The Financial Warmth of the Last Mile: Can Village and Township Banks Alleviate Rural Household Financial Vulnerability?

Theoretically, this paper develops a theoretical model integrating the rural credit market and rural household decision-making, and deduces how the establishment of village and township banks impacts rural households’ financial vulnerability. Empirically, leveraging data from the China Family Panel Studies (CFPS) spanning 2012 to 2022, the paper validates the theoretical inferences. Findings: first, the establishment of village and township banks significantly reduces the probability that rural households fall into financial vulnerability. This conclusion reminds valid following a series of robustness checks. Second, the effect of village and township banks’ establishment exhibits notable heterogeneity at the individual, household, and regional levels, which calls for differentiated consideration. Third, mechanism analysis demonstrates that village and township banks mitigate household financial vulnerability by expanding inclusive financial services. Fourth, the establishment of village and township banks within formal financial systems creates substitution effects on informal finance. This reduces household reliance on high-risk informal financial channels and further decreases household financial vulnerability. This study demonstrates rural banks’ pivotal role in mitigating household financial vulnerability while delivering critical policy implications for advancing inclusive finance and rural revitalization strategies.