Informality and Access to Finance: Evidence from India

CentER Discussion Paper Series No. 2014-052

50 Pages Posted: 4 Sep 2014  

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Mohammad Hoseini

Tilburg University - Center for Economic Research (CentER)

Date Written: September 4, 2014

Abstract

This paper gauges the effect of financial deepening and bank outreach on informality using micro data from the Indian manufacturing sector and exploiting cross-industry variation in the need for external finance. We distinguish between two channels through which access to finance can reduce informality: reducing the entry barrier to the formal sector and increasing productivity of formal firms. We find that bank outreach has a stronger effect on reducing the incidence of informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus diminishing opportunistic informality. In comparison, financial deepening increases the productivity of formal sector firms while it has no significant impact on informal sector firms.

Keywords: Informality, Financial Development, India

JEL Classification: G21, G28, O15, O16

Suggested Citation

Beck, Thorsten and Hoseini, Mohammad, Informality and Access to Finance: Evidence from India (September 4, 2014). CentER Discussion Paper Series No. 2014-052. Available at SSRN: https://ssrn.com/abstract=2491466 or http://dx.doi.org/10.2139/ssrn.2491466

Thorsten Beck (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Mohammad Hoseini

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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