TESTING AN INNOVATIVE FINANCIAL PRODUCT FOR SUGARCANE FARMERS

Principal Investigators: Rajkamal Iyer (MIT), Antoinette Schoar (MIT)
Research Team: John Victor Arun Kumar, Pratibha Joshi
LEAD Centre: Small Enterprise Finance Centre (SEFC)
Focus Area: SME Finance
Project Geography: Tamil Nadu
Partner: USAID, IGC
Status: On-going

Background:

This study aims to test a financial product that addresses the particular factors faced by farmers and allows them to better manage their financial needs over the crop cycle. At the same time, we envisage that the financial product would reduce the repayment risk and transaction costs to the lenders. We also aim to explore how different financial contracts affect the welfare of farmers and understand whether farmers optimally choose the right financial product to maximize their welfare.
The innovative financial product we aim to pilot fills an important gap in the agriculture industry and famer access to credit. Currently in India, facilities exist to aid farmers with the initial investment to acquire seeds, fertilizer, etc. However, there is a dearth of financial services to help them smooth their consumption and other requirements during the crop cycle. Out of 89.35 million farmer households, 43.42 million (48.6%) were reported to be indebted; with more than 80% being from small and marginal farmers with less than four hectares of land.The outcome of the study will elevate our understanding of how liquidity constraints affect risk taking, investment decisions and the associated real effects.