Enhancing capabilities: social capital as an enabler of financial access to informal enterprises in india

Maurya, Prateeksha; Mohanty, Pratap Chandra (2019). 'Enhancing Capabilities: Social Capital as an Enabler of Financial access to informal enterprises in India' Paper presented at the annual conference of the HDCA 2019, London, UK.

Abstract

Introduction

The informal sector holds  importance for the developing and underdeveloped economies as a major source of livelihood for the  unemployed. But this is sector is low on productivity and constrained by finance  limiting growth opportunities (Rotheberg et al., 2016).Women remain  behind men in terms of enterprise ownership and management (Georgellis and Wall, 2005). Only 13.76% of the total enterprises in India are women-owned and a large proportion (83.19%) are own account enterprises (6th Indian Economic Census, 2013-14). This is the outcome of  factors such as lack of access to formal credit, insufficient skills and information, and regulatory problems.. Some studies suggest female entrepreneurs face tighter credit constraints than male (Muravyev et al, 2012).

Tthe role of social capital in access to credit for entrepreneurial activities acts as a catalyst for achieving capabilities. Social capital includes both capabilities and functionings; it is,a hybrid concept within the capability approach (Migheli, 2011). . Social networking can help  banks to access informal and non-public information about  enterprises, reducing information asymmetry. Persons with large social capital can have better-performing enterprises which ultimately increases creditworthiness (Barr, 2000).

 The study looks at the role of social capital as a determinant of financial access for the informal enterprises in India, the existence of gender-based disparity in access to formal credit, and the role of culture in deciding the quantum of social capital and  financial access.

Data from the Indian Human Development Survey- II (IHDS-II) conducted during 2011-12 j. It consists data from 42,152 households shows households which reported to have ‘petty shops/small business’ as their primary activity have been used as a proxy for informal enterprise ownership and utilized for this study. This survey covers  aspects of social capital such as social network, political memberships and affiliations,  and gender relations. .

Pimary data has been collected through survey and focus group discussion (FGD)in Uttarakhand state  to explore women entrepreneur related issues such as proxy ownership. Uttarakhand is an amalgamation of hilly and plain topographies. The hilly belts are home to  indigenous tribes .

Regression and Principal Component Analysis (PCA)  has been done using IHDS-II data  

The dependent variable, ‘Formal_Credit’ (FC) is a binary variable indicating if the business owner reported having credit from banks, other formal institutions and micro-credit agencies/self-help groups. As the dependent variable is binary, logit or probit regression models could be used.The explanatory variables consist of an array of factors that reportedly determine the extent of financial access . It includes social capital index, owner characteristics (Owner’s age, education, religion, caste, gender, wealth index, empowerment index ,and  firm characteristics .

Social capital index has been developed using three key variables: Social network, confidence in institutions, group membership and affiliations using PCA.

The cultural aspects which affect the quality of social capital that is possessed by the women entrepreneurs have been combined to develop an ‘empowerment index’ which comprises of factors like caste, religion, gender relations, decision making power, education, wealth, etc).

The preliminary results of the study found that social capital has a significant impact on access to credit by informal firms. The enterprises in rural areas have better chances to avail formal credit than the urban firms as most informal firms rely upon relationship lending which is stronger in rural areas due to higher informal interactions between lender and borrowers (Berger and Udell, 2005). Entrepreneurs from the marginalized sections of the Indian society, i.e., those belonging to scheduled caste and scheduled tribe have poor social capital and hence their financial access is also very poor. Thus, it is inferred that entrepreneurs with high social capital have more chances to avail formal credit.

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