Conditions necessary for Micro-credit to be a successful poverty reduction tool

 Poverty reduction remains a daunting task for policy makers’ world over. Out of quiver of many policies prescriptions available to policy makers is microcredit among the latest. However as it is noted by all the scholars worldwide that no single policy prescription is panacea  for reducing poverty and hence microcredit should be one of the policy prescription along with other in the poverty reduction programme.

                To make microcredit a successful poverty reduction tool we must use it simultaneously with other poverty reduction tools such as

1. Subsidised food grain distribution: Since poor people spend around 80 percent of their income on food and hence making available subsidised food grains will go a long way in increasing the purchasing power of the poor. This will further protect the poor from high market prices of food grains and will enable them to make prompt payment instalments to service their loans.

2. Skill development of poor people: Since poor people lack enough skills to make money out of the microcredit they receive and hence enabling poor to earn more income out of same amount of money which he could get hitherto. This will also make poor as good entrepreneur.

3. Reduce transaction cost and corruption: In underdeveloped countries, poor people spend more money to get benefit[1] of welfare schemes designed to benefit them. Sometimes high transaction cost even prevents them from accessing welfare schemes. (El-Ghonemy, 2007)This welfare trap keeps them in poverty trap because of high levels of transaction cost[2]. Hence reducing corruption and easing governance in these nations will surely help many poor get out of poverty.

4. Convergence of different pro-poor schemes: It was experience of Andhra Pradesh state of India that convergence of different government programmes can lead to better execution of schemes and more benefit to poor. This was done to converge all other manual labour requiring programme with MGNREGA, a job guarantee scheme. (NREGA website) (NABARD pdf report)Similarly, if input subsidy scheme can be merged with microcredit to help famers and self help groups then poor can get more benefit out of the micro credit and consequently come out of poverty soon.

Nevertheless, above mentioned programmes can enhance the effectiveness of microcredit but more important point for success of microcredit in poverty alleviation is to form a cohesive group and supervise properly to avoid diversion of credit to other activities[3].

Bibliography

Anonymous. (n.d.). Retrieved November 19, 2014, from NREGA: nrega.nic.in/presentations/9%20AP%20State%20-%20Convergence.ppt

Anonymous. (n.d.). Status of Microfinance in India 2012 – 2013 – NABARD pdf report. Retrieved November 18, 2014, from NABARD: http://indiamicrofinance.com/status-microfinance-india-2012-2013-pdf-report-nabard.html

El-Ghonemy, M. R. (2007). The Crisis of Rural Poverty and Hunger: An Essay on the Complementarity between Market- and Government-led Land Refrom for its Resolutions. New York , USA: Routledge.

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[1] Sometimes transaction cost exceeds benefit derived from the government progarmme leading to net loss to poor.

[2] Corruption is also a component of transaction cost.

[3] Possibility of consumption credit to stop diversion can hardly be denied.