Unexpected events like a failed harvest, livestock disease, or sudden illness can cripple a borrower’s ability to repay. Traditional loans don’t usually consider these shocks. That’s why insurance-linked credit—also called “credit-linked insurance” or “loan protection insurance”—is emerging as a game-changer for farmers, rural entrepreneurs and self-employed individuals.
What Is Insurance-Linked Credit?
It’s a loan product that automatically bundles in an insurance policy. If the borrower faces a predefined adverse event—like crop failure, disability, or hospitalization—the insurance payout either covers the EMIs or repays the loan balance, reducing default risk and financial stress.
How It Works
Loan Application: Borrower applies for a crop loan, microloan or small business loan.
Automatic Insurance: The lender partners with an insurer to attach a relevant policy to the loan.
Premium Built-In: Premiums are either subsidized by the government or included in the loan cost at a small additional charge.
Claim Trigger: If the insured event occurs, the insurance covers partial or full repayment or offers cash assistance.
Key Features
Protection for Borrowers: Reduces risk of over-indebtedness.
Security for Lenders: Lowers default rates and NPA risks.
Government Support: Many schemes provide premium subsidies for farmers and low-income households.
Examples in India
Crop Loans + PM Fasal Bima Yojana: Farmers automatically get crop insurance with seasonal loans.
Health-Linked Microfinance Loans: Some MFIs bundle health insurance for borrowers and families.
Livelihood Loans: Insurance pays EMIs during temporary disability or death of borrower.
Benefits
For Borrowers: Peace of mind, improved creditworthiness, and reduced financial shocks.
For Lenders: Safer loan portfolios, ability to reach riskier customer segments.
For Policymakers: Promotes financial inclusion and resilience.
Challenges
Awareness and understanding among borrowers.
Ensuring fast, transparent claim settlements.
Keeping premiums affordable.
Future Outlook
Insurance-linked credit is likely to grow as fintechs and NBFCs design customizable products, especially for rural households, self-employed workers and MSMEs.
Conclusion
By merging credit with insurance, lenders can offer a safety net—not just a loan. This model supports financial inclusion and reduces the vicious cycle of debt triggered by shocks like crop failure or illness.
FAQ Section
Q1. Who can avail insurance-linked credit?
Farmers, self-employed individuals, small businesses, and even salaried workers depending on lender offerings.
Q2. Does insurance-linked credit increase my EMI?
A small premium may be added to your EMI, but it provides significant protection.
Q3. What events are usually covered?
Crop failure, natural disasters, hospitalization, disability, or death—depending on the product.
Q4. Do I have to file claims myself?
In many cases the lender coordinates the claim with the insurer, making it seamless.
Q5. Are government subsidies available?
Yes, especially for agricultural loans under schemes like PM Fasal Bima Yojana.
Published on : 18th September
Published by : SMITA
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