Limits of Micro Credit for Rural Development: A Cursory Look

This paper argues that microcredit, as a development intervention, has limited scope because it shifts the focus away from the society to the individual.

The paper lists the following difficulties that formal financial institutions have with regard to providing microcredit:

• High transaction costs;
• Large geographical dispersion;
• Small amounts involved in transactions;
• Lack of information about clients' credit worthiness;
• Lack of assets that can be used as collateral for loans.

The paper surveys literature to explore the limits of microcredit as a development intervention, and:

• Attempts to bring to focus the concept of rural microfinance;
• Explores the issues of credit markets and the poor;
• Looks at the conditions that limit the effectiveness of microfinance institutions as development interventions in different parts of the globe, including India.

The paper concludes that:

• The success or failure of any microcredit scheme depends on how it is conceived, organized and implemented;
• The provision of microcredit is a necessary, but not a sufficient condition, for the success of rural micro-enterprises;
• The wealthier segments of the target group benefit the most;
• The political framework in which it is implemented limits the impact of a scheme.

The paper recommends that microcredit institutions address these limiting conditions if they want microcredit to play a greater role in developing the rural areas of a country.