Seminar by Vidyarani K and Maheshkumar T

Decomposing the Caste Divide in Formal Credit for Unorganised Enterprises: Insights from Indian Enterprise Surveys

Ms. K Vidyarani and Mr. T Maheshkumar

PhD Scholars, CDS

Abstract
Globally, access to credit remains a significant policy issue. The present study examines the under-researched question of how caste influences access to formal credit and loan amount for unorganised enterprises, with the objective of identifying potential barriers. Using the nationally represented enterprises surveys on unincorporated non-agricultural enterprises (2011 and 2016), we assessed the determinants of credit market participation and the loan outcome. In addition, we employed the Blinder Oaxaca decomposition method to assess whether credit disparity is due to caste discrimination or firm-level characteristics in the formal credit market. By employing probit and linear regression, we find a significant differential in formal credit between FC and other caste groups (SC/ST and OBC) both in terms of access and the amount of credit received over time. The mean decomposition results also find a significant credit differential between the FC and the other lower castes in India. This gap is largely explained by the endowment effects rather than the coefficient (discrimination) effects. Among the overall endowment effects, predictors like collateral, workers, and labour productivity are significant contributors to the observed credit gap from 2011 to 2016. Nevertheless, we identified that the coefficients (discrimination) effects are still positive and explain about 12.14 percent (in 2011) and 17.98 percent (in 2016) for SC/ST as compared to FC in the credit market; it is about 25.46 percent (in 2011) and 19.63 percent (in 2016) for OBC even after taking into account all of the possible firm-level characteristics. This suggests that SC/STs and OBCs remain disadvantaged groups and are experiencing discrimination when compared with the FC in India. But this proportion has increased over time for the SC/ST and decreased for the OBC as compared to the FC. It is apparent that SC/STs are most disadvantaged social group in the formal credit market in India. The findings from this study imply that affirmative action initiatives in India have yielded limited effects on enhancing credit market accessibility for entrepreneurs belonging to socially marginalised groups. In light of these results, policymakers are urged to address this pressing issue by introducing targeted programmes and regulatory incentives. Such measures would aim to stimulate increased lending from financial institutions to these disadvantaged groups, thereby fostering greater inclusivity and opportunities for advancement.

Key words: Caste, discrimination, unorganised enterprises, formal credit, decomposition, India
JEL: C21; J15; L26; O15; O17