Does banking development matter for new firm creation in the informal sector? Evidence from India

Abstract

There is little evidence on the effect of banking development on firm creation in the small firm sector. This paper examines whether differences in banking sector penetration across Indian districts explain the differences in firm start-ups in Indian informal sector. Our empirical strategy lies in examining the effect of the spread of banking facilities at the district level on new firm formation in the informal sector for the period 1994–1995 to 2010–2011. Our results confirm that local bank availability is associated with significant increase in enterprises in the informal sector and the effect is more pronounced for larger enterprises in the sector.