110815

Micro…nance and Disaster Management:
How does Micro…nance help coping with ‡oods?
Evidence from Northern India
Kristina Czura Sarah Linders
Goethe University Frankfurt University of Heidelberg
UMM Workshop Groningen
Czura & Linders (Uni Frankfurt) Micro…nance & Disaster Management Jun ‘11 1 / 17

Motivation
Credit as Coping Mechanism
Insurance and credit have been identi…ed as coping mechanisms for
risk to smooth consumption (Morduch (1995), Townsend (1994))
Both formal and informal credit have been identi…ed as important
mechanisms in dealing with idiosyncratic shocks (Eswaran & Kotwal
(1989), Udry (1990), Udry (1994), Gertler et.al. (2002), and Skou…as
(2003))
Further, access to credit has been identi…ed to reduce the use of other
coping mechanisms like child labor and reduction of educational
attainment in face of negative income shocks (e.g. Jacoby & Skou…as
(1997), Beegle et.al. (2006), Guarcelllo et.al.(2009))

Motivation
There is, however, little research on how households cope with large
aggregate shocks, like natural disasters
I A few studies elicit a substitution e¤ect of other coping mechanisms for
credit constrained households (e.g. Jacoby & Skou…as (1997), Gitter &
Bradford (2007)).
I Sawada (2008) …nds direct evidence for consumption smoothing after
the Kobe earthquake for households having access to credit
I Shoji (2010) shows that households with access to credit can keep their
pre-‡ood consumption level and level of nutritional intake after the
1998 ‡ood in Bangladesh
Nevertheless, there is little evidence on the direct use of credit as
insurance against aggregate shocks in the literature
I Del Ninno et.al. (2003) and Khandker (2007) …nd that informal credit
and micro credit played a major role for consumption smoothing in the
1998 ‡ood in Bangladesh
I Czura & Klonner (2010) show that demand for funds provided by
Roscas did increase as a consequence of the Indian Ocean Tsunami

Research Idea
1 Phase: Short run research question (current research project)
I What adverse income shocks do households face and how do they cope
with them? In particular, how do households cope with ‡ood?
I How do households …nance the consequences of adverse income shocks
and what role can Micro…nance potentially play?
2 Phase: Long run research question (future research project)
I Develop a disaster-loan-product and pilot test it in a randomized …eld
experiment setting

Research Partner - Gramyasheel Micro…nance
Gramyasheel NGO is working since over 15 years in the districts of
Supaul, Madhepura and Saharsa on di¤erent projects in water and
natural resource management and is promoting various forms of
livelihood activities.
Further, Gramyasheel NGO was a partner of NABARD and formed
SHGs in the SHG-linkage program
Gramyasheel Micro…nance has been established by the NGO
Gramyasheel in 2009
I Group lending methodology: lending to joint liability groups (JLGs) of
female clients
I Loan products o¤ered: standard loan (increasing loan amount with loan
cycle), emergency loan, short term business loan
I Loan purpose: working capital needs and asset acquisition needs for
standard and short term business loan, hospitalization costs for
emergency loans
As Gramyasheel MFI is operating in a ‡ood ravaged area they would
like to extend their loan portfolio by a Disaster Loan Product

Area of Operation - Flood situation

Area of Operation - Flood Situation
Kosi river
I the river moved its riverbed westward over the last 100 years
I the river is carrying silt from Nepal, hence elevating the river bed such
that monsoon rain cannot be absorbed properly causing ‡oods
Flood management
I Embankments were build to keep river Kosi in its river bed. The
‡oodplains were reduced, leading to higher ‡oods inside the
embankment
I Villages still exist inside the embankments
I Embankment creates waterlogged areas in former ‡oodplains so that
even outside the embankments water levels rise with higher water levels
of Kosi
Disastrous ‡ood caused by breach in embankment in 2008

Empirical Strategy
For empirical identi…cation in this cross-section setting we study
households from three di¤erent locations within Supaul district that
are di¤erently a¤ected by ‡oods
1 Urban and rural micro…nance clients who live close to, but outside the
embankment borders
F not directly a¤ected by the ‡ooding, but indirectly a¤ected by rising
ground water levels in times of ‡ooding and through agricultural
activities inside the embankment area
2 Households living inside the embankment
F villages inside the embankment face yearly recurring ‡ooding after the
monsoon
3 Households in the ‡ood zone of the 2008 ‡ood
F area has not been a¤ected by ‡oods ever since the establishment of the
embankment in the 1950s

Characteristics of Household Head

Consequences of Shock for Household

Financing Constraints after Shock

Conclusion
Households are exposed to severe negative income shocks with
average amounts lost due to shocks comparable to average annual
income of households
Most households only relied on informal …nancing sources such as
family, friends, neighbors and other relatives
Indication of lack of access to …nancing sources especially after
adverse income shocks
In the next steps of the analysis, we will take a closer look at
di¤erences in shocks and coping mechanisms applied across the three
distinct groups of households interviewed
There seems to be a lack of …nancing sources especially in face of
shocks and there is a huge potential for micro…nance to close this gap

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