Group-lending with sequential financing, joint liability and social capital

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Group-lending with sequential financing, joint liability and social capital

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Prabal Roy Chowdhury () (Indian Statistical Institute, New Delhi)

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Prabal Roy Chowdhury

Abstract

We examine group-lending under sequential financing. In a model with moral hazard, social capital and endogenous group formation, we identify conditions such that sequential financing with joint liability leads to positive assortative matching between borrowers with and without social capital and, moreover, `bad' borrowers are partially screened out, thus resolving the moral hazard problem to some extent. Further, if the later loans are not too delayed, then under these conditions the expected payoff of the bank is greater compared to that under joint liability lending. Positive assortative matching or sequential financing (specially in the absence of joint liability) are no panacea though.

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Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 04-23.

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Length: 34 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:ind:isipdp:04-23

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Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
O1 - Economic Development, Technological Change, and Growth - - Economic Development
O2 - Economic Development, Technological Change, and Growth - - Development Planning and Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-05-14 (All new papers)
NEP-CWA-2005-05-14 (Central & Western Asia)
NEP-FIN-2005-05-14 (Finance)

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- Prabal Roy Chowdhury, 2003. "Group-lending: Sequential financing, lender monitoring and joint liability," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 04-10, Indian Statistical Institute, New Delhi, India. [Downloadable!]

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