Does Social Capital Positively Influence Loan Performance Even During a Crisis?

Journal: Journal of Development Economics 

Synopsis:  

The paper examines whether joint-liability group loans, which leverage social capital, perform better than individual liability loans, especially during economic crises. The study uses data from a non-banking finance company in India, comparing loan performance before and during the Covid-19 crisis. 

The researchers found that group loans had lower delinquency rates during the crisis, suggesting that social capital played a role in repayment discipline. The study indicates that peer pressure within borrowing groups was likely the mechanism behind this outperformance. Even when traditional enforcement methods like group meetings were not feasible due to lockdowns, group loans still performed better, pointing to the robustness of social capital. 

The findings highlight the potential of social capital in mitigating credit risks, especially in times of economic stress. The research suggests that group loans can be a more resilient lending model in emerging markets, helping borrowers maintain access to finance during crises.