Can Rural Banks Reduce Poverty? Evidence from the Indian Social Banking Experiment

We exploit the introduction and removal of a nation-wide bank branch licensing rule which sought to increase and equalize bank branch presence across Indian states to estimate the e¤ect of rural bank openings on poverty. Between 1977 and 1990, to qualify for a license to open a branch in a census location which already had one or more bank branches an Indian bank had to open four branches in locations with no bank branches. This policy caused banks to open relatively more rural branches in Indian states with lower initial …nancial development between 1977 and 1990. The reverse was true outside this period. We use these policy-induced trend reversals in the relationship between a state’s initial …nancial development and rural branch expansion as instruments for rural branch expansion and …nd that rural branch expansion in India signi…cantly reduced rural poverty.