Role of Microfinance as Counter-Recessionary Tool: A Macro-theoretic Analysis with Special Reference to Indian Economy

The chapter is primarily intended to develop a macro-theoretic model based on Keynesian paradigm by incorporating an altered construct of financial sector comprised of banking sector to address the case of credit rationing faced by MSMEs classified as non-quality borrowers by banks in a closed economy setting with flexible interest rate. The seminal finding is that in presence of credit rationing, the dwindling of credit flow towards apparently non-quality sectors in the face of rising default risk due to the advent of economic downturn or recession led by investment pessimism on part of the quality borrowers, as perceived by banks, can be potentially destabilizing by having to accentuate the recession and henceforth, will be a self-defeating response for the banks by causing a further worsening of asset quality, inducing a more pronounced credit tightening or austerity in credit dissemination. Thus, bolstering credit flow towards this rationed sector can become a plausible way to tackle the recession underway by effective enforcement of priority sector lending norms, which can eventually bring about the reversal of economic downturn by countering the financial accelerator in effect due to elevated risk-perception and consequently, a low appetite for risk-taking of the overall banking system.