Working Paper: CEPR ID: DP4211
Authors: Robin Burgess; Rohini Pande
Abstract: Lack of access to finance is often cited as a key reason for why poor people remain poor. This Paper uses data on the Indian rural branch expansion programme to provide empirical evidence on this issue. Between 1977 and 1990, the Indian central bank mandated that a commercial bank could 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 was 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 programme significantly lowered rural poverty, and increased non-agricultural output.
Keywords: bank licensing; credit constraints; diversification; finance and development; growth; poverty; redistribution; rural banking; structural change
JEL Codes: E50; G20; H10; H40; I30; N20; O00; O10; O20; O30; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rural branch expansion program (R59) | Reduction in rural poverty (F63) |
| Rural branch expansion program (R59) | Increase in total output (E23) |
| Initial financial development (O16) | Reduction in rural poverty (F63) |
| Rural bank expansion (G21) | Structural changes in the economy (L16) |
| Rural bank expansion (G21) | Shift from agricultural to non-agricultural employment (J43) |
| Rural bank expansion (G21) | Increase in secondary and tertiary sector output (O49) |
| Rural bank expansion (G21) | No direct effect on primary sector output (F69) |