Role of microfinance in reducing the dependence on informal borrowing in urban poor of Kolkata

The poor, in the absence of a regular and stable source of income often seeks finances from local money lenders to cope with their financial urgencies. The informal moneylenders charge an exploitative amount of interest often using abusive collection techniques to take undue advantage of their vulnerability. Since for the poor, ongoing access to credit is more important to survival than the actual cost of the credit, they fall prey to the vicious cycle of the “Debt trap ”which often translates into the death trap in an agrarian economy like India. Microfinance essentially addresses the credit needs of the poor by offering a reasonable and reliable credit delivery system. Since microfinance provides cheaper loans, access to microfinance is expected to reduce the incidence of informal borrowing. The role of microfinance in reducing informal borrowing though remains debated, is widely studied in rural economies but none of the studies so far have analysed this phenomenon in an urban setting. This study aims to evaluate the association of microfinance membership with incidence of informal borrowing in urban poor of Kolkata. The study is conducted on a total of 547 households which also comprises non member households as control group to study the effect of microfinance membership on informal borrowing in the last 3 years. It was found that urban poor households with membership in microfinance show significantly lesser informal borrowing as compared to the non member urban poor households.