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The IUP Journal of Applied Economics
The Role of Household-Level Characteristics in Predicting the Unbanked in Rural India: A Comparison of Eastern and Western Regions
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In India, despite numerous measures adopted by Reserve Bank of India (RBI) to ensure adequate supply of financial services in rural areas, the banking participation by households in terms of owning a bank account is considerably low. The present paper employs Discriminant Analysis (DA) and Logistic Regression Analysis (Logit) technique to determine the unbanked households in rural India using information on various socio-demographic characteristics of the households from National Family Health Survey (NFHS) 2005-06 data. The unique feature of the paper is that it combines the results from both the methods to improve the predictive accuracy and compares the household-level characteristics that affect the banking participation in the two regions with highest and lowest unbanked households in rural India. Combining both the methods, the paper correctly predicts 95.1% and 83.3% of unbanked households in Eastern and Western region respectively. It is also observed that the number of adults along with their education level increases the probability of being banked, while families belonging to two major minority religions (Muslim and Christian) reduce the probability of the same. While female headship and belonging to SC or ST category reduces the banking participation in Western region, female headship is found to increase banking participation in Eastern region.

 
 
 

There is a growing concern among policy makers about the distribution of assets and wealth among low-income households, especially in the developing countries. Such a distribution has significant effect on the wellbeing of households and it also provides inputs to policy makers in designing policies and programs for the betterment of poor households. Improving access to formal financial institutions such as banks for low-income households is one of the key efforts of government programs. Compared to informal sources, formal institutions help households reduce their transaction cost, provide better financial security, and easier repayment of debt. This also encourages households to make small savings which ultimately help them in building assets and creation of wealth. With the objective of bringing lowincome households within the ambit of formal financial institutions, the Government of India has launched wide range of programs. Providing basic savings account is the very first step towards the movement called ‘financial inclusion’.

Poor people are vulnerable to fluctuations in income resulting from events such as economic shocks, sickness, death or bad weather. When poor have access to a range of financial services such as saving vehicles, insurance, and credit, it helps them in smoothing of consumption despite large variation in income. Field experiment studies demonstrate that poor but banked households are more likely to raise their consumption level, productivity and income, health expenditures, and thus, are less exposed to illness and other such unexpected shocks (Dupas and Robinson, 2009 and 2011; and Ashraf et al., 2011). Unbanked households lack savings and are unable to fight income shocks and emergencies, and finally, resort to borrowing from informal sources (Kempson and Whyley, 1999). Secondly, people who save at home without any bank account are vulnerable to theft (Kempson and Whyley, 1998).

 
 
 

Applied Economics Journal, Discriminant Analysis (DA), Reserve Bank of India (RBI), Logistic Regression Analysis (Logit), National Family Health Survey (NFHS), The Role of Household-Level, Characteristics, Predicting, Unbanked in Rural India, Eastern, Western Regions.