Determinants of repayment performance of group lending in China

Abstract

PurposeThe purpose of this paper aims to explore how borrower and group‐level characteristics affect repayment decisions of group borrowers by highlighting the case of rural credit cooperatives (RCCs) in Guizhou province in Southwest China.Design/methodology/approachThe Logit model was applied to test the determinants of repayment performance of RCCs' group lending. The authors used the survey data of 245 farm households in Guizhou province, collected in 2008.FindingsThe empirical results indicate that there is a serious mismatch between joint liability mechanisms and the social and economic conditions in rural China. Mechanisms such as threatening to withhold defaulters' future loans from RCCs failed to work. In addition, higher household incomes also did not improve repayment performance. However, factors such as a higher degree of acquaintanceship in a group, migrant income, and employment in government agencies, positively improved the chances of repayment.Practical implicationsGroup lending is more suitable for poorer areas with few opportunities for migration and limited access to finance. In addition, constructing the trustworthy relationship between micro‐lenders and customers and designing diverse and flexible financial services to meet heterogeneous demands are equally important.Originality/valueThis paper is an attempt to empirically explore the determinants of repayment performance in group lending programs in China. The results provide meaningful policy implications for the government and rural financial institutions.