Financial Infrastructure and Micro-enterprise Performance : Evidence from India

How does financial infrastructure affect the performance of micro and small enterprises (MSE)? We study this question by examining a nationwide branch expansion policy in India, initiated in 2005, and targeted towards private banks. The policy classified districts as ``underbanked'' if their ex-ante bank branch density was less than the national average bank branch density. Using a regression discontinuity design based on the discontinuous change in districts' classification as underbanked at the national average threshold, we find MSEs in underbanked districts to have significantly higher value-addition and revenues in the post-treatment period. There was however no change in credit access for MSEs in underbanked districts from either bank or non-bank sources. Instead, we find support for an aggregate demand channel, whereby the expansion in financial infrastructure boosted household consumption and impacted micro-enterprise performance through increased demand for local goods and services