Banking the Underbanked: Capital Investment and Credit-Constrained Firms

Inadequate banking infrastructure can exacerbate inequalities across firms. We exploit a place-based policy at scale – India’s nationwide bank expansion policy in 2005 that incentivized banks to open branches in “underbanked†districts – and employing a regression discontinuity design identify substantial increases in capital expenditures and credit growth of manufacturing establishments post-intervention. We find that establishments most likely to be credit constrained i.e., small, young and those not publicly listed drive these effects. Using novel regulatory data we find evidence in support of two mechanisms – increased hiring of bank officers and physical proximity of lenders to small, informationally opaque borrowers that explain the uptick in capital spending by small firms.