Group lending to a borrower network: a partial joint liability model

Usha Sridhar; Sridhar Mandyam

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Need to know

A new mathematical framework with a network structure embedded in the borrower group analyses small loan disbursals against social collaterals.
A limited joint liability scheme with incentives is proposed where the borrowers need to provide guarantees only to their immediate neighbors in the network.
A weighted quadratic mean-variance model analyses the return and risk for a lender; for given default probabilities of the borrowers.
The impact of network structure on the repayment behaviour of the borrowers is highlighted.

Abstract

ABSTRACT

We introduce a new group lending scheme that provides small loans against social collateral, with a primary focus on socially networked groups of prospective borrowers. We explore a quadratic mean-variance model to analyze the return and risk that a lender can expect given the default probabilities of the borrowers. A limited joint liability scheme with incentives is proposed in which the borrowers need to provide guarantees only to their immediate neighbors in the network.We highlight some features and establish the theoretical foundation of the model. The working of the model is demonstrated using synthetically generated network data.

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