The real cost of credit constraints: Evidence from micro-finance

Renuka Sane, Susan Thomas

The paper studies the effect of a law that banned micro-credit lending in the state of Andhra Pradesh in India. Regions in Andhra Pradesh are matched to re- gions that did not face the ban. A differences-in-differences estimation of changes in matched regions is used to establish a causal impact on average household con- sumption in the region. The results show that the average household consumption in the ban-affected regions dropped by 15 percent immediately after the ban com- pared to the matched regions, and persisted for four quarters. The result is robust to cross-sectional variations in regional exposure to micro-finance prior to the ban, variation in rural and urban locations, and variations in matching strategy. The analysis points to a ban as a sub-optimal intervention to improve customer welfare.

Citation: The real cost of credit constraints: Evidence from micro-finance, Renuka Sane, Susan Thomas. The B.E. Journal of Economic Analysis and Policy, Volume 16, Issue 1, January 2016.