Firm bribery and credit access: evidence from Indian SMEs

This study investigates the effects of paying bribes on access to credit for small and medium enterprises (SMEs). Bribery is variously portrayed, in the literature, as greasing the wheel (helping) or sand in the wheel (impeding) applications for credit. Studies supporting both perspectives leave the issue unresolved, encouraging further analysis, using reliable data and robust analytic methods. An examination of The World Bank Enterprise Surveys of SME data for India, using an instrumental variable probit model, provides a more definitive answer. SME bribery is detrimental to accessing credit and more so for firms that have been in business for many years and operating on a small scale. Involvement of supply and demand side forces increases the need for multiple control variables. From a supply side perspective, high corruption increases difficulties for financial institutions to control borrower risk and recover loans. Accordingly, financial institutions reduce their lending to SMEs, which mostly belong to a high-risk category. Unlike large firms, SMEs paying bribes to grease the wheel are drawn to the informal sector, avoiding attention from officials. Where SMEs pay bribes in the formal sector, it is noticed and likely to increase the probability that other parties will also demand payments. The demand side argument regards bribes as tax, increasing loan costs to SMEs. Consequently, making significant bribes decreases SMEs’ profitability. Less profitable SMEs may not obtain access to credit. From a policy perspective, anti-corruption measures, in emerging and low-income economies, are vital for developing SMEs and stimulating significant welfare gains.