Independent Research and Policy Advocacy

How Can Group Loans be Provided more Responsibly?

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The popularity of the joint liability group (JLG) loan, attributable to its ability to deliver credit to households that lack collateral while achieving near-zero default rates, has led to the establishment of a large microcredit sector in many countries including India. However, repayment (or its lack thereof) presents an incomplete picture in assessing whether a JLG loan actually helped a customer achieve her original goals or improve her financial situation.

For many smallholder farmers, for example, who account for a large customer segment for JLG loans, income is often volatile and dependent upon external factors, such as the price of harvested crops or rainfall patterns. The repayment plans for typical JLG loans, however, are structured and not very flexible. They require weekly or monthly payments for the life of the loan. The farmer’s obligation to make these structured repayments according to this schedule is akin to a highly leveraged position in the stock market – very risky. In a bad month when income from the sale of produce is low, repaying a loan might only be possible by making sacrifices such as eating less or lower quality food, working more hours as a part-time casual laborer, or parting with a cow for much less than it is worth. In a case like this, the farmer may have successfully repaid a loan, but at what cost? In this way, repayment behavior does not necessarily signify whether a loan enhanced a household’s financial position. At worst, it may shroud whether the loan left the household worse off.

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