Abstract
One of the most essential tools of poverty reduction would be the viable expansion of institutional credit facilities to large sections of the people who neither have adequate collateral nor credit history to secure a loan. In this backdrop, social collateral is popularized through the group lending programs to address the credit market problems. Microfinance through group lending is acting as a screening device; the joint liability mechanism creates incentives for internal monitoring. Hence, it has received a lot of attention from policy makers as well as academicians. It is playing an important role in delivering financial services to the “socially and economically excluded” poor, in general, and women, in particular. The group lending works with various dynamic incentives. One such kind is principle of progressive lending and it plays a vital role in sustaining the groups for the persistent delivery of microfinance services to its members. In progressive lending, a typical borrower receives very small amounts at first, which increases with good repayment conduct or it links new, larger loans to past repayment. This article explores possible theoretical and empirical relationship between progressive lending and its determinants in group lending approach. The primary survey was conducted in 10 villages covering 106 self-help groups and 318 members in Karnataka, India. The empirical results show the progressive lending amount rising up to 698% of the initial loan of the self-help groups.
Highlights
Asymmetries of information cause many problems in the credit markets, namely, adverse selection, moral hazard, and lack of enforcement
The emergence of innovative group lending models in the field of microfinance is celebrated as a contractual innovation that has achieved the perceptible miracle of enabling previously unbankable or marginalized borrowers to lift themselves up by their own bootstraps by creating “social collateral” to replace the missing physical collateral that excluded them from access to more traditional forms of financial services, like credit, savings, and so on (Conning, 2000)
The per capita credit (PCC) accessed by the members in the total sample rose from Rs. 1,802 in the first loan cycle to Rs. 12,327 in the sixth loan cycle
Summary
Asymmetries of information cause many problems in the credit markets, namely, adverse selection, moral hazard, and lack of enforcement. The practice of repeat loans with higher doses of credit is followed by SHGs in their group lending thereby enticing prompt repayment.
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