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.