Financial Inclusion and Markets

The period 2015-2020 has seen major events in Indian banking history. The period saw high levels of Non-Performing Assets (NPAs), bank mergers as well as enormous thrust of financial inclusion. In this article we explore how the stock prices of banks react financial inclusion as more bank accounts are opened under the financial inclusion mandate. The study has two distinct parts. In the first part, an analytical summary of Indian banking is presented. The study then considers financial inclusion data from Pradhan Mantri Jan Dhan Yojana (PMJDY) intervention. The financial inclusion data involves 34 banks covering the period January 2015-March 2020. Our sample has 23 public sector banks and 11 private banks. Monthly data for these banks were obtained for share prices, number of PMJDY beneficiaries, deposits in the accounts, Rupay cards, payments made at POS, and mobile payments. Thereafter we use panel regression technique to establish the relationship between financial inclusion and banking stocks. We find that, banking returns decrease as bank sizes increase or NPAs mount. Our results also establish a positive relationship between financial inclusion and share price. While the evidence of financial inclusion affecting stock prices is weak, it does establish that growth in payment instruments do have positive effects. We also find a positive relationship between financial inclusion and cashless payments. However, we do not find a strong evidence of the market rewarding cashless payments. We also find that as number of cashless instruments (cards) and the payments in such accounts increase, more and more individuals make cashless payments. This once again highlights the importance of payments into the accounts of the beneficiary. Our findings suggest that while the market doesn’t reward how many new beneficiaries are added, it does reward the banks if the newly opened accounts attract deposits. This certainly augurs well as financial inclusion must play an integral part of the Indian financial system. Most importantly, our study suggests that new accounts must see deposits for the financial system to be rewarded. We also find that the market may not reward bank consolidation and hence any further consolidation may have to be relooked at.