Banks In Rural Areas Research Articles

The Distributive Consequences of Social Banking: A Microempirical Analysis of the Indian Experience

AbstractThe governments of many developing economies have actively promoted the expansion of banks in rural areas, believing that such investments are necessary to reduce poverty and existing levels of wealth inequality. There is little evidence on whether such “social banking” programs succeed in their objectives. This article uses the government of India's credit policies of the 1980s to test the effect of the two main components of the social-banking program on households, the spread of rural banks and required lending for agriculture. Government policies were stated in terms of district-level outcomes and monitored using a district-level database of banking statistics. I use this same database, merged with household data, for this analysis. The availability of the data that guided policy enables the use of policy rules as instruments to identify the effects of social banking. I find that social banking had a larger effect on nonpoor households relative to poor, defined in terms of wealth and land owne...

Does Privatization of a Postal Savings Bank in Japan Have Economic Value?

Economic theory traditionally supports the viewpoint that government ownership is inefficient and that privatization invariably leads to efficiency improvements. However, there is often frequent opposition to privatization activity because it is difficult to examine and empirically validate the effects of privatization. This is the first study to examine the impact of the privatization of postal saving banks. In this paper, we use event study and find that impacts of the privatization of a postal savings bank in Japan are evaluated as positive. We also find that the privatization of the postal savings bank threatened other banks in rural areas that had hitherto enjoyed a regional monopoly.

Understanding Mission Expansion in the Federal Home Loan Banks: A Return to Behavioral‐Choice Theory

Congress established the Federal Home Loan Banks (FHLBs) in 1932 to pursue the public purpose of homeownership. Recently, three views of their mission have emerged; one is that their purpose is to help small banks to remain viable. Why did their mission expand in this direction? We argue that mission expansion is a process that is better understood in terms of behavioral choice than public choice. Change began when expert attention was directed to small banks in rural areas and officials innovated within the existing rules to address their needs. Recognizing the FHLBs' usefulness, community bankers sought a more fundamental change in their practice. Responding to the general interest in preserving small banks' viability, legislative entrepreneurs advanced permissive rule changes. These were implemented to different extents in individual FHLBs in response to local needs. The case illustrates the usefulness of the behavioral‐choice paradigm for understanding change in public agencies and suggests legitimacy for mission change and the value of maintaining publicly directed administrative capacity.

Nationwide Branch Banking and the Presence of Large Banks in Rural Areas

Relaxation of government restrictions on multioffice banking (interstate banking and branching by banks) in recent years has facilitated substantial consolidation of the banking industry in the United States. In this article, the author examines the impact of this consolidation on the presence of large banking organizations in rural banking markets.

The impact of formal finance on the rural economy of India

India has systematically pursued a supply-led approach to increasing agricultural credit. Its objectives have been to replace moneylenders, to relieve farmers of indebtedness, and to achieve higher levels of agricultural credit, investment, and output. India's success in replacing moneylenders has been outstanding. Between 1951 and 1971 their share of rural credit appears to have dropped from more than 80 percent to 36 percent. (It may have dropped to as low as 16 percent by 1981, but that estimate is disputed). Still, institutional credit is far from reaching all farmers. Only about a quarter of cultivators borrow, and no more than 2 percent take out long-term loans. Most small farmers have little access to credit, and long-term credit goes mostly to large farmers. Overall, farm debt has probably not increased sharply in real terms, as formal credit has primarily substituted for credit from other sources. Moreover, with the rapid growth of commercial banks in the 1970s, the system mobilized more deposits than it lent in rural areas in 1981. Of course, enhanced deposit services are a useful service of the rural population, but one must ask what has been the impact of heavy rural credit and better financial services on agricultural investment, production, and rural incomes. The authors' econometric results suggest that the rapid expansion of commercial banks in rural areas has had a substantially positive effect on rural nonfarm employment and output. The availability of better banking facilities appears to have overcome one of the obstacles to locating nonfarm activities in rural areas. Expanded rural finance has had less of an effect on output and employment in agriculture than in the nonfarm sector. The effect on crop output has not been great, despite the fact that credit to agricluture has greatly increased the use of fertilizer and private investment in machines and livestock. There has been more impact on inputs than on output, so the additional capital investment has been more important in substituting for agriclutural labor than in increasing crop output. But overall, rural credit and expansion of the rural financial system have had a positive effect on rural wages. Creating nonfarm jobs has apparently added more to total employment than the substitution of capital for labor has subtracted it in agriculture. So, wages have risen even for agricultural workers, albeit modestly. The supply-led approach to agricultural credit that has been pursued for three decades has clearly benefited current borrowers and farm households formerly indebted to moneylenders. It has also spurred fertilizer use and investment in agriculture. It has been less successful in generating viable institutions - and has failed to generate agricultural employment. The policy's costs to India's government have been high as portfolio losses associated with poor repayment ultimately have to be borne by the government or one of its institutions under optimistic assumptions. The benefits of the agricultural income are at best no more than 13 percent higher than the cost to the government of the extra agricultural credit. If assumptions about the cost of supplying the credit and about repayment rates are less optimistic, the social costs - and the costs to the government of providing the credit - would have exceeded the benefits in agricultural income. The expansion of commercial banks to rural areas paid off in nonfarm growth, employment, and rural wages. The question is: Could these benefits have been achieved without imposing agricultural credit targets on the commercial banks and credit cooperatives? Or did the commercial banks expand only because they were forced to lend to agriculture? The authors could not answer these questions with the data at hand.