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Digital Credit Linked to Digital Payments: Impact on Small Merchants in India

Financial Inclusion India

Following the 2016 demonetization policy in India, there has been a significant push by the government of India to promote the use of digital finance to reduce corruption and tax evasion. This has resulted in a promising landscape for the promotion of digital credit, hypothesized to be particularly useful for small merchants who lack access to formal credit markets and require timely access to working capital. Against this backdrop, this large-scale individual-level randomized controlled trial tests the impact of offering digital credit to small merchants in Jaipur, India. One potential barrier to digital credit is the required adoption of digital payment mechanisms that provide the transaction history required by the lenders. Therefore, this study will additionally randomize subsidies for digital payment infrastructures to test whether reducing this barrier increases take up of digital credit loans, and estimate the resulting heterogeneity in impacts as a function of initial fixed costs to access. Its exploratory research revealed that merchants in Jaipur received limited credit for business purposes, while owning smartphones and bank accounts. The final results will help policy makers and private sector lenders make critical decisions about expanding digital credit, especially for small merchants. Results forthcoming.

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DCO Quarterly Newsletter: February 2020


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