For centuries, caste-based discrimination has limited the economic opportunity, mobility, and social integration of marginalized communities (Munshi, 2019). Even today, more than 260 million people across the globe experience caste-based discrimination (United Nations). Therefore, it is important to study and evaluate policy measures that have the potential to reduce discrimination and welfare gaps by caste. In my job market paper, we examine whether formal financial access through bank branch expansion can help achieve this in India.
We use a quasi-experimental design based on the Reserve Bank of India’s (RBI) 2005 bank branch expansion policy. This policy encouraged commercial banks to open branches in “underbanked” districts, i.e., districts where the ratio of population to the number of bank branches in the district was higher than the national-level ratio. This unique policy design allows us to leverage a fuzzy regression discontinuity design (RDD) in combination with pan-India survey datasets, administrative records, and census data to estimate its causal impacts. A kernel density plot of the running variable and the first stage RD plot are shown in Figure 1.
Figure 1: Demonstration of fuzzy RDD
Financial inclusion as a tool for narrowing caste-based welfare gaps
There are two key findings in this paper based on data from the 2011-12 round of the India Human Development Survey (IHDS):
First, financial inclusion increases across all caste categories in response to the bank branch expansion policy. Scheduled caste (SC), Other backward class (OBC), as well as General category households are more likely (by 40%, 14.9%, and 26.3% respectively) to open a bank account due to the policy. However, there are some differences across caste groups: for instance, while OBCs and General category households also experience a significant improvement in the likelihood of investing in fixed deposits, the corresponding effect is insignificant for SCs. On the other hand, only SC households experience an increase in the likelihood of purchasing insurance.
Second, welfare outcomes improve mostly for the marginalized caste households. We find that total monthly household consumption of durable goods by SCs increases by 42.2% in treatment districts compared to a control mean of Rs. 2,420 for SCs in control districts. For total monthly household food consumption, which is linked to an individual's overall health/nutritional status and consequentially, to his/her income-earning potential, this increase is 15.7% for SCs. Additionally, there is a 59.7% reduction in the likelihood of falling below the poverty line for SC households, compared to a reference mean of 17.4%. However, for OBC and General category households, we do not see any statistically significant improvements in consumption and poverty. In Figure 2, we show the post-policy discontinuities for these four welfare indicators of SC households. The disproportionate gain for SCs underscores the powerful role of financial inclusion in narrowing of welfare gap between marginalized and non-marginalized caste groups.
Figure 2: Post-policy discontinuities in welfare outcomes for SC caste category
Why do marginalized castes benefit more?
We identify three channels—informal finance, business finance, and labor market effects—that can explain why the welfare impacts are larger for marginalized caste groups despite all castes benefitting in terms of financial inclusion.
(i) Informal finance channel: Historically, marginalized castes rely mostly on informal lenders for credit, who often charge higher interest rates due to caste-based biases. However, as formal banking expands in underbanked areas, informal lenders face new competition, prompting them to reduce interest rates. SC borrowers in treated districts are thus able to secure loans at fairer interest rates, allowing them to channel resources toward consumption and other needs without facing punitive lending terms. Using data from the 2013 All India Debt and Investment Survey, we find that annual interest rates paid by SC households on informal loans decline by 8.11%. We also find an increase in the likelihood of taking informal loans by 9% for SCs, with no significant impacts for OBC and General category households.
(ii) Business finance channel: Using data from the 2013 Economic Census we show that with formal banking services becoming more accessible, marginalized caste-owned businesses, especially in agriculture, are more able to access business loans; the number of firms in the district with formal finance as the main source of credit increases by 80.80 units for SC-owned businesses). This financing allows them to invest in productivity-boosting technologies and increases household income from agriculture by 3625.5 INR. The policy thus had a direct impact on empowering SC-owned businesses and agricultural enterprises, creating opportunities for growth and economic resilience. Notably, non-marginalized castes primarily took advantage of loans for non-agricultural businesses, reflecting the structural barriers that marginalized castes still face in diversifying beyond agriculture.
(iii) Labor market effects: As businesses expanded with increased access to credit, the demand for labor rose in treatment districts, driving down caste-based wage discrimination. Using 2011-12 IHDS data, we show that marginalized workers, who often encounter wage gaps due to caste biases, experienced higher wages (11.8% increase in hourly wage/salary for SC workers) and better job opportunities (14.2% increase in the number of wage/salary jobs in SC households), with no statistically significant impact for OBCs and Generals. The increase in labor demand helped SC households diversify their income sources, as surplus agricultural laborers took advantage of non-farm wage opportunities in the market, contributing to a broader reduction in caste-based welfare disparities.
Impacts on taste-based discrimination
Furthermore, the study highlights how financial inclusion may have long-term impacts on reducing taste-based discrimination, as a spillover of the reduction in wage and interest rate discrimination in labor and informal credit markets respectively. We show that non-marginalized households in treated districts report a reduction in the practice of untouchability by 11 percentage points (pp) and marginalized households report an increase in participation in community groups by 17.2 pp. At the district-level, the number of caste-based hate crimes registered under the SC-ST Prevention of Atrocities Act register significant declines by 13.12 units, suggesting a shift in societal attitudes as caste divides get narrower.
Broader implications for social inclusion and policy
In conclusion, the results of our study demonstrate that financial inclusion is not just an economic tool but a social equalizer that can help narrow caste-based divides in India. By providing access to credit and savings, formal financial services empower marginalized communities, allowing them to improve their living standards, break free from discriminatory practices, and integrate more fully into society. These findings highlight the transformative potential of inclusive financial policies, offering a roadmap for tackling social inequality through economic empowerment.
Rikhia Bhukta is a PhD student at Indian Institute of Technology Kanpur.
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