Speaker
Description
Introduction
Agriculture is inherently risky and smallholder farmers often lack the funds to expand their operations or invest in profitable technologies and inputs. For instance, lacking documented land rights or lacking the necessary collateral limits potential borrowers’ access to formal credit (Higgins et al., 2018), and consequently potential borrowers are involuntarily limited in their borrowing, resulting in efficiency losses and potential entrapment in a low productivity equilibrium (Croppenstedt et al., 2013). One way to potentially overcome both types of credit rationing and expand investments in agriculture is through agricultural insurance. Yet, the challenges with agricultural insurance are well known (e.g., Hazell et al., 1986; Binswanger-Mkhize, 2012; Carter et al., 2017; Kramer et al., 2022), namely high costs associated with monitoring and assessing losses, resulting in high administrative loads; informational asymmetries manifesting as both adverse selection and moral hazard; the highly covariate nature of production risks; and a mismatch between insurance demand (which is highest among wealthier farmers) and who would actually benefit from risk transfers (poor farmers without the ability to self-insure). Although index-based insurance programs promoted to address some of these challenges, they have few drawbacks that can be covered by leveraging remote sensing. Now, it is essential to deepen our understanding of the extent to which it can enhance rural credit access, help smallholders manage agricultural risks (Benami et al., 2021), and improve targeted populations’ wellbeing and livelihoods.
Objective
KhetScore - a novel credit scoring method that generates credit scores using remote sensing and crop analytics - was designed by Dvara E-Registry (DER) the implementing partner for this study to overcome information asymmetries and documentation requirements in the provision of financial instruments for marginal landless farmers. This evaluation aims to find out beneficial impacts of offering farmers KhetScore loans bundled with insurance over a wide range of agricultural, gender parity, and mental health outcomes. In particular, the evaluation demonstrates the potential for this novel financial product to have transformative effects on the rural economy by strengthening financial literacy, improving credit and insurance uptake, increasing farm profits, enhancing women’s empowerment, and easing some of the mental health stresses that so often accompany near-subsistence agriculture.
Method
To evaluate the impacts, we implemented a cluster randomized trial with about 1,800 potential KhetScore clients from 58 villages of two blocks in Jajpur, Odisha. We randomized all 58 villages into a treatment arm (29 villages), where farmers were offered the KhetScore loans bundled with insurance, and a control arm (29 villages), where DER did not offer any loans or insurance products.
To estimate intent-to-treat (ITT) effects, we used analysis of covariance (ANCOVA) estimators, in which endline values of outcome variables are regressed on a dummy variable indicating whether the farmer was in the treatment group, controlling for baseline values of the dependent variable and a matrix of covariates, with standard errors adjusted for the clustered nature of the experimental design. ITT provided an estimate of overall impacts of offering loans and insurance based on the KhetScore credit-scoring methodology. Assuming a positive correlation between take-up and the various outcomes of interest, these ITT effects will be a downward-biased measure of the beneficial impacts. It provided a conservative estimate of the overall program impacts and may be of greater interest to policymakers interested in the economywide impacts of the program, rather than just the effects on those households who took up KhetScore loans. Nevertheless, we also estimate impacts for those households in the sample that decided to take up these products if offered to them. We estimated local average treatment effects (LATE) (Imbens and Angrist, 1994), by instrumenting for product take-up with random assignment to the treatment group.
Findings
In this impact evaluation, we found that KhetScore loans have a wide range of significant and meaningful impacts that benefit participants in our study area. We find evidence of significant increase in the uptake (62 percent higher than the control) and renewal (28 percent higher than the control) of agricultural insurance, and an overall increase in familiarity with the terms and conditions of crop insurance. The program also increased overall utilization of credit, especially among women. Much of this overall increase comes from an expansion in formal credit uptake and not merely from a shift from informal to formal credit. In addition, households in the treatment group were more than 40 percentage points less likely to report facing difficulty in repaying their loans, indicating that the KhetScore loan and insurance bundle had particularly favorable terms.
LATE estimates that the treatment increased revenues and profits per acre by more than INR 7,500(USD 101) and INR 8,500(USD 114) respectively. As a result, treatment households had significantly higher agricultural profits, with profits nearly doubling those in the control group. We also observe important impacts on women’s empowerment and mental health. Compared to female DER clients in the control group, those in the treatment group were 28 percentage points more likely to report making contributions to household decisions regarding borrowing and 25 percentage points more likely to make contributions to household decisions about how to use borrowed money. We also find that the program had a beneficial effect on reducing stress levels especially pronounced among the other female household members who co-signed the loans. These findings also underscore the value of surveying not only the (typically male) head of the household, but also other household members since the impacts of an intervention may differ across members of a household.
Conclusion
Our findings suggest that the KhetScore credit-scoring methodology, serves to mitigate credit rationing while simultaneously enhancing the inclusivity of rural finance. KhetScore's elimination of paperwork prerequisites, specifically the need for land titles, extends access to formal credit to a previously underserved group of potential borrowers. Furthermore, the incorporation of crop insurance may alleviate collateral requirements, addressing both risk-related and quantity-related constraints in formal borrowing. These results provide valuable insights for policymakers interested in expanding access to credit and insurance for sharecroppers and tenant farmers who lack documented land rights.
