Informal insurance under group lending with individual liability: Evidence from India
Description
In recent years, there has been a shift from joint liability lending to group-based loans with individual liability, as adopted by institutions such as the Grameen Bank and other prominent microfinance organizations worldwide. Under the traditional joint liability model, a group of borrowers collectively bore responsibility for loan repayment. In contrast, under the individual liability model, although borrowers must form a group to access credit, each individual is responsible only for her own share of the loan, and not for the defaults of others. Evidence from field experiments (Giné and Karlan, 2011) suggests that this shift in lending structure does not significantly affect overall repayment rates. However, given the relatively recent adoption of individual liability schemes, there is limited research on the factors that enable their effective functioning within group-based lending contexts. A theoretical explanation by Basu and Dutta (2013) suggests that, despite individualized liability, borrowers may informally insure one another within their groups. This informal insurance mechanism, based on reciprocity, can help sustain repayment rates similar to those observed under joint liability systems. Specifically, when a member experiences a negative income shock and is unable to repay her loan, other group members may provide financial support with the expectation that such support will be reciprocated in the future. This study aims to examine whether such informal insurance mechanisms play a significant role in sustaining repayment rates under individual liability lending. In particular, it seeks to evaluate the extent to which reciprocal support within borrower groups contributes to repayment performance. To empirically investigate these questions, we propose conducting a survey among borrowers of Bandhan Financial Services Pvt. Ltd. (BFSPL), one of the largest microfinance institutions (MFIs) in India. BFSPL operates under an individual liability lending model based on group formation and serves nearly 5 million borrowers, with total loan disbursements of approximately GBP 500 million. The survey will focus on randomly selected groups of BFSPL clients in West Bengal. Each group typically consists of around 10 members, and we plan to survey approximately 100 such groups. The survey will consist of two components. First, individual group members will be interviewed using a structured questionnaire that includes both member-specific and group-level questions. These questions will focus on identifying the existence and dynamics of informal insurance, including the frequency and magnitude of financial assistance received from other group members for loan repayment over the past year. The second component will involve interviews with group leaders to gather information on overall group characteristics. Together, these data will enable us to assess the role of informal insurance in facilitating loan repayment under individual liability lending systems. The findings of this study are expected to provide valuable policy insights for regulators, microfinance institutions, and other stakeholders. In particular, they may help inform the design of interventions that support the smooth functioning of MFIs and guide institutions considering alternative lending models.
Copyright Date
January 2015
Publication Date
1-1-2015
Keywords
Insurance, Group lending
Conference
6th IGC-ISI India Development Policy Conference, 21-22 July, 2015, New Delhi
