ICICI Bank Joins World Bank, IFC For Weather Hedge Project

Mumbai, December 21: | Updated: Dec 22 2002, 05:30am hrs
A weather-linked derivative product in India seems like a far-fetched thought. But weather hedges may well be a reality soon. ICICI Bank is in the process of developing a rainfall-linked weather derivative for India along with the World Bank and the International Finance Corporation (IFC).

The bank is working on the derivatives side as a part of its social initiative and is being handled by its social initiatives group. While the project is nationwide in nature, the first weather hedges may well come up for Andhra Pradesh

On the weather side, we have a project with IFC Washington and World Bank to develop a rainfall derivative. Though it is in a very nascent stage at the moment, ICICI Banks executive director Nachiket Mor told FE.

The derivative model is being looked at as a substitute for the traditional crop insurance product with an index-based model. The idea is to create an index after an extensive study which will determine the optimal range of rainfall in the region and if the rainfall is not in the defined band, the farmer gets a specific payout. In Latin America and Africa, experiments have been tried in weather derivatives and rainfall insurance and have been successful.

Traditional models of crop insurance have bled money everywhere. There are too many hazards and no one has been able to do it profitably. So new thinking everywhere mostly led by World Bank and IFC is to make a move from individual claim-based insurance model to a more index-based model, an ICICI Bank official working on the product said.

The official said: So what rainfall insurance would do is to conduct a large and extensive rigorous study, establish an index which in very simple terms will say that this is an index which has been carefully researched and for the state of Andhra Pradesh it is likely to be region specific if rainfall falls below these many millimeters then there will a uniform payout.

What this index entails is that it takes banks away from the hazards linked to individual claims to a more unambiguous index saying that whether one files a claim or not, if the rainfall falls below a particular level this is the payout one gets. However the critical factors in implementing this model are the construction of an accurate index and getting the farmers interested in the product.

Our belief for the micro finance initiative of the bank is that unless we find a commercially viable way to deliver these services, it is not going to scale up. We cant look at a government subsidy-based model to continue forever. This is in a nascent stage and we are working with World Bank and IFC to do these studies in India as there are no such India specific studies or India specific indices. And they have great experts who have done great work elsewhere, said the official.

Weather hedges, or derivatives, protect a range of industries globally against weather-related damages, most notably in the agriculture and energy sectors, but also in transportation, construction, leisure, and insurance industries. Farmers particularly benefit from weather hedge products, since they offer a valuable shield against crop risk failure owing to drought or severe weather.