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Bank competition and SMEs access to finance in India: evidence from World Bank Enterprise Survey

Bijoy Rakshit (Economics and Business Environment Area, Indian Institute of Management Jammu, Jammu, India)
Samaresh Bardhan (Department of Humanities and Social Sciences, Indian Institute of Technology Ropar, Rupnagar, India)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 10 January 2023

Issue publication date: 20 March 2023

668

Abstract

Purpose

The primary purpose of this study is to investigate the effects of bank competition on SMEs' access to finance in selected Indian states. Using 9,281 firm-level observations from World Bank Enterprises Survey (WBES), this study tests the market power hypothesis versus the information hypothesis to determine whether bank competition promotes access to finance for financially constrained firms.

Design/methodology/approach

The authors measure state-level bank competition using two structural indicators: the Herfindahl Hirschman Index (HHI) and three bank concentration ratios (CR3). The authors apply simple probit regression, probit model with sample selection (PSS) and two-stage least squares (2SLS) to examine the effects of bank competition on firms' financing constraints.

Findings

The results obtained through PSS and 2SLS indicate that bank competition alleviates firm's financing constraints and positively impacts its need for a bank loan and the decision to apply for bank credit. However, the prevalence of bank competition in promoting access to finance is more pronounced for small and medium-sized firms than for large firms. Higher bank competition also alleviates the credit constraints faced by female entrepreneurs.

Practical implications

Reserve Bank of India (RBI) and other government stakeholders should ensure bank competition without hampering the agenda of bank consolidation to facilitate access to credit for SMEs. Regulators should also identify and monitor the financial institutions that make an insignificant contribution to promoting competitiveness in the financial system.

Originality/value

Previous studies primarily investigate the effect of bank competition on a firm's access to finance from advanced and cross-country perspectives. This study contributes to the literature on bank competition by examining its role in promoting access to finance from an emerging economy standpoint. Measurement of bank competition indicators at the state level is an additional contribution.

Keywords

Acknowledgements

The authors would like to acknowledge the Editor-in-Chief Dr Haiyan Zhou, associate editor Dr Wenxia Ge and two anyonymous reviewers for their supoort.

Citation

Rakshit, B. and Bardhan, S. (2023), "Bank competition and SMEs access to finance in India: evidence from World Bank Enterprise Survey", Asian Review of Accounting, Vol. 31 No. 2, pp. 317-347. https://doi.org/10.1108/ARA-05-2022-0124

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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