Collateral Free Lending with Risk-Contingent Credit for Agricultural Development

Abstract

This paper investigates a viable alternative to traditional credit products through the development of risk-contingent credit for operating loans and farm mortgages and applies the concept to agricultural loans for pulse crops in India. We analyze daily commodity spot prices and design risk contingent structured financial instruments. 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.

Keywords: India, Commodity-Linked Loans, credit rationing, Development Finance, Agricultural Finance, Commodity Price Risk, Pulse Crops in India

JEL Classification: G13, 013, Q12, Q14