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An Empirical Analysis of Financial Inclusion Across Population Groups in India 97

An Empirical Analysis
of Financial Inclusion Across
Population Groups in India
Nitin Kumar*
* Research Officer, Reserve Bank of India, Mumbai, India. E-mail: nitin_005us@yahoo.com. The usual disclaimer
applies.
2012 IUP. All Rights Reserved.
The financial inclusion mission has gained tremendous relevance in an emerging economy
like India. Financial exclusion seems to be more severe in rural and backward locations.
In this respect, the current analysis is an attempt to explore the behavior of inclusion/
exclusion across varied population groups. The pooled dataset spanning over the period
from 1990 to 2008 for rural and urban regions separately has been employed.
A set of control variables have been included to disentangle the role of various demographic
and institutional factors. Bank group size, as captured by assets, has a direct influence
on the number of operating branches. Ownership effect also plays a key role in determining
the number of branches operating. Test of convergence has been carried out to examine
if lesser branched regions are catching up with their counterparts with higher branch
network. Evidence of conditional convergence has been found. Finally, structural change
has also been observed in terms of the number of functioning branches. The result is a
testimony to the fact that inclusion policies are actually translating into significant
improvement of branch density in India.
Introduction
The importance of efficient financial institutions is well established in the literature (King and
Ross, 1993; Beck et al., 2000 and 2004; and Klapper et al., 2006). A well-organized financial
system is the key towards growth, progress and various expansionary activities, more so in the
case of emerging markets. However, the potential benefit cannot be harnessed till the societies
are well connected with the formal system, especially the rural poor and deprived masses.
Globally, the financial inclusion drive has gained momentum lately. This is reflected in the
various number of projects, reports, and research being conducted by the international
organizations such as the World Bank and IMF (Beck et al., 2007; World Bank, 2008a and
2008b; and World Bank, 2009) at a cross-country level. In fact, regular reports with a focus on
the South Asian nations are being published by the World Bank (Kiatchai and Kulathunga,
2009). The report contains in detail the various indicators, relevant information pertaining to
financial inclusion and comparative analysis on the basis of various parameters for the South
Asian countries. Financial access surveys are also being conducted by the CGAP and World
Bank (2010). Building on the existing database, Financial Access 2010 reviews the survey
responses from 142 economies, updates statistics on the use of financial services, and analyzes
changes that took place in 2009a turbulent year for the financial sector in most economies.
The IUP Journal of Bank Management, Vol. XI, No. 1, 2012 98
In addition, Financial Access 2010 expands on the previous years work by reviewing three
policy areas relevant to the current financial access debate: financial inclusion mandates,
consumer protection in financial services, and access to finance by Small and Medium Enterprises
(SMEs). Nearly 60% of the economies experienced a contraction in real per capita income in
2009 due to deepening of the global financial crisis.
In India too, financial inclusion efforts have gained reasonable prominence. The Report of
the Committee on Financial Inclusion (Rangarajan Committee, 2008) has not only recognized
the importance of access of finance to the poor and vulnerable groups as a prerequisite for
poverty reduction and social cohesion, but also provided policy suggestions for the improvement
of the same. It defined inclusion in the Indian context and discussed key statistics in this
background. The Eleventh Five Year Plan (2007-12) envisions inclusive growth as the key
objective. The inclusive growth implies an equitable allocation of resources with benefits accruing
to every section of the society. It is aimed at poverty reduction, human development, health
and provides opportunity to work and be creative. Also, various initiatives have been undertaken
by the Reserve Bank of India towards fulfilling the objectives of the financial inclusion agenda
(Leeladhar, 2006; Mohan, 2006; Thorat, 2007; and Subbarao, 2009a and 2009b). Prominent
among them are the relaxation of branch licensing policy in rural agglomerations; availability
of no-frills accounts for poor and underprivileged; and easing the Know Your Customer (KYC)
norms to keep the procedural hassles involved in opening a bank account to the minimum.
In the Indian economy, still around 70% of the population dwells in rural regions with
agriculture and other small-scale entrepreneurship as their main pursuit. Although there exists
supply side deficiency, weak demand may also be a reason for low banking penetration in such
cases (Rangarajan Committee, 2008; Goyal, 2010; and Kamath et al., 2010). As per the
Rangarajan Committee Report (2008), marginal farmer households constitute 66% of the total
farm households. Only 45% of these households are indebted to either formal or non-formal
sources of finance. Overall, 73% of farmer households have no access to formal sources of
credit. Indian household financial savings in shares and debentures prior to reforms were above
20%, but post-reform it reached a low of below 5%. Technology, actually, raised entry costs,
for example, depository charges. Mutual funds through which retail investors were supposed to
enter are more interested in servicing corporates and a few high net worth individuals through
high-cost structured products. The sub-brokers that households trusted disappeared from the
markets (Goyal, 2010).
