Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment

TLDR

Lack of access to finance is a key reason why poor people remain poor. The paper uses data on India’s rural branch expansion program to provide empirical evidence on the role of rural banks. The study exploits a 1977–1990 mandate that required banks to open four rural branches for each new branch in already banked areas, using this rule to identify the impact of rural bank openings on poverty and output. The mandate led to more rural branches in less developed states during 1977–1990, the opposite pattern after the period, and the expansion program significantly reduced rural poverty and boosted non‑agricultural output.

Abstract

Lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirial evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. We show that between 1977 and 1990 this rule caused banks to open relatively more rural branches in Indian states with lower initial financial development. The reverse is true outside this period. We exploit this fact to identify the impact of opening a rural bank on poverty and output. Our estimates suggest that the Indian rural branch expansion program significantly lowered rural poverty, and increased non-agricultural output.