Dynamic Incentives in Microfinance Group Lending

One of the most essential tools of poverty reduction would be theviable expansion of institutional credit facilities to large sections of the people whoneither have adequate collateral nor credit history to secure a loan. In this backdrop,social collateral is popularized through the group lending programs to address thecredit market problems. Microfinance through group lending is acting as a screeningdevice; the joint liability mechanism creates incentives for internal monitoring. Hence,it has received a lot of attention from policy makers as well as academicians. It isplaying an important role in delivering financial services to the “socially andeconomically excluded” poor, in general, and women, in particular. The group lendingworks with various dynamic incentives. One such kind is principle of progressive lendingand it plays a vital role in sustaining the groups for the persistent delivery ofmicrofinance services to its members. In progressive lending, a typical borrowerreceives very small amounts at first, which increases with good repayment conduct or itlinks new, larger loans to past repayment. This article explores possible theoreticaland empirical relationship between progressive lending and its determinants in grouplending approach. The primary survey was conducted in 10 villages covering 106 self-helpgroups and 318 members in Karnataka, India. The empirical results show the progressivelending amount rising up to 698% of the initial loan of the self-help groups