9Credit2_2010 - Credit 2: Empirical Exercises 1 Do more...

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Credit 2: Empirical Exercises 1 Do more banks mean less poverty? Can formal banks reduce poverty? Notes today are from Burgess, Robin and Rohini Pande (2004). "Can Rural Banks Reduce Poverty? Evidence from the Indian Social Banking Experiment" The American Economic Review. market opportunities. What about growth of number of banks± if poorest places have fewest banks to start and everywhere is becoming more equal, then could see that growth in banks is associated with lower poverty trend. more concerning, if banks are choosing to open in places that have the greatest potential for growth, would ²nd that growth in banks is associated with reductions in poverty. Banks might be unimportant. Problem is: banks choose where to open branches. If we want to see if the branch themselves matter, we have to know what underlying conditions lead to a 1
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branch opening in one place and not another. Burgess and Pande (2004) examine a change in banking priority laws in India. From 1977-1990, to receive a license to open a bank in an area that already had a bank, you had to open 4 in places which had no banks. In 1990 this policy was cancelled. From 1969-1990, 30000 banks opened in places with no previous formal credit. Banks were further regulated to ensure that they actually used the o¢ ces open in rural areas, so that rural lending interest rates were below urban ones; rural savings interest rates were above urban ones; loans to small-scale businesses were given priority; and all branches had to maintain at least a 60% credit-deposit ratio. So, there was a huge increase in the number of banks opened in "unbanked" locations (places with no previous bank). This happened at the same time as a law made it so that banks had to open more rural areas. What we were worried about, before, was that banks choose where to open branches and might be just opening them in places where growth was coming anyway. Here, if we can attribute the new branches to the law, rather than to have a bank in 1961 should be increasingly likely to get a new bank in 1977, so we might expect these places to experience faster growht ±because of the law, not because of choices banks are making. That is, this law should change the underlying conditions which matter ±now, places without banks are more likely to get them than before. That should cause a change in the number of banks, and, if banks matter for poverty, it should reduce the poverty rate. In fact, Household data indicates a huge increase in bank borrowing (from .3%-29% of household debt). This rise came largely at the expense of moneylenders (from 61-16% 2
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of hhld debt). It seems likely that this was due to the expansion of banks, but need to banks are more prevalent and moneylenders less. That is, maybe this change would have
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This note was uploaded on 02/09/2011 for the course EEP 115 taught by Professor Waynem.getz during the Fall '10 term at University of California, Berkeley.

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9Credit2_2010 - Credit 2: Empirical Exercises 1 Do more...

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