The micro, small and medium enterprises (MSME) sector in India has consistently contributed more than 30% to the country’s GDP over the last decade. The significance of MSMEs in India’s economy also arises from both its scale in the country (over six crore enterprises) and employment generation (more than 11 crore direct jobs).
Since lack of optimal access to formal finance has been identified as one of the key binding constraints faced by microenterprises in the literature on enterprise growth, it is important to examine the evidence regarding the impact of reducing capital constraints for these enterprises on their business operations and growth. It further becomes important to explore the level of positive spillover on household wellbeing.
This paper provides an overview of the recent academic and grey literature on the impact of access to formal finance on microenterprises in developing countries. It disaggregates the evidence across various sectors and assesses the differential impact of the size of credit injection. The review also attempts to understand the impact of finance on this segment of microenterprises, collecting evidence from various studies done in the last decade or more, both in India and in other developing countries.