In this context, it is useful to examine if there really exists a significant difference between
the branches operated in rural and urban agglomerations. To this end, the present analysis is
an attempt to explore how the relationship between the operating branches varies according to
population categories, bank groups and income. The pooled dataset has been employed to test
the hypothesis spanning over the period from 1990 to 2008 for rural and urban regions separately.
The regression has been carried out utilizing both the number of branches opened and functioning
branches as dependent variables. Certain interesting findings include: the quantum of operating
branches in more populous regions is lesser after controlling other banking and demographic
factors; both time and income level are turning out to be insignificant in the determination of
An Empirical Analysis of Financial Inclusion Across Population Groups in India 99
operating branches; bank group size, as captured by assets, has a direct influence on the
number of operating branches; and last but not the least, ownership effect plays a significant
role in determining the number of operating branches. The test of convergence has been carried
out to examine the trend of the functioning branches across the urban and rural population
groups over time. A negative and significant coefficient of initial branches is an evidence of
conditional convergence. The real expenditure has a direct and significant effect on the growth
rate of functioning branches. The result implies that higher income regions are experiencing a
higher branch growth. Finally, it is imperative to test if the number of branches has encountered
any marked shift from its mean level. The three series tested for structural change are: functioning
branches for rural and urban sectors, and total functioning branches. Each one of the series
indicates the presence of structural shift in the number of functioning branches, which may be
due to the impact of policy changes towards financial inclusion.
The present study is structured as follows: the next section is devoted to a brief discussion
on the literature pertaining to financial inclusion, followed by an outline of the data chosen and
variables utilized. The empirical methodology is described in the next section, with results in the
subsequent section. The last section concludes with a summary of the major findings and
policy implications.
Inclusion Developments and Relevant Literature
Financial inclusion has become the buzzword in last few years. Apex organizations, including
World Bank, International Monetary Fund (IMF), G-20 nations and others, have undertaken
financial inclusion as the key agenda item. Updated online database of financial access has
been launched by World Bank and IMF. This resource is an important tool for increasing
financial inclusion. With such international data comparisons, policy makers and researchers
can set forth agendas for improving access to financial services. Policy makers can use the data
for monitoring and evaluation of pro-access policies. Researchers will use it to assess varying
policy approaches to learn what works. In fact, the steps have resulted in improved responses
with more comprehensive coverage over time (Errico and Musalem, 1999; and IMF, 2009).
An estimated 2.7 billion people in developing countries do not have access to basic formal
financial services (CGAP and World Bank, 2010). However, financial inclusion has been in
existence in a disguised form without the same nomenclature in the Indian economy (Subbarao,
2009a). The Eleventh Five Year Plan (2007-12) envisions inclusive growth as a key objective.
The inclusive growth implies an equitable allocation of resources, with benefits accruing to
every section of the society.
It is surprising to note that financial exclusion is a matter of concern in the developed
economies also. For instance, Sinclair et al. (2009) documents that the number of households
without bank accounts in the UK has fallen in recent years, but access to banking services
remains a problem for a significant proportion of lower-income households and those living in
deprived locations. In 2001, 9.1% of American households were without transaction accounts,
a drop of only half a percent since the data was collected in 1998 (Aizcorbe et al., 2003). Of
the families in the lowest income quintile in 2001, only 62.5% had a transaction account
(Federal Reserve, 2001).
