Crop insurance and crop credit: Impact of the comprehensive crop insurance scheme on cooperative credit in Gujarat

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Abstract
This paper is an attempt to analyse the impact of a credit‐linked crop insurance scheme—the Comprehensive Crop Insurance Scheme (CCIS) of India—on crop credit or short‐term agricultural credit, especially to small fanners. A dominant view on rural credit institutions is that they are unwilling to extend adequate credit to small farmers on account of the problems of information and enforcement, and that a crop insurance scheme—because it faces similar problems—would make little difference. A common device used in rural credit markets with a view to limiting the consequences arising out of agricultural risk, information asymmetries and enforcement problems is collateral. Small farmers in developing countries do not own adequate land and other assets which can be used as collateral, and consequently face a situation of inadequate availability of credit. The question is whether crop insurance can serve as a substitute (perhaps partial) for collateral. In view of the above facts, this paper addresses the issues whether the CCIS led to a significantly higher flow of institutional credit to farmers, especially small farmers, and whether there was any improvement in the repayment of loan—in other words, whether there was any collateral effect. The analysis is based on empirical data from Gujarat (India). The findings show that there is a significant increase in the flow of credit to insured farmers after the introduction of the CCIS. The expansion is in both coverage and size—there was an increase in the number of borrowers, and also in credit per borrower as well as per hectare. The share of small farmers (with land holdings of 2 ha or less) in the total loan increased from 19 per cent to 27 per cent. There was a significant increase in the repayment of loan in absolute terms—repayment per farmer and repayment per hectare. But it is not clear if the propensity to repay improved. The expansion of credit appears to be what one may call a collateral effect.