Making the poor creditworthy : case study of the integrated rural development program in lndia

India's Integrated Rural Development Program (IRDP) is among the world's most ambitious efforts at credit-based poverty alleviation. IRDP was initiated a decade ago and has reached 27 million poor households The through commercial banks which provide finance for investment in income generating assets. Credit is matched by capital subsidies of 33-50z on household investment. Government spent Rs 4.7 bln on such subsidies in 1987-88, an amount which may increase in future years. The program has increased the asset holdings of about one quarter of all rural households in India. This paper examines the impact of the IRDP and the long-term viability of credit-led approaches to poverty alleviation. Success is assessed against the program's objectives including productivity of investments, real income gain by households, and credit repayment. Drawing on new data from the first panel survey of beneficiaries over a four-year period, the analysis identifies household characteristics, program features, and economic conditions that contribute to success. The paper also examines the extent to which the IRDP's structural objective of assuring that the poor have continuing access to institutional credit and banking services a goal of Indian credit policy since the early 1950s. is being achieved.

The paper shows that providing some poor households with capital to invest in income generating assets can be an effective means of raising their incomes. Nevertheless, even where beneficiaries have succeeded in self-employment and repaid credit according to schedule, the program has not led to their continued access to banking services. With the interest rate on IRDP fixed by government at a rate below the banks' costs and interest rates on all priority lending in rural areas held below market clearing levels, banks choose not to lend additional funds after their obligation to achieve IRDP targets is satisfied. Although the high rates of interest and recovery observed in informal credit markets indicate that poor borrowers do pay for credit at a rate which covers costs, informal markets do not cater to the demand for long term investment capital. Moneylenders are unwilling to accept such risk except in exchange for long term labor contracts (i.e.. bonded labor) to assure repayment, a condition prohibited by law.