Heat Shocks and Agricultural Loan Repayment

A growing literature documents how extreme weather and climate change affect farmers directly. Much less is known about how these shocks propagate to the institutions that finance and service them. In this study we exploit year-to-year fluctuations in heat shocks on farming activities to quantify their effect on loan repayment. While heat shocks have large effects on agricultural output, we find the effects on repayment capacity are very small, at worst. We find no statistical evidence of a one-year heat shock affecting delinquency rates and estimate that a two-year uniform 1◦C increase only increases delinquency rates by approximately 3% of its standard deviation. We explore the underlying mechanisms that explain this small result and rule out various other possible explanations, including aggregation and attenuation biases. These results suggest the important role that robust buffering mechanisms and lender forbearance play in minimizing the transmission of climate-related physical risk to the financial sector.