Do Rural Banks Matter? Evidence From the Indian Social Banking Experiment
This paper asks whether branch expansion into unbanked locations - driven by government policy - has helped to transform production and employment activities and to reduce poverty and inequality.
It finds that the arrival of bank branches in unbanked locations seems to have been in part responsible for:
- Diversification into non-agricultural production and employment;
- A reduction in rural poverty;
- A reduction in rural inequality.
The paper further observes both a direct effect visible on the growth of the non-farm sector and an indirect effect visible in agricultural wages. Impacts on rural poverty are driven by the 'social' elements of the program - namely expansion into unbanked locations and priority sector lending. When banks were left to their own devices - placing branches in already banked locations and non-priority sector lending - they appear to bypass the poor.
Finally, the paper concludes that the architects of the social banking experiment in India appear, in part, to have been justified in stressing social elements in their attempts to use state control of banking as an engine for poverty reduction.