The IUP Journal of Bank Management, Vol. XI, No. 1, 2012 100
To measure financial inclusion, a multidimensional Index of Financial Inclusion (IFI) has
been proposed by Sarma (2008). The IFI is an index that captures information on various
dimensions of financial inclusion in one single digit lying between 0 and 1. It captures the
penetration of the banking system, its availability to users and its actual usage. Chakravarty
and Pal (2010) employ the axiomatic measurement approach for the measurement of financial
inclusion. It improves upon the IFI proposed by Sarma (2008) such that the index can be
utilized to determine the percentage contributions by the various factors. Kendall et al. (2010)
carried out a cross-country analysis. In developed countries, they estimate 3.2 accounts per
adult and 81% of adults banked. By contrast, in developing countries, they estimate only 0.9
accounts per adult and 28% banked. In regression analysis, they find that measures of
development and physical infrastructure are positively associated with the indicators of deposit
account, loan, and branch penetration. A state-wise dynamic panel data analysis of determinants
of financial inclusion has been performed by Kumar (2011) in the context of India. The results
disclose income to be having an unambiguously beneficial impact on the financial inclusion
indicators. The findings reveal the importance of the regions socioeconomic and environmental
setup in shaping the banking habit among the masses.
Data Strategy
This section provides in detail the discussion on the data utilized for the study. As the focus of
the analysis is to examine the banking outreach in rural vis--vis urban agglomerations, an
attempt has been made to collate variables depicting the characteristics of these two distinct
population groups. The study spans over the period from 1990 to 2008. The pooled dataset
consists of various variables for rural and urban regions separately. Among the most prominent
variables pertaining to banking outreach are the branches opened and branches functioning in
a region. The branches opened depict the aggressiveness with which the bank is moving towards
greater penetration. The factors for greater aggressiveness can be attributed to various demand
and supply factors, such as relaxation of branch authorization by RBI and greater demand for
banking services.
The functioning branches are the net of branches opened and branches closed, which
portrays the actual number of operating branches at a particular instance. The information on
both these variables is obtained from the Branch Banking Statistics published by the Reserve
Bank of India.
Among the socio-demographic factors, population is a vital variable which directly affects
the demand for banking services. A large population is expected to exhibit greater banking
requirements compared to sparsely populated segments per se. The rural and urban population
figures are available only for the census years. To overcome this limitation, population distribution
ratio as available for the census years 1991 and 2001 has been employed to interpolate the
rural and urban population distribution for the study period.
The income level has been established as a significant determinant of the inclusion
effort (Devlin, 2005; and Kumar, 2011). Although state-wise Net State Domestic Product
(NSDP) per capita is available, population group-wise NSDP per capita is not available.
An Empirical Analysis of Financial Inclusion Across Population Groups in India 101
The Monthly Per Capita Expenditure (MPCE) survey was conducted by National Sample Survey
Organization (NSSO) that is the closest available proxy for income levels of rural and urban
inhabitants. The National Sample Surveys in India are integrated household surveys carried
out every year on an all-India basis with the exception of some border areas. The MPCE is
defined as the household consumption expenditure over a period of 30 days divided by the
household size. The reports present national and state level estimates of various socioeconomic
indicators and distribution of households and persons over different socioeconomic categories
in both rural and urban areas.
To control for the size of varied bank groups, their assets have been included. The information
on bank group-wise assets is obtained from Statistical Tables Relating to Banks in India published
by Reserve Bank of India. All the major bank groups active in the Indian scenario have been
included in the study, viz., State Bank and its associates (SBI), Nationalized Bank Group,
foreign banks and private banks.
Empirical Methodology
This section describes in detail the econometric methods employed to assess the rural-urban
financial inclusion disparity. Initially, a simple ordinary least squares framework was utilized
over the study period of 1990 to 2008 in an attempt to understand the determinants of branch
expansion. The basic regression takes the following form:
Y = + X + Z + ...(1)
Here, Y represents the vector of endogenous variable; the associated parameters of the
exogenous variables are represented by ; X depicts the matrix of explanatory variables; Z
stands for the matrix of control variables to disentangle their effects; and being the vector of
stochastic term having standard distribution assumptions. The branches opened and number
of functioning branches constitute the endogenous variable. Separate regressions have been
carried out for each of them with a common set of independent variables. Among the exogenous
variables are: time trend, monthly per capita expenditure, population and fixed assets. Population
dummies and bank group dummies have been taken as the control variables to control for the
population group effect and bank group effect, respectively.
Although, urban regions may be enjoying a higher branch density compared to rural sections,
over the years, the growth of branches opened in rural areas is catching up with the urban
areas. The notion of convergence (also referred to as the catch-up effect) has been widely used
in economic growth literature (Barro et al., 1992; Mankiw et al., 1992; and Evans and Karras,
1996). Similar analogy has been implemented to test the convergence in the growth of branches
over time across the population segments.
