Equilibrium Effects of "Financial Affirmative Action": Evidence from India

Abstract

Can government policies relax credit constraints faced by minority citizens and affect their economic well-being? We examine this question by studying a unique policy intervention in India which encouraged commercial banks to increase lending to minority borrowers in ``minority concentration'' districts -- districts where the share of religious minorities exceeded 25 percent of the district population. Comparing districts within a narrow window around the population threshold in the spirit of a regression discontinuity design, we identify substantial increases in minorities' access to bank credit along both the extensive, and intensive margins. The increase in bank credit is driven by farm and consumption loans, with no evidence of a deterioration in credit quality. Exploring mechanisms, we find banks' collaboration with local self-help groups and a relaxation in collateral requirements to facilitate credit extensions to disadvantaged minority borrowers. Consistent with higher farm credit, we document an increase in farm machinery and irrigated farm holdings for minority households. Examining labor market impacts, we identify positive treatment effects for minority individuals’ participation in manufacturing work. In equilibrium, we find financial affirmative action to have boosted per capita monthly household consumption of minority households by 15 percent, accounting for 60 percent of the overall consumption gap between minority and non-minority households.