This study aims to explore the intricate and dynamic relationship between financial inclusion and the financial performance of banking institutions, revealing a novel U-shaped pattern. By employing a comprehensive financial inclusion index, it highlights how financial inclusion initially hampers performance due to elevated costs and risk exposure, but beyond a critical threshold, it becomes a driver of financial success.
Using a robust regression framework, this study analyzes financial inclusion metrics and banking performance indicators from 2014 to 2023. The analysis, conducted with Stata 17, offered a comprehensive understanding of the interplay between financial inclusion and bank performance.
The results uncover a significant U-shaped relationship, marking a groundbreaking contribution to the Indian banking sector. Early-stage financial inclusion efforts strain profitability due to operational inefficiencies and risk factors, but as inclusion scales beyond a critical point, its benefits outweigh costs, enhancing financial performance. This “too little of a good thing” effect underscores the need for strategic, well-calibrated financial inclusion initiatives that balance growth with sustainability.
Unlike prior studies that assume a linear relationship, this research is the first to empirically establish a U-shaped link between financial inclusion and bank performance to identify the optimal level of financial inclusion to enhance the financial performance of banks in the Indian context. The findings provide actionable insights for policymakers and financial institutions, advocating for a nuanced, stage-wise approach to financial inclusion that maximizes financial viability.
