Does Credit From Various Sources Improve MSME Performance? An Empirical Analysis for a Large Transitioning Developing Economy of India

Abstract

Access to credit is one of the essential factors in improving micro, small and medium enterprises (MSMEs) performance, as it allows the enterprises to expand their operations, which in turn boosts their productivity. However, MSMEs often face limited access to finance, primarily due to the reluctance of banks and other formal financial institutions to lend to them. Despite the significance of this issue, its impact on MSMEs' growth trajectories has not been extensively studied. Most of the existing empirical research tends to overlook the diverse effects of various credit sources on firms' performance, leaving a crucial gap in the literature. This study attempts to bridge this gap by examining the impact of various credit sources—formal, informal and cofunding—on the performance of MSMEs in India. Using data from the NSSO survey (2015–2016) on unincorporated nonagricultural enterprises, our findings reveal that cofunding has a greater influence on MSME performance relative to the formal or informal credit sources alone. These results are found to be robust across using different model specifications and methods accounting for potential issues of endogeneity, reinforcing the reliability of the findings.