Role of Micro-Credit in Risk Coping and Consumption Smoothening in Rural India

Given the vulnerability of poor households, there has been growing attention on the potential role and impact of microcredit in dealing with risks and reducing their vulnerability. This paper examines the role of group credit in managing risks by the poor in rural India by exploring how micro-credit enables members to manage risks and in coping with shortfalls in consumption/income during periods of shocks and stresses.

The study covered 50 households which had 35 participant households (project group) and 15 non-participant households (control group). Data used in this paper come from the material collected in three villages of Maharashtra, India. Results show that micro-credit induced the participant households to undertake investments in several forms - physical (housing); productive (livestock, poultry, irrigation infrastructure); human (health expenditures) and social assets.

However, the degree to which micro-credit could help the poorest households for absorbing the risks was limited due to certain group-specific and participant-specific factors. As a result, their dependence on other welfare-reducing measures (reduction in expenses on food) to cope with personal risks (periods of unemployment) was far from eliminated.