Usage of formal financial services in India: Demand barriers or supply constraints?

Abstract

Estimating the role of both demand-side and supply-side factors in financial inclusion and its distribution is important for policy making. However, existing literature has primarily focused on supply-side factors. In this context, this paper estimates relative importance of removing demand-side barriers and eliminating supply constraints to enhance financial inclusion in India. It also measures the extent of concentration of usage of formal financial services among richer households. Results suggest that, while availability of banking services has a significant positive effect on usage of formal financial services, its contribution in inducing households to use formal financial services is very small compared to the contribution of factors, such as education, income, employment status, gender and social norms, that influence the demand for formal financial services. It highlights the importance of placing greater emphasis on addressing demand-side barriers, rather than on improving physical availability of banking services, to promote financial inclusion in India.