Banking the unbanked

Banking the unbanked

Is the NDA government's flagship initiative Jan Dhan Yojana bearing fruit on the ground?
There is a big debate about the activity role of financial markets and products in shaping consumer welfare and real economic. In developed economies, there is an increasing discussion that financial sector may have become inefficiently large and products offered to households may have become excessively complex. In contrast, in many developing countries, like India, there has been a significant push to increase the usage of financial products ¬ to “complete” the market. While there is some empirical literature on the former, evidence on the latter is scant.
To address this we conducted an extensive scientific study of the largest outreach programme in the world, the Pradhan Mantri Jan Dhan Yojana (JDY). JDY was launched in India on 28 August 2014, with the objective of providing banking services to a large proportion of the unbanked population in India.
Our study has two modest objectives. First, we document the initial uptake and subsequent usage of banking services ¬ that includes a savings account, overdraft facilities, and insurance benefits ¬ by the unbanked targeted by the programme. Second, we exploit the regional variation in pre-JDY financial access to explore how expanding access to financial services is related to broader outcomes such as lending, GDP growth, and consumer prices.
Several economic theories predict that financial inclusion programmes can directly benefit lower income households at the micro level through savings, spending, and reduction in transaction costs. What does the evidence say? We begin by documenting substantial outreach of the programme that led to 255 million formerly unbanked individuals getting access to formal banking services by November 2016. About 77% of the new accounts maintain a positive balance with the average monthly balance of Rs 482, which is about 60% of the rural poverty line in India.
Overall, our micro-evidence suggests that there was substantial uptake by households under JDY. Moreover, both savings and transactions go up over time for individuals banked under the programme. This evidence is consistent with learning by individuals that results in an increase in usage over time as they gain familiarity with banking services. The initial usage is also more frequent among married account holders.
We also note that financial inclusion programmes such as JDY can also have broader regional implications through at least two channels. First, such a programme could allow new capital to come into the formal banking system by means of new deposits, relaxing the capital constraints. This would allow banks to increase lending to their clients.
Second, information asymmetry between new customers and lenders or other costs in acquiring new customers may imply that a programme like JDY may allow banks to meet the unmet demand for credit for some households. To the extent that this increase in credit is large, one would see such programmes stimulating local economic growth through increased consumption, investments, and employment.
To investigate such broader effects, we exploit spatial (regional) variation in implementation of this programme to explore how access to consumer savings accounts is related to broader economic outcomes such as lending and local GDP growth. To do this, we construct four pre-programme measures of JDY exposure that reflect the number of adults per branch in a region, the fraction of branches owned by the state-owned banks in a region, the percentage of unbanked households in a region, and a comprehen sive index capturing the degree of financial inclusion in a region.
In districts with high ex-ante exposure to JDY, using aggregate data provided by the central bank of India, we observe an increase in aggregate lending in areas with greater ex-ante JDY exposure. We verify these effects are present in our micro data and find an increase in both the number of new loans granted and the amount of loans granted in regions with greater JDY exposure relative to those with lower exposure. Our findings suggest that JDY may have allowed banks to meet the unmet demand for credit for some households that did not have prior access to formal banking products.
We also examine the impact of JDY on a number of other macroeconomic outcomes at the regional level. Here we do not observe an economically significant change in the GDP growth rate in more affected areas. However, given our nearterm focus due to the short time series of data, it is possible that the overall impact of the programme on GDP growth rate will manifest itself over the longer term.
We do find some evidence suggesting that the programme was associated with an increase in investments, though the data underlying this test is very limited.Importantly , we do not observe any significant relative change in the inflation rate in more exposed areas.This suggests that one of the common concerns that the programme may have led to substantially higher price level due to a higher circulation of money and creation of additional demand ¬ may be unwarranted, at least in the near term.
Overall, our research has shown that a financial inclusion programme like the JDY can have a very meaningful impact on the number of households using formal banking services. Our results also suggest that JDY has led banks to cater to the new demand for formal banking credit by previously unbanked borrowers, which could have a positive impact on the broader economy in the long run.