To test if there exists any evidence of convergence of branches in low network areas vis--vis
high density agglomerations, the following regression setup has been utilized:
BRAN_GR = + *BRAN_INI + Z + ...(2)
The IUP Journal of Bank Management, Vol. XI, No. 1, 2012 102
BRAN_GR denotes the compounded growth rate of branches compared to the branches in
the initial year, which is represented by BRAN_INI. Z signifies the matrix of control variables
such as time trend, population and income.
The previous couple of years have seen numerous steps being undertaken towards greater
financial inclusion. Not only has the state given financial inclusion high importance, but it has
also been undertaken in a mission mode by the Reserve Bank of India (Leeladhar, 2006;
Mohan, 2006; Thorat, 2007; Rangarajan Committee, 2008; and Subbarao, 2009a and 2009b).
Numerous outreach programs to enhance the financial awareness, relaxation of branch expansion
regulations in rural inhabitations, introduction of no-frills accounts for low income individuals,
and easing of the KYC norms to keep the procedural hassles involved in opening a bank
account to the minimum are some of the chief measures that have been initiated towards this
goal. In this context, it becomes vital to examine the stability of the estimated parameters over
the time period of the study. A structural break can render the estimated coefficients misleading
in the presence of shift. The Chow test (Chow, 1960) is most commonly used in time series
analysis to detect structural break. However, a weakness of the test is that the breakpoint has
to be supplied exogenously. As various steps towards financial inclusion are spread over the
years and their relative significance in quantitative measures is also not known, a Bai-Perron
test of structural change is applied (Bai and Perron, 2003). The test addresses the problem of
estimation of the break dates and presents an efficient algorithm to obtain global minimizers of
the sum of squared residuals. The algorithm is based on the principle of dynamic programming.
To investigate the stability of the parameters, the following null is tested
H
0
:
i
=
0
...(3)
against the alternative that at least one coefficient varies over time. A sequence of F-statistics
is computed as follows:

k n i u i u
i u i u u u
F
T
T T
i
2 /

...(4)
Here i u denotes the residuals obtained from the segmented regression, whereas residuals
obtained from unsegmented regression are depicted by u
. The F-statistics are then computed,
and H
0
is rejected if the value is too large. Hansen (1997) has developed an algorithm for
computing approximate asymptotic p-values of the test above. Bai and Perron (2003) extend
this approach to F-tests for 0 vs. l breaks and l vs. l + 1 breaks, respectively, with arbitrary but
fixed l.
Empirical Findings
Table 1 provides the trend of major variables over the selected years. As observed, the number
of branches opened seems to be accelerating lately with nearly 4,000 branches being added to
the already growing family of Scheduled Commercial Banks. There has been consistent and
continuous improvement in the number of functioning branches, which implies an enhancement
An Empirical Analysis of Financial Inclusion Across Population Groups in India 103
of the web of branches over time despite closures. The real MPCE has increased for most of the
years. It reflects the higher spending power of the masses for both rural and urban zones
separately. Last but not the least, the swelling population figures are also tabulated, whose
coverage is a challenge for financial inclusion strategies.
Table 1: Totals of Variables for Selected Years
Year Branches Branches MPCE MPCE Population
Opened Functioning Rural Urban (million)
1990 2,429 61,082 531.28 835.65 862.2
1994 715 62,495 523.73 852.40 935.0
1998 872 65,006 516.43 924.70 1,007.0
2002 620 66,554 602.09 1,146.39 1,078.1
2006 1,455 70,262 596.86 1,118.28 1,147.8
2008 3,997 76,611 661.92 1,262.10 1,181.4
Note: All monetary variables have been normalized by GDP deflator; and the banks consist of
Scheduled Commercial Banks in India.
To understand the rural-urban disparity in terms of financial inclusion status, it is pertinent
to have a glance of the branch density across these two population groups. The Average
Population Per Branch (APPB) is presented in Table 2. The figures indicate that the density had
deteriorated over the years. However, since 2004, the ratio has improved favorably, analogous
to the popular belief that the urban regions are actually enjoying a better branch density
compared to the rural areas. In 2008, a single branch catered to about 12,190 individuals in
urban areas as against 17,250 in rural areas.
Table 2: Trend of Branch Density Across Rural and Urban Population Groups
Year APPB Rural APPB Urban APPB Total
1990 14.47 13.17 14.11
1991 14.59 13.54 14.31
1992 14.81 13.76 14.52
1993 14.98 13.85 14.67
1994 15.25 14.21 14.96
1995 15.47 14.32 15.14
1996 15.65 14.28 15.25
1997 15.86 14.25 15.39
1998 16.06 14.15 15.49
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Table 2 (Cont.)
