The Distributive Consequences of Social Banking: A Microempirical Analysis of the Indian Experience

The governments of many developing economies have actively promoted the expansion of banks in rural areas, believing that such investments are necessary to reduce poverty and existing levels of wealth inequality. There is little evidence on whether such “social banking” programs succeed in their objectives. This article uses the government of India's credit policies of the 1980s to test the effect of the two main components of the social-banking program on households, the spread of rural banks and required lending for agriculture. Government policies were stated in terms of district-level outcomes and monitored using a district-level database of banking statistics. I use this same database, merged with household data, for this analysis. The availability of the data that guided policy enables the use of policy rules as instruments to identify the effects of social banking. I find that social banking had a larger effect on nonpoor households relative to poor, defined in terms of wealth and land ownership. Of the two components of the program, it is bank access that matters. Policies requiring banks to lend for agricultural purposes did not significantly affect household per capita expenditures.