Study: Is India’s flagship financial inclusion initiative bearing fruit on the ground?
There is a big debate about the role of financial markets and products in shaping consumer welfare and real economic activity. 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.