Banking the Unbanked: What do 280 Million New Bank Accounts Reveal about Financial Access?

72 Pages Posted: 30 Jan 2017 Last revised: 22 Sep 2023

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Soumya Ghosh

State Bank of India

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Amit Seru

Stanford University

Date Written: October 26, 2017

Abstract

We study the world’s largest government financial inclusion program that led to over 280 million new bank account openings in India. Using administrative account-level data, we shed light on the demand and supply of banking services to the poor. Banking usage is initially low but increases over time. Account usage is greater in regions with a high pre-program theft rate indicating that safekeeping is an important function of banking for the unbanked. Individuals also use banking access to manage their liquidity, increasing saving balance during periods of positive income shock and decreasing the balance during periods of high liquidity need. Banks also extend credit to newly banked customers with stronger effects among those with higher liquidity needs. Concurrently, household survey evidence reveals a decline in individuals’ borrowing from informal sources. There is also suggestive evidence that consumption volatility decreases in regions more exposed to the program. These results are consistent with a latent demand among unbanked for banking services that allow for safekeeping and liquidity management through savings and access to formal credit. There is an increase in delinquency rates on credit extended to newly banked consumers, suggesting that unbanked borrowers are of lower credit quality. Quantitatively small deposit inflow from newly banked consumers (0.8% of pre-program deposits) coupled with their lower credit quality likely dissuaded banks from “banking the unbanked” in the absence of government intervention.

Keywords: Banking, Financial Inclusion, Financial Literacy, Big Data, Financial Access, Savings, Spending, Debit Card, Consumer Finance, Household Finance

JEL Classification: C93, D14, G21, O16, O12

Suggested Citation

Agarwal, Sumit and Alok, Shashwat and Ghosh, Pulak and Ghosh, Soumya and Piskorski, Tomasz and Seru, Amit, Banking the Unbanked: What do 280 Million New Bank Accounts Reveal about Financial Access? (October 26, 2017). Columbia Business School Research Paper No. 17-12, Georgetown McDonough School of Business Research Paper No. 2906523, HKUST Finance Symposium 2017, Indian School of Business WP 2906523, Available at SSRN: https://ssrn.com/abstract=2906523 or http://dx.doi.org/10.2139/ssrn.2906523

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Soumya Ghosh

State Bank of India ( email )

India

Tomasz Piskorski

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru

Stanford University ( email )

Stanford, CA 94305
United States

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