas. India’s rural transformation and national economy are dependent on the agriculture sector, for which fiscal and monetary interventions are required to ensure the security of the farming community, but also to generate constant mode of income, savings, and investment. The grossly under-funded Indian agriculture sector provides huge opportunities for banks, insurance and reinsurance companies to provide sustainable solutions to farmers by providing the necessary capital to come out of poverty trap and get insulated from the income shocks.