How peer mechanism impacts loan repayment in a Self-help group?: An empirical study in India

TL;DR

This study explores how peer mechanisms in self-help groups in India affect loan repayment, finding that peer monitoring and leadership help, but excessive sanctions can backfire.

Contribution

The study empirically evaluates the impact of peer selection, monitoring, and sanctions on loan repayment in Indian self-help groups.

Findings

Peer selection reduces adverse selection in self-help groups.

Peer monitoring helps mitigate moral hazard among group members.

Excessive peer sanctions can lead to misuse of loan funds.

Abstract

Women’s empowerment through financial inclusion is an important sustainable development goal. Formal institutions and banks are hesitant to lend to the poor due to the lack of collateral and information asymmetry. The self-help groups address this gap through a social contract based on social capital and joint liability. The joint liability gives rise to a peer mechanism in the form of peer selection, monitoring and peer sanctions. This study examines how peer group in West Bengal, India, using data from 400 members and ordered logistic regression. As per the findings, peer selection reduces adverse selection, and peer monitoring mitigates moral hazard among the members of the group. Further leadership and access to technology strengthen the repayment behaviour. However, excessive peer sanctions can lead to increased misuse of funds. The study aims to highlight the potential limitations of the peer mechanism in reducing information asymmetry and increasing repayment of loans with policy implications.

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