Financial inclusion helps rural households address climate risk

Financial inclusion plays an important role in helping households manage risks, but its role in mitigating climate risks is unexplored. Access to formal financial institutions in regions with high climate risks increases households' access to liquidity that they need to buffer against climate shocks. Using longitudinal data from 1082 rural households located in the semi-arid tropics in India, we find that households facing high climate risks hold a higher proportion of assets in liquid form. Access to formal financial services, however, reduces the need to keep liquid assets to be able to respond to high climate variability. Our results suggest that expanded financial inclusion in regions with high climate variability can reallocate resources held in unproductive liquid assets to invest in climate adaptation.