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A model of credit constraint for MSMEs in India

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Abstract

This study examines credit constraints using standard models in the highly constrained micro, small, and medium enterprises (MSMEs) sector in India. The mixed results may not be reflective of MSMEs in India, as the standard models have been developed for much larger firms in western markets having lower information asymmetry than Indian firms. These models are biased toward long-term financing due to the ready availability of short-term credit in western markets, as against limited access to working capital to MSMEs in India. We propose an augmented model of investment sensitivity based on the framework of the Fazzari and Petersen model and Carpenter and Petersen model that includes the often-neglected role of working capital as both a use and a source of funds, and gross fixed asset formation and leverage as drivers of credit constraints, for the information asymmetric MSME firms. The paper finds the augmented model, also called the Financing Deficit Model, robust for ascertaining credit constraints of Indian MSME firms and its variables consistent with available literature.

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Notes

  1. The classification of MSMEs is by gross block of plant and machinery in million Indian rupees (INR), by the Government of India, the ministry for MSME, as per the Micro, Small and Medium Enterprises Development (MSME) Act, 2006.

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Authors and Affiliations

  1. Mumbai, India

    Malcolm Athaide

  2. XLRI, Xavier School of Management, Jamshedpur, India

    H. K. Pradhan

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  1. Malcolm Athaide
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Appendix

Appendix

Table 9 Descriptive statistics of derived variables of models of credit constraints
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Table 10 Correlation Matrix of Fazzari- Hubbard- Petersen Model
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Table 11 Correlation Matrix of Carpenter-Petersen Model
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Table 12 Correlation Matrix of Guariglia Model
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Table 13 Correlation Matrix of Bond and Meghir Model
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Table 14 Correlation Matrix of Financing Deficit Model
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Athaide, M., Pradhan, H.K. A model of credit constraint for MSMEs in India. Small Bus Econ 55, 1159–1177 (2020). https://doi.org/10.1007/s11187-019-00167-4

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