Measuring the Impact of Microfinance in Hyderabad, IndiaPDF version

 
Researchers: 
Abhijit Banerjee
Researchers: 
Esther Duflo
Researchers: 
Rachel Glennerster
Researchers: 
Cynthia Kinnan
Partners: 
ICICI Bank
Partners: 
Spandana
Fieldwork implemented by: 
Centre for Micro Finance (CMF)
Location: 
Hyderabad, India
Sample: 
6,800 households in 104 slum communities in Hyderabad
Timeline: 
2005 - 2010
Policy Issue: 
Credit
Policy Issue: 
Gender
Policy Issue: 

Microcredit is one of the most visible innovations in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with more than 200 million borrowers1, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more and, by putting money into the hands of poor families (and often women), it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.

Context of the Evaluation: 

Over one third of Hyderabad's population resides in slums and other poor settlements2, where there is extremely low access to formal financial services. At the time of the baseline survey, there were almost no microfinance institutions (MFIs) lending in the sample area, yet 68 percent of the households had at least one outstanding loan. The vast majority (93 percent) of households borrowed from informal sources (e.g. moneylenders, friends, or family), while just over 5 percent reported having a loan from a commercial bank.

Launched in 1998, Spandana is one of the largest and fastest growing microfinance organizations in India, with 1.2 million active borrowers in 2008. Spandana offers traditional microfinance loans, in which self-formed groups of six to ten women are given loans. A “center” is comprised of 25-45 groups, and to join an individual must (i) be female, (ii) be aged 18 to 59, (iii) have lived in the same area for at least one year, (iv) have valid identification and residential proof, and (v) at least 80 percent of women in a group must own their home.

Details of the Intervention: 

This project investigates a randomized impact evaluation on the introduction of microcredit in a new market. Spandana selected 120 areas in Hyderabad as places in which they were interested in opening branches, based on those communities having no pre-existing microfinance presence, and having residents who were desirable potential borrowers. Sixteen communities were subsequently dropped from the sample because they were found to have large numbers of migrant workers, who are less desirable as loan candidates. Fifty-two areas were randomly selected for the opening of an MFI branch immediately, while another 52 served as the comparison communities.

Spandana introduced their financial products into the treatment villages between 2006 and 2007. Data was collected on income, consumption, borrowing, and investment practices in a random sample of eligible households in both treatment and comparison areas. The typical loan was approximately Rs. 10,000 (US$200).

Results and Policy Lessons: 

Loan Take-Up: Around 1.5 years after Spandana extended credit offers, 27 percent of eligible households in treatment areas had taken up loans from Spandana or another MFI, compared to 18.3 percent in comparison areas.

Business Activity: Generally, there is little evidence that microcredit offers impacted business activities. Treatment households were no more likely to own a business or start new businesses. After 1.5 years, households in treatment areas reported investing around twice as much in their businesses as households in comparison areas. However, a second endline survey conducted 3.5 years after the initial microcredit offer shows no difference in investments between the two household types.  After 3.5 years, business investment levels were around 25 percent higher for treatment households.

Spending: There were no significant differences in total household expenditures between treatment and comparison groups. However, expenditure patterns were different for different groups. Treatment households bought more durable goods for their homes and businesses (i.e. they invested) and cut back sharply on temptation goods (tobacco, eating out, etc.)and festivals. A switch from temptation goods to investment may lead to higher consumption in the future. 

Education, Health and Female Empowerment: No evidence was found to suggest that microcredit empowers women or improves health or educational outcomes. Women in treatment areas were no more likely to be make decisions about household spending, investment, savings, or education. Households in treatment areas spent no more on medical care and sanitation than do comparison households, and were no less likely to report a child being sick. There was no change in the probability that children or teenagers were enrolled in school or in the number of hours worked by girls or boys aged 5 to 15, although teenage girls' labor supply decreased.

1 CGAP. “Financial Inclusion” http://www.cgap.org/topics/financial-inclusion. Accessed: 2015. 01.20

2 Greater Hyderabad Municipal Corporation, “Chapter V: Basic Services to the Urban Poor,” Hyderabad - City Development Plan, http://www.ghmc.gov.in/cdp/chapter%205.pdf. (Accessed September 8, 2009)

Related Papers Citations: 

Banerjee, Abhijit, Esther Duflo, Rachel Glennerster, and Cynthia Kinnan. 2015. "The Miracle of Microfinance? Evidence from a Randomized Evaluation." American Economic Journal: Applied Economics 7(1): 22–53.