Access to essential health services and the financial burden of healthcare expenses are pressing global issues, affecting billions of people worldwide. However, recent research suggests that finance could play a crucial role in addressing these challenges. A study conducted by Kim Fe Cramer, an assistant professor at the London School of Economics, found that improving financial inclusion through increased bank presence in India had significant positive effects on households’ health.
The study utilized a natural experiment that introduced variations in bank presence across different districts in India over a ten-year period. In 2005, the Reserve Bank of India (RBI) implemented a policy to incentivize banks to open new branches in underserved districts. After five years, there was a 19% increase in the number of bank branches in these districts compared to similar districts where the policy did not apply.
The findings of two nationally representative household surveys showed improved health outcomes in districts with increased bank presence. The Indian Human Development Survey (IHDS), conducted six years after the policy went into effect, revealed a 36% decrease in non-chronic illnesses such as fever or diarrhea in households within these districts. Additionally, the Demographics and Health Survey, conducted ten years after the policy implementation, indicated higher vaccination rates and reduced risks associated with pregnancy in these areas. Moreover, households reported fewer school and work absences due to illness and lower medical expenses.
Several mechanisms contributed to these positive health outcomes. Firstly, banks provided credit to local businesses, enabling households to increase their income and invest more in health. Secondly, households gained direct access to financial services, including savings accounts and health insurance. In India, local banks act as intermediaries, selling health insurance policies to customers on behalf of insurance companies in major cities. This differs from the approach in most developed countries, where health insurance is typically purchased directly from insurance companies or obtained through government programs.
Furthermore, healthcare providers also benefitted from increased access to credit. Eight years after the RBI policy was implemented, there was a 140% increase in the number of hospitals operating in incentivized districts, with institutional loans becoming the primary source of finance for providers. The availability of credit for healthcare providers led to improved healthcare supply and reduced problems reported by local households. This recognition of the importance of expanding credit to healthcare providers was further highlighted during the COVID-19 crisis in May 2021, when the RBI provided $6.78 billion in easily accessible credit for the sector.
The success of the RBI policy in improving health outcomes through increased financial inclusion is a promising development for policymakers in developing countries. It also highlights the potential for similar interventions to stimulate demand and supply in other markets. Increasing the number of bank branches in underserved areas could have multiple positive community outcomes beyond improved health indicators. For instance, it could contribute to achieving other United Nations Sustainable Development Goals, such as better education outcomes by allowing households to invest more in education and providing credit for creating new schools and training programs.
The findings from this study shed new light on the role of finance in addressing global health challenges. By utilizing a natural experiment, the research captured the general equilibrium effects and explored the long-term impact of financial inclusion. This provides valuable insights for policymakers and researchers alike, offering a potential roadmap for improving health outcomes in developing countries and beyond.
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