Abstract
This article examines: (a) the role of financial literacy in improving access to credit and (b) trends in loans disbursed to microfinance institutions (MFIs) by financial institutions over the past 15 years. Using primary data from 250 business owners in Northeast India, along with secondary data from the National Bank for Agriculture and Rural Development (2023, Status of microfinance in India 2022–2023), the study analyses both demand-side borrowing behaviour and supply-side lending patterns. The study finds that commercial banks have consistently dominated loan disbursement to MFIs, accounting for nearly 50% of total credit. The results from a logistic regression model indicate that financial literacy, along with age and education, significantly enhances access to institutional loans. Importantly, the study also documents an inverse relationship between business profitability and credit access; this inverse relationship is explained using pecking order theory. The study further demonstrates that financial literacy plays a crucial role in reducing information asymmetry in the credit market, consistent with the framework proposed by Akerlof (1970, The Quarterly Journal of Economics, 84, 3, 488–500). The article concludes by encouraging financial literacy initiatives under the Reserve Bank of India’s National Strategy for Financial Education, and in light of policy implications, the article advocates establishing ‘financial literacy and credit facilitation hubs’.
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