Year APPB Rural APPB Urban APPB Total
1999 16.27 14.01 15.58
2000 16.50 14.05 15.75
2001 16.81 14.26 16.01
2002 17.05 14.36 16.20
2003 17.29 14.39 16.36
2004 17.50 14.26 16.45
2005 17.65 13.91 16.40
2006 17.78 13.57 16.34
2007 17.66 13.01 16.03
2008 17.25 12.19 15.42
Note: APPB is in thousands.
The basic data description according to major bank groups is illustrated in Table 3. The
Nationalized Bank Group is the frontrunner both in terms of largest number of average
functioning branches and highest number of average branches opened. The Nationalized Bank
Group is followed by Regional Rural Banks (RRBs) in respect of average functioning branches
and private sector banks in terms of average branches opened during the study period. Foreign
banks constitute the smallest group with average functioning branches of 130 and average
branches opened at about 7. Nationalized banks have displayed the highest stability as depicted
by the least coefficient of variation for both the functioning and opened branches. The figures
for RRBs have been the most volatile, which signifies that although growth of branches has
taken place, it has been uneven across the banks and over time.
Mean SD CV Mean SD CV
SBI and its Associates 6,617.05 2,500.73 37.79 102.16 132.65 129.85
Nationalized Banks 16,225.79 3,733.33 23.01 272.82 279.22 102.35
Foreign Banks 129.84 110.79 85.32 5.68 7.73 135.91
Private Sector Banks 2,780.74 696.90 25.06 147.26 158.91 107.91
Regional Rural Banks 7,248.13 6,861.93 94.67 39.03 66.45 170.26
Table 3: Bank Group-Wise Data Description
Bank Group
Number of Functioning
Branches
Number of Branches
Opened
An Empirical Analysis of Financial Inclusion Across Population Groups in India 105
The regression result with common set
of explanatory variables and functioning
branches as the dependent variable is
presented in Table 4. The dependent
variable has been normalized relative to
SBI branches. Likewise, the asset variable
has been defined relative to SBI assets.
Over a period of time, apart from opening
of new branches, banks perform diverse
pursuits, such as closures, mergers,
amalgamations and change of status,
which not only lead to changes in the
number of functioning branches but also
variations in the status with respect to
ownership and population group
categorization. With this motivation, it
becomes useful to assess the determinants
of functioning branches disentangling the
operating and demographic factors, which
may confound the outcome. The time
trend has an insignificant impact on the
dependent variable. The finding depicts
that on controlling for various other
characteristics, the number of branches
has not significantly improved over the
time period of the study. The bank group
size, as captured by real assets, has a
positive effect, which implies that larger
bank groups are aggressive in carrying out
branch expansionary activities. Among
the ownership dummies, both foreign and
private banks seem to possess significantly lesser number of functioning branches as compared
to the SBI group, whereas the Nationalized Group is owning significantly more number of
branches vis--vis SBI and associates.
As discussed in the empirical methodology, it is vital to examine the convergence of the
functioning branches across the urban and rural population groups over time. The convergence
results are displayed in Table 5. Model 1 is the benchmark regression excluding the RRBs and
Model 2 is the consolidated dataset including RRBs. Qualitatively, the outcome of both the
models is very similar. A negative and significant coefficient of initial branches is an evidence of
conditional convergence. The real expenditure has a direct and significant effect on the growth
Dependent variable: Number of functioning branches
Explanatory Variables Model 1
Intercept 133.8
(158.81)
Time 0.82
(2.6)
MPCE 0.01
(0.05)
Population 0.12
(0.22)
Assets 0.29*
(0.11)
Pop_gr_dum 29.29
(85.98)
Nationalized_dum 139.68*
(8.63)
Foreign_dum 75.57*
(8.62)
Private_dum 36.05*
(6.97)
R-square 0.96
Table 4: Regression Result
(Functioning Branches)
Note: Period of the study: 1990 to 2008; Figures in bracket
denote the robust standard errors; * Significant
at 1%.
