By Aakanksha Vora

Banking serves as a gateway into the formal financial system, which can decrease inequality of outcomes and opportunity for the 1.7 billion unbanked adults globally. Building a financially included economy, by banking the unbanked, can alleviate poverty and reduce wealth disparities. However, there are several barriers to access, and ownership of a bank account does not always result in long-term, active use.

To study the factors that influence financial inclusion of the unbanked, I estimate the effects of policy exposure to India’s 2016 demonetization on access and usage of bank accounts. In November 2016, the Indian government invalidated 86% of currency overnight to combat endemic corruption, which resulted in asymmetrical cash contractions across districts. Using a differences-in-differences strategy, I exploit spatial variation in the severity of the shock to estimate the effects on household-level bank account and credit card ownership, as well as district-level deposits. For households in treated districts, I find an immediate and persistent 5 p.p. increase in bank account ownership, a 2% increase in savings deposits, and a lagged but persistent increase in credit card adoption.

Despite the benefits of using a bank account, a majority of the banked population has inactive accounts, which is very costly for the banking system. The second half of my thesis studies the factors that influence active bank account ownership to find tractable ways to help individuals accrue the benefits of financial inclusion. Although most studies in the field use randomized controlled trials, I chose to take a different approach by using publicly available data and designing a novel empirical test. To determine the effects of increased financial access on household savings in response to stochastic income shocks, I test the direct effects of income on consumption and the exogenous effects of income, through rainfall shocks, on consumption. I find that households in treated districts are able to offset the changes in consumption due to increased access to savings instruments.

My findings are evidence that small incentives to deposit cash into an account resulted in significantly higher rates of bank account ownership. Moreover, nudging households to operationalize their accounts by making deposits and withdrawals resulted in persistently higher savings and financial resilience. These results provide new insights for policymakers in India and other developing countries with low financial inclusion. My findings lay out solutions that will allow millions of people to escape poverty by increasing their ability to receive direct government transfers and manage unexpected changes in their income; and by giving them an opportunity to save and invest in their health, education, and businesses.

Please come chat with me at the Econ Senior Thesis Zoom sessions—Monday, May 25, 1-2pm ET—to learn more or ask any questions about my research or the senior thesis process: click here for Zoom link.