Paper short abstract:

Unequal financial sector has profound implications for the rest of the economy and increased and inclusive financial development may provide more opportunities and help in reducing regional inequalities. In this study we examine disparities in financial development at the regional level in India.

Paper long abstract:

In theoretical models, well-developed financial systems can be seen to promote economic growth, remove financing constraints for firms, reduce poverty and provide new opportunities (Levine 1997; Jalilian & Kirkpatrick 2005). Less developed financial systems, on other hand, lead to entrenching of inequality, loss of opportunities to the poor and less investment in enterprise growth and also human capital development (Claessens and Perroti 2007; Arora 2012a). Unequal financial sector has profound implications for the rest of the economy and increased and inclusive financial development may provide more opportunities and help in reducing regional inequalities. In this study we examine disparities in financial development at the regional level in India. We have mainly two research questions: How do we measure the level of financial development at the sub-national level? What is the impact of unequal financial development on economic performance of the sub-national units such as the states?

To explore the research questions, our study develops a multidimensional banking development index at the sub-national level for three different bank groups - public, private and foreign banks for 25 states of India for the years 1996 to 2015. The indices suggest that financial deepening is higher in the leading regions which are high income and more developed compared to the less developed regions. An interesting finding is the improvement in index scores in the recent years for some states including those in the North East reflecting some early impact of recent drive on financial inclusion.