| Pub. Date | : Nov, 2021 |
|---|---|
| Product Name | : The IUP Journal of Bank Management |
| Product Type | : Article |
| Product Code | : IJBM21121 |
| Author Name | : Nishi Malhotra* and Pankaj Baag** |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 23 |
Using agency theory as theoretical lens, this paper examines the obstacles that Joint Liability Groups (JLGs) face in providing credit to the unbanked and the underbanked. A thorough literature study was used to analyze the data. Most underbanked and unbanked persons lack collateral, and lenders know nothing about their creditworthiness. Thus, moral hazard and adverse selection are concerns. Large banks are not willing to provide access to finance to micro borrowers. JLGs use peer monitoring and social capital to help the poor and unbanked have access to financial services. In addition, the study demonstrates the importance of risk and social homogeneity in JLG's success monitoring. As a result of the absence of regulation, JLGs are unable to preserve financial records or have regular meetings. The group's success is determined by financial literacy and social intermediation. This study is the first to examine SBLP (Self-Help Group- Bank Linkage Program) via the lens of agency theory and social contracting, and will be of interest to academics and bankers. It found that peer monitoring and enforcement can help increase loan repayments and financial sustainability for JLGs. This study will also help build collective credit agreements and social contracts for micro borrowers through JLGs.
Globally, there are 1.7 billion people who are financially excluded (Beck et al., 2004), who do not have access to physical collateral and suffer from information asymmetry, due to which the formal financial institutions are not willing to lend money to them. These are the unbanked and underbanked. Moneylenders having access to the local information and knowledge about the client could profitably expand into the rural hinterlands (Rosenberg, 2009). Most of the informal finance sources such as moneylenders and chit funds charge extremely high rates of interest, which leads to the vicious debt trap for the poor. Further, Beaman et al. (2014) has explored the reasons for not lending to the poor and marginalized as higher transaction costs and higher contracting costs, and lack of financial management skills. Due to credit rationing