Rural Banks Can Reduce Poverty: Experimental Evidence from 870 Indian Villages

Abstract

We evaluate an at-scale experiment that randomized branch placement by a private sector bank across 870 South Indian villages. Within two years of branch opening, one in three households in treated villages had taken a formal loan and roughly a quarter had taken up an insurance or savings product. Survey data show a 10% reduction in informal borrowing levels. These changes impact individual and aggregate wellbeing: Relative to control villages, poverty rates in treatment villages are 8% lower and are accompanied by reductions in psychological stress. Alongside, occupational diversification and village economic activity rise: households in treated villages are 7% more likely to have a member working in non-agriculture self-employment, have 20% higher business income, and 6% higher wage income. Our evidence is consistent with a model of entrepreneurship in which access to cheaper formal credit increased village-wide labor demand.