What hinders and what enhances small enterprises’ access to formal credit in India?

Abstract

We investigate enterprise level factors affecting access to 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. These results provide some insights into the factors to improve credit constraints for small enterprises in India.