Repayment Performance and Costs of Defaults in a Group Lending Programme-A Case Study in Urban Microfinance

Under the Joint Liability Groups (JLGs), 'joint liability' feature ensures that if any one member of the group fails to repay her loan, all group members are treated jointly being in default; thus the repayment responsibility becomes a collective one. Though this may result in collective responsibilities and peer pressure, many factors may weaken the repayment performance of group lending under joint liability. Evidence indicates that repayment incentives for a good borrower will disappear under joint group liability when there is an expectation that a significant number of group members will default. Besides, the unilateral focus of Microfinance Institutions (MFIs) to achieve high repayment rates, among other factors, may lead to wilful defaults with hidden costs for regular repayment clients.

The paper explores the hidden delinquency behind the 100% repayment performance of an urban MFI. In particular, the study looks at the extent of loan delinquency among borrowers of an MFI located in a peri-urban area of Uttar Pradesh, and the financial and non-financial costs of such defaults borne by repayment clients. Findings indicate that the recovery mechanism with an additional 'joint centre liability' feature ensured 100% on time repayment record (OTRR) with no financial costs due to hidden delinquency for the MFI. The costs of delinquent or default clients fell on the regular repayment poor clients. It was found that the cost of borrowing for the repayment clients increased from 18% to 30%; and the average cost for each repayment client was found to be Rs. 49.70 per week, besides the non-financial costs like personal hardships in arranging money to repay the defaulter's share, time and energy lost in unsuccessful attempts to recover from the defaulters who had run away or moved away.