Does Microfinance Reduce Poverty in India?

This study analyzes MFI impact on household poverty, as defined by the Indexed Based Ranking (IBR) Indicator, a measure reflecting multi-dimensional aspects of poverty. It draws upon a national-level, cross-sectional household data set in India in 2001. The study uses the propensity score matching (PSM) model and the treatment effects model to estimate poverty-reducing effects of MFI access and loans used for productive purposes. Study findings include:

• Larger poverty reducing effect is seen among rural households when MFI access is defined as taking loans for productive purposes;
• Simple MFI access has larger average poverty-reducing effects than taking loans from MFIs for productive purposes in urban areas;
• Significant welfare increasing effects are observed for the poor and the moderately poor in rural areas;
• Welfare increasing effects are found only for the moderately poor in urban areas.

These results imply that monitoring the use of MFI loans as well as increasing their number is particularly important in helping the poor overcome poverty and protecting them from various shocks.