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

60 Pages Posted: 24 Jun 2019

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Prasanna

Indian School of Business

Nitin Vishen

Indian School of Business

Date Written: June 23, 2019

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

Suggested Citation

Agarwal, Sumit and Tantri, Prasanna and Vishen, Nitin, Do Social Ties Trump Collateral in Determining Loan Performance? Evidence Using Same Day Loan Repayments (June 23, 2019). Available at SSRN: https://ssrn.com/abstract=3408622 or http://dx.doi.org/10.2139/ssrn.3408622

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Prasanna Tantri (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India
9160099959 (Phone)
500032 (Fax)

Nitin Vishen

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India
+91-8521150372 (Phone)

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