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

Author: Robin Burgess & Rohini Pande

Abstract: Between bank nationalization in 1969 and the onset of financial liberalization in 1990 India was home to the largest rural branch expansion program undertaken in any country. This paper exploits a key institutional feature of this program to provide evidence on the financepoverty nexus. In 1977, the Indian central bank mandated that for every branch opened in an already banked location a commercial bank must open four in unbanked locations. This rule was removed in 1990. Between 1977 and 1990 this rule caused banks to open more rural branches in states with fewer branches per capita in 1961. The reverse was true outside this period. We exploit these facts to obtain credible instruments for rural branch openings. Our estimates suggest that a 1 percent increase in the number of rural locations banked per capita reduced rural poverty by 0.42 percent and increased total output by 0.34 percent.

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