Does Social Capital Positively Influence Loan Performance even during a Crisis?

Abstract

Theory suggests that the relative performance of group loans over individual loans should deteriorate during a crisis due to group members defaulting in anticipation of default by other members or due to mass strategic defaults. However, it is difficult to test the hypothesis in a crisis due to differences in the types of borrowers of the group and individual loans. We overcome the challenge by comparing the performance of the simultaneous group and individual loans of the same individual before and during the COVID-19 crisis in India. We find that the delinquency rate of group loans is 35% lower.