Microfinance and the Dynamics of Financial Vulnerability: Lessons from Rural South India

This paper examines the positive and negative effects of microfinance on the financial vulnerability of client households. Microfinance practitioners and donors are becoming increasingly concerned about the effect of microfinance on household financial vulnerability. Impact studies have found that microfinance protects clients against risks and helps them develop income-generating activities. It does, however, have negative effects on the most vulnerable populations who are not able to use it efficiently.This paper draws on data collected in rural South India to analyze the effects of microfinance on clients' financial vulnerability. Results indicate that:

• Microfinance can either reduce household financial vulnerability or push them further into debt;
• Microfinance processes and use are inseparable from broader local dynamics of employment, financing and consumption;
• Impact of microfinance depends upon how clients coordinate it with other financial management strategies.

The paper recommends that financial inclusion should not be only a matter of access. Policy makers should ensure consumer protection and look at how people make use of credit facilities.