Collateral-free lending with risk-contingent credit for agricultural development: indemnifying loans against pulse crop price risk in India

摘要

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.