Does the owner’s caste affect access to credit for enterprises in India’s unorganized sector?

Using a large publicly available dataset, we examine the extent of difficulty faced by marginalized caste entrepreneurs from the unorganized sector in India when trying to access formal credit for their small businesses. Contrary to the expectation that a perceived social vulnerability would translate to more difficult credit access, we find that entrepreneurs from marginalized castes are in fact more likely to obtain credit from the formal financial system. This result on the extensive margin of credit could be interpreted as the formal financial system’s positive bias towards the marginalized castes. However, when we focus on the actual loan amounts received, we find that all else being equal, entrepreneurs from marginalized castes receive significantly lower loan amounts. This result on intensive margin of credit could potentially be interpreted as evidence of negative discrimination by the formal financial system. Therefore, determining whether financial inclusion policies for marginalized caste entrepreneurs have been successful yields answers both ways, depending on whether we look at extensive or intensive margin of credit. This finding has serious implications for a good design, monitoring and evaluation of financial inclusion policies (such as mandatory lending within affirmative action programmes or priority sector lending) for borrowers from marginalized communities.