Access to Formal Banks and New Technology Adoption: Evidence from India

Abstract

This article examines whether improvement in access to credit affects new technology adoption. Using the Additional Rural Incomes Survey and Rural Economic and Demographic Survey Indian household panel data, and bank branch data from the Reserve Bank of India, I evaluate the impact of bank branch expansion on high‐yielding variety seed adoption by Indian households. I use the Indian government's social banking policy to provide exogenous variation in district bank access. This policy, in effect between 1977 and 1990, forced banks to open more branches in financially less developed areas. I find that districts with lower initial financial development experienced a significant rise in new branch openings during the social banking period (1977–1990). Further, I find that households in financially less developed districts were more likely to adopt high‐yielding variety seeds during the social banking period, consistent with the hypothesis that access to credit is an important determinant of new technology adoption. A supplemental analysis using district panel data, which has broader geographic coverage, yields the same positive impact of formal credit access on high‐yielding variety seed usage and provides no evidence of historical trend differences in the use of high‐yielding variety seeds between more and less financially developed areas.