Intra-Group Transfers and Group Formation

This paper analyzes different intra-group transfer schemes and the resulting types of group formation. It introduces the concept of partial joint liability and revenue sharing (PJLRS), and shows that this form of intra-group transfer results in heterogeneous group formation. Group formation is a crucial part of joint responsibility based group lending. Self-formed groups provide mutual guarantees by being jointly liable for loan repayment. Study findings indicate that in PJLRS:

• Risky borrower compensates the safe one by sharing a portion of returns if successful;
• Safe borrower is jointly liable for repayment if he is successful and the risky borrower is unsuccessful;
• Safe borrower is able to fulfill his individual repayment liability if he is unsuccessful and the risky type is successful;
• Risky borrower is not jointly liable for repayments.

PJLRS works like risk pooling in the sense that if group members are in the same occupation and have the same source of income then adverse shocks will affect them simultaneously and may not help in meeting repayment obligations.