Microfinance and Household Poverty Reduction: New Evidence from India

This study examines whether household access to microfinance reduces poverty.

The study draws from a national-level cross-sectional household data set from India and analyzes MFI impact on household poverty. It uses the Index Based Ranking indicator which reflects multi-dimensional aspects of poverty. The study employs the treatment effects model and Tobit model to estimate the poverty reducing effects of access to MFIs and loans used for productive purposes. These models compensate for endogenous binary treatment effects or sample selection bias associated with access to MFIs. Study findings indicate that:

• Both models confirm positive effects of MFI access on the multidimensional welfare indicator, suggesting that MFIs play a significant role in poverty reduction;
• Loans for productive purposes are more important for poverty reduction in rural areas than in urban areas;
• In urban areas, simple access to MFIs has larger average poverty-reducing effects than access to loans from MFIs for productive purposes.

Study findings indicate that rural clients’ intended use of loans is important in determining poverty reduction outcomes. This finding on outreach and productive use of loan for better impact warrants more policy choices.