Government-sponsored microfinance program: Joint liability vs. individual liability

Arghya Kusum Mukherjee,Amit Kundu,Steve Cook

doi:10.1080/23322039.2014.939768

Arghya Kusum Mukherjee, Amit Kundu + Show 1 more

Open Access

https://doi.org/10.1080/23322039.2014.939768

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Abstract

AbstractSwarnajayanti Gram Swarozgar Yojana (SGSY) is a government-sponsored microfinance program. The scheme is based on four features: group lending with joint liability, progressive lending, back-ended subsidy, and social capital. We propose a new model of SGSY having these features: group lending with individual liability, progressive lending, back-ended subsidy, and social capital. “Joint liability” clause of the existing model is replaced with individual liability in the new model. The paper shows that problem of adverse selection is removed in both models, i.e. in “SGSY with group lending and joint liability” and “SGSY with group lending and individual liability.” The problem of “moral hazard” is more severe in the existing model of SGSY compared with the proposed model of SGSY. Borrowers are also benefitted from participation in the proposed scheme of SGSY than that in the existing model of SGSY.

Highlights

The literature points out several advantages of joint liability: it solves informational asymmetries by shifting the burden from the lender to the clients (Ghatak & Guinnane, 1999) resulting in lower transaction costs for the institution
We have shown that “individual lending with progressive lending and backended subsidy” cannot solve the problems arising from information asymmetry in the credit market
Our proposition is: Proposition 3: The problem of moral hazard will be less severe in Swarnajayanti Gram Swarozgar Yojana (SGSY) “program with group lending and individual liability” than “SGSY program with group lending and joint liability”

Summary

Group lending and adverse selection

The group gets Rs.“2a”/ as credit and this is distributed between the two borrowers If both borrowers are successful, “group” can repay the loan and receive back-ended subsidy. Group lending with joint liability If partner of a borrower chooses an action p/, the payoff function of the borrower who chooses an action p is: ΠijC = pp∕(YH − r) − p(1 − p∕)r − p2∕2 + 1∕ p{Y2H − 2ar} + (acr)(p∕ + p − p p∕). Substituting the value of r in the zero profit condition of the FI, under joint liability, progressive lending, and back-ended subsidy:. This is in same vein to Ghatak and Guinnane (1999).

Group lending with individual liability

Non-cooperative decision

Conclusion