Do Social Ties Trump Collateral in Determining Loan Performance? Evidence Using Same Day Loan Repayments

Abstract

We compare default rates of collateral based individual loans and joint liability based group loans in situations where the same individual is required to repay both the types of loans on the same day. We find that among such pairs of loans, group loans out-perform by 10.1 percentage points. The results hold even when the collateral on individual loans are relatively easily enforceable. Moreover, the out-performance of group loans increases during periods of economic distress. Our results show that social ties are more potent than collateral based lending in enforcing loan contracts.

Keywords: Banking; Collateral Based Lending; Group Loans

JEL Classification: G21; G19