Informality and Access to Finance: Evidence from India

T.H.L. Beck, M. Hoseini

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Pages1-50
Number of pages50
Volume2014-052
Publication statusPublished - 4 Sep 2014

Publication series

NameCentER Discussion Paper
Volume2014-052

Keywords

  • nformality
  • Financial Development
  • India

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    Beck, T. H. L., & Hoseini, M. (2014). Informality and Access to Finance: Evidence from India. (pp. 1-50). (CentER Discussion Paper; Vol. 2014-052). Finance.