This paper gauges the effect of financial deepening and bank outreach on informality using
micro data from the Indian manufacturing sector and exploiting cross-industry variation in the need
for external finance. We distinguish between two channels through which access to finance can
reduce informality: reducing the entry barrier to the formal sector and increasing productivity of
formal firms. We find that bank outreach has a stronger effect on reducing the incidence of
informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus
diminishing opportunistic informality. In comparison, financial deepening increases the productivity
of formal sector firms while it has no significant impact on informal sector firms.