Credit where credit's due: can't micro-loans do more for India's poor?

Credit where credit's due: can't micro-loans do more for India's poor?

Credit where credit's due: can't micro-loans do more for India's poor?

Have micro-credit programmes succeeded in meeting the needs of the poor? Are non-governmental organisations (NGOs) such as aid charities or private credit unions, better than governments at reducing poverty by bankrolling grassroots enterprise? Though poor people tend to trust official schemes less, both types of credit programme in India have shown a tendency to overlook poor people's needs by failing to recognise how complex and variable a handicap poverty can be, especially for women. A wealth of policy lessons can be learned by analysing how these schemes are designed and delivered, with a spotlight on how they define or profile poverty.

Most micro-credit programmes are intended to reduce poverty by compensating the poor for their lack of access to loan capital from formal credit institutions. But they may fail to take proper heed of poverty as a tangle of contrasting forms of exclusion. This literature review assesses and compares the record of official and independent credit programmes in this light. NGOs are widely preferred to government institutions as providers of credit. But yardsticks used on either side to assess performance can differ, making claims about their relative merits hard to evaluate.

One lesson that emerged from government schemes was that in places where gender inequalities were less severe, women were able to use their loans more productively. But overall, the signs were that targeting women for preferential treatment was not enough to ensure significant poverty reduction, particularly where gender bias at the delivery end meant programmes concentrated on 'traditionally' female (usually low-paid and low-productivity) activities.

More general criticisms of government-run schemes were that:

  • they were 'bolted-on' to mainstream banking systems in a haphazard way, and as a result met few of the needs of the poor
  • they lacked awareness of background disadvantages faced by the poor - such as lack of access to markets or to political influence. This meant credit alone was not enough to improve the situation of the poorest; more powerful groups in a community could easily corner the benefits.

By contrast, NGO programmes tended to follow more flexible rules, and to use credit to tackle poverty through a range of support activities, including group organisation and providing practical information on how to use credit. Not all responses to NGO schemes were positive. Some were criticised because they were often unable to reach the poorest, partly because of unrealistic repayment rules, and partly because some of the poorest were reluctant to take on more debt. Some NGOs appeared to be biased in their approach to women, and worked with women only because they were seen as better credit risks than men, rather than out of recognition of their abilities or talents.

In terms of more general lessons arising from experiences to date, it was observed that:

  • credit may not do much to alleviate the poverty of those recipients whose only asset is their labour power, and who may need additional complementary resources to enable them to use loans successfully
  • sustainability of credit programmes may mean that rules to ensure loan recovery need to be waived or modified for the poorest sections of the community
  • government-run schemes can spread their net much wider than NGO-run credit programmes, hence the latter are not necessarily better than state institutions at using credit to reduce poverty. Their flexibility and willingness to experiment does, however, provide an important model for future anti-poverty initiatives of all kinds.
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