The IUP Journal of Bank Management, Vol. XI, No. 1, 2012 106
Dependent variable: Growth rate of functioning branches
Explanatory Variables Model 1 Model 2
Intercept 1.7 2.4
(1.7) (1.46)
Time 0.04 4.45E03
(0.04) (3.55E02)
Initial branches 4.10E05* 3.90E05*
(1.18E05) (1.08E05)
Population 1.60E04 1.04E03
(1.52E03) (1.31E03)
MPCE 3.09E03*** 4.25E03*
(1.68E03) (1.42E03)
R-square 0.53 0.55
Table 5: Test of Convergence
Note: Period of the study: 1990 to 2008; Figures in bracket denote the robust standard errors; * Significant
at 1%; and *** Significant at 10%.
rate of the functioning branches. The result implies that higher income regions are experiencing
a higher branch growth.
Finally, it is imperative to test if the number of branches has encountered any marked shift
from its mean level. It shall help to determine if any policy factor does have a role in strategizing
the branch expansion plan of the banks, and if so, the lag with which it is implemented. The
three series tested for structural change are: functioning branches for rural and urban sectors,
and total functioning branches. To examine if at all there is an indication of breakpoint(s), the
F-statistics procedure as tabulated in Equation (4) has been employed.
1
The plot for functioning
branches in rural areas is displayed in Figure 1. As observed from the graph, the series is
increasing slightly till around 1996. Thereafter it is stable for a few years, before a sharp
upward trajectory. The plots for urban and all India total are portrayed in Figures 2 and 3,
respectively. The figures are quite similar. Both are displaying an increasing trend till 1999, after
which there is a deceleration. A sharp reversal of curve with declining trend is observed around
2004 for both the series. On the basis of graphical outcomes, there seems to be a strong case
for structural break in the number of functioning branches. To empirically test and pinpoint the
year of shift, the Bai and Perron (2003) methodology has been utilized. The result of the
breakpoint years is available in Table 6. In addition to the single-segment model, two-segment
model has also been used primarily due to the double humped figures as obtained for urban
and total number of functioning branches. The year 2006 turns out to be the structural change
1
The OLS-based CUSUM procedure has also been used with very similar results.
An Empirical Analysis of Financial Inclusion Across Population Groups in India 107
Figure 2: F-Statistics for Functioning Branches in Urban Region
25
20
15
5
1995 2000 2005
Time
F
-
S
t
a
t
i
s
t
i
c
s
30
35
10
0
Figure 1: F-Statistics for Functioning Branches in Rural Region
40
30
20
10
0
1995 2000 2005
Time
F
-
S
t
a
t
i
s
t
i
c
s
The IUP Journal of Bank Management, Vol. XI, No. 1, 2012 108
Population Group/Model Single-Segment Model Two-Segment Model
Rural 2006 1995, 2006
Urban 2003 1997, 2005
Total 2004 1997, 2006
Table 6: Structural Change Breakpoints
year, assuming a single shift year for rural functioning branches. In the case of urban and total
number of branches, the break years are 2003 and 2004, respectively, on the basis of single-
segment model.
Conclusion
The financial inclusion agenda has gained tremendous relevance in an emerging economy like
India. The issue of financial exclusion seems to be more severe for rural and less populous
regions compared to urban and developed areas. In this respect, the current analysis is an
attempt to explore the behavior of inclusion/exclusion across the population groups.
The pooled dataset has been employed to test the hypothesis spanning over the period from
1990 to 2008 for rural and urban regions separately. A set of control variables have also been
employed in the regression analysis to understand the role of demographic and institutional
Figure 3: F-Statistics for Functioning Branches in All India
20
15
10
5
0
1995 2000 2005
Time
F
-
S
t
a
t
i
s
t
i
c
s
25
30
An Empirical Analysis of Financial Inclusion Across Population Groups in India 109
factors. Bank group size, as captured by assets, has a direct influence on the number of
operating branches. Ownership effect also plays a significant role in the determination of branches
operating. Both time and income level turn out to be insignificant in the determination of
operating branches. The test of convergence has been carried out to examine the trend of the
functioning branches across the urban and rural population groups over time. Evidence of
conditional convergence has been found, which implies higher growth of branches in regions
having less density of branches initially. The real expenditure has a direct and significant effect
on the growth rate of functioning branches. The result implies that higher income regions are
experiencing a higher branch growth. Finally, test of structural change has been carried out to
investigate the possible shift of functioning branches over time. Each one of the series (functioning
branches for rural and urban sectors, and total functioning branches) is indicating the presence
of structural shift in the number of functioning branches. The finding is an evidence of the
positive impact of varied inclusion policies that have been implemented lately.
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