What Hinders and What Enhances Small Enterprises’ Access to Formal Credit in India?
22 Pages Posted: 30 Jan 2015 Last revised: 7 Feb 2015
Date Written: January 30, 2015
Abstract
This paper investigates factors associated with the likelihood of receiving formal credit for small enterprises in India by employing a probit sample selection model. Our results indicate that enterprise size, owners’ education level, being registered under an agency and being involved in diversified activities are positively associated with access to formal credit. However, the ownership of land that can be used as collateral is negatively associated with the likelihood of receiving formal credit. This may be due to an obsolete land administration system resulting in high transaction costs of land as collateral. Furthermore, enterprises with female owners and those engaged in capital intensive industries are more likely to face credit constraints. These results provide some insights into the factors to improve credit constraints for small enterprises in India.
Keywords: small enterprises, credit constraints, priority sector lending, sample selection model
JEL Classification: G02, L60, O02
Suggested Citation: Suggested Citation