Rotating Savings and Credit Associations as Insurance

Recent theoretical research on rotating savings and credit associations (Roscas) suggests that identical individuals prefer a random to a bidding Rosca when participants save for a lumpy durable or an investment good. Here,in contrast, under the assumption that participants are risk averse and that their incomes are stochastic and independent, it is shown that a random Rosca is not advantageous, while participation in a bidding Rosca improves ex ante expected utility if temporal risk aversion is less pronounced than static risk aversion. When information on individual incomes is private, fixed contributions to a bidding Rosca help to mitigate the problem of information asymmetries. When information on incomes is public, a lack of enforceability of variable contributions may explain the existence of Roscas instead of more efficient insurance arrangements.

Credit Constraints as a Barrier to Technology Adoption by the Poor: Lessons from South-Indian Small-Scale Fishery

technology adoption, inequality, fishing sector, India

Cosigners as Collateral

We investigate the role of cosigners as collateral using data from a South Indian financial institution. Using an exogenous change in the cosigner requirement, we establish a negative causal effect of cosigners on defaults: an increase in the number of cosigners reduces defaults all these equal. Our results suggest that a one-sixth increase in the number of cosigners reduces the incidence of a default by 7.5 percent. While most theories of collateral predict that increased cosigners will reduce defaults, we are first to find empirical evidence of this effect.credit, default, cosigner, rosca

The Tsunami and the Chit Fund- Evidence from the Indian Ocean Tsunami Hit on Credit Demand in South India

We analyze the effects of the 2004 Indian Ocean Tsunami on credit demand in South India. Combining data from a semi-formal financial intermediary with geophysical data on the Tsunami, we estimate the extent to which the price of credit and the structure of credit flows changed in response to this shock. We find a significant increase in the interest rate by 5.3 per cent on average in the affected branches around the Tsunami. Interest rates increased most dramatically in the first three months after the Tsunami hit and decreased subsequently over the year 2005. We conclude that (i) funds provided by Roscas did play a role for coping with this huge negative shock, (ii) repercussions of the Tsunami in the Rosca credit market were limited in terms of the order of magnitude of effects, and (iii) semi-formal credit and official aid are substitutes as disaster coping mechanisms rather than complements. --Roscas,Credit and Savings Associations,Rural Finance,Microfinance,Coping Strategies,Natural Disaster,Impact Evaluation

Adverse Selection in Credit Markets: Evidence from a Policy Experiment

We test if riskier borrowers are willing to pay higher interest rates than safer borrowers are as predicted by Stiglitz and Weiss (1981). The data are from an Indian financial institution where interest rates are determined by competitive bidding. The government imposed an interest rate ceiling in 1993 and then relaxed the ceiling in 2002. Changes in default patters are analyzed before and after each of these policy changes. We find no evidence of adverse selection despite the use of collateral as a screening device. This study isolates adverse selection from moral hazard and controls for information on riskiness observed by the lender but not by the researcher.Defaults, Risk, Auctions, Asymmetric Information

Adverse Selection in Credit Markets: Evidence from a Policy Experiment

We test if riskier borrowers are willing to pay higher interest rates than safer borrowers are as predicted by Stiglitz and Weiss (1981). The data are from an Indian financial institution where interest rates are determined by competitive bidding. The government imposed an interest rate ceiling in 1993 and then relaxed the ceiling in 2002. Changes in default patters are analyzed before and after each of these policy changes. We find no evidence of adverse selection despite the use of collateral as a screening device. This study isolates adverse selection from moral hazard and controls for information on riskiness observed by the lender but not by the researcher.Defaults, Risk, Auctions, Asymmetric Information

Cosigners as Collateral

We investigate the role of cosigners as collateral using data from a South Indian financial institution. Using an exogenous change in the cosigner requirement, we establish a negative causal effect of cosigners on defaults: an increase in the number of cosigners reduces defaults all these equal. Our results suggest that a one-sixth increase in the number of cosigners reduces the incidence of a default by 7.5 percent. While most theories of collateral predict that increased cosigners will reduce defaults, we are first to find empirical evidence of this effect.credit, default, cosigner, rosca

Financial Fragmentation despite Arbitrage

If there were no impediments to the flow of capital across space, then interest rates would equalized. We provide evidence to the contrary. We find significant differences in interest rates across the South Indian state of Tamil Nadu, i.e. evidence that financial markets are fragmented. We also find evidence of limited arbitrage across financial markets. --credit constraints,informal finance

Cosigners Help

We investigate how well social collateral does as an alternative to traditional physical collateral. We do so by studying cosigned loans - a borrower´s loan is backed by the personal guarantee of a cosigner. We use a regression discontinuity approach with data from South Indian bidding Roscas. Our main finding is that cosigners do indeed provide social collateral: doubling the number of cosigners halves the probability of arrears for high risk borrowers. We then distinguish between different theories of social collateral. Cosigners may be e¤ective as a monitoring device (a borrower would pay to rid herself of the nuisance of a cosigner) or as an insurance device (a borrower would pay for the benefit of a cosigner). We show that these two interpretations of cosigning have different empirical predictions in the context of a bidding Roscas. We find support for the insurance role of cosigners. --credit,default,cosigner,rosca