Financial inclusion and poverty reduction in India

Purpose This paper aims to investigate the impacts of financial development through commercial banks on poverty conditions in India. Design/methodology/approach Using unbalanced panel data for Indian states and union territories from 1973 to 2004, and applying the generalized method of moments estimation, the author estimates models in which the poverty ratio is explained by financial inclusion and financial deepening for public sector banks and private sector banks, respectively. Findings The results show that financial inclusion and deepening have statistically significant negative relationships with the poverty ratio for public sector banks, but not for private sector banks. In addition, the coefficients of the interaction term between financial inclusion and deepening are estimated to be negative and statistically significant in most cases of public sector banks. Considering the positive impacts of financial inclusion and deepening on poverty reduction, this result implies that promoting breadth and depth of public sector banks could have a synergistic effect on poverty reduction in India. Originality/value First, unlike previous studies, the author applies both the numbers of bank branches and accounts as the measure of accessibility and usage of banking services. Second, using the interaction term between financial inclusion and deepening, the author empirically analyzes whether, and to what extent, the breadth and depth of the banking sector interact with each other in the process of poverty reduction. Third, the author divide the Indian commercial banks into public sector banks and private sector banks and compares their impacts of financial inclusion and deepening on poverty conditions.