KATHOLIEKE UNIVERSITEIT LEUVEN FACULTEIT ECONOMISCHE EN TOEGEPASTE ECONOMISCHE WETENSCHAPPEN DEPARTEMENT ECONOMIE

DETERMINANTS OF MICROFINANCE GROUP PERFORMANCE: AN EMPIRICAL ANALYSIS OF SELF HELP GROUPS IN INDIA

Charlotte VERHELLE Lodewijk BERLAGE

Contact person: Lodewijk Berlage, Department of Economics, K.U. Leuven, Naamsestraat 69, B-3000 Leuven, Belgium. Email: lodewijk.berlage@econ.kuleuven.ac.be

2003

TABLE OF CONTENTS Section 1 Section 2 Introduction Literature on repayment performance in microfinance 2.1. 2.2. Section 3 Section 4 Section 5 Theory Empirical analysis

Structure of group based microfinance systems in India The promoting NGOs The data 5.1. 5.2. 5.3. Data Collection and Preliminary Data Analysis Measurement of SHGs performance Description of potential determinants of performance

Section 6

Econometric analysis of determinants of success 6.1 6.2 Regression results: first approach Regression results: second approach

Section 7 References Appendix

Conclusion

SECTION 1 INTRODUCTION
Since the 1970s, microcredit and subsequently microfinance programs have been promoted in many developing countries to meet the financial needs of the rural poor. Poor peoples access to financial services has traditionally been restricted due to a combination of information and enforcement problems with high transaction costs involved in lending small amounts to a large number of poor households. The new microfinance institutions seem to be able to circumvent the problems faced by formal financial institutions by relying on information flows within tightly knit communities and on the use of social collateral to alleviate respectively the information and the enforcement problems. The apparent success of several microfinance schemes, e.g. the Grameen Bank solidarity group scheme, incited researchers to examine the determinants of successful performance and practitioners to replicate successful schemes. The spread of these schemes was encouraged by the

Microcredit Summit of 1997, where it was decided to advance by 2005 $21.6 billion to 100 million of the worlds poor in the form of micro enterprise loans. With donor funding pouring in while available resources are being reallocated from traditional poverty alleviation programs to microfinance, a proliferation of new microfinance initiatives has been observed. Often these are replications of successful schemes or methodologies, frequently applied in a social and cultural context which is different from that of the prototype. For the success of such replications it is important to understand the roles of the various factors driving microfinance performance.

Theoretical insights as to the determinants of successful microfinance performance abound. The empirical research, however, falls short of theory. Several authors (e.g. Morduch (1999)) have suggested that narrowing the gap between theory and evidence could be an important step towards evaluating and improving programs. The purpose of this paper is to contribute to this purpose by investigating the effects on the performance of Self Help Groups (SHGs) in India of the mechanisms identified in the theoretical literature.

The paper is organized as follows: the rationale for microfinance and the empirical evidence of the determinants of group performance are discussed in the following section. In section 3, we outline the structure of the Self Help Group microfinance system in India and in section 4 we describe the major characteristics of the supporting NGOs included in our survey. The survey covered 63 randomly selected Self Help Groups in Chhattisgarh; these groups are supported by four different NGOs. We start our empirical analysis in section 5 with a description of the data collection and some descriptive statistics on performance indicators

and on possible determinants of success. In section 6 we discuss the results of an econometric analysis on the link between performance and potential determinants. Section 7 concludes.

SECTION 2 LITERATURE MICROFINANCE

ON

REPAYMENT

PERFORMANCE

IN

2.1.

Theory

The success of microfinance in terms of credit repayment triggered the interest of many economists in the mechanisms generating these high repayment rates. Several models of joint-liability lending have been proposed that stress various aspects of microcredits informational and enforcement advantages over other forms of lending. Through joint-

liability lending microfinance institutions can lessen the three major problems facing formal credit institutions in lending to the poor. These problems are: (a) to ascertain what kind of a risk the potential borrower is (the problem of adverse selection), (b) to make sure she will utilize the loan once made, properly, so that she will be able to repay it (the problem of moral hazard) and (c) to find methods to force the borrower to repay the loan if she is reluctant to do so (the enforcement problem). By utilizing the informational advantages of members

belonging to the same community and their potential to exert pressure on borrowers, borrowing groups under a joint-liability contract are in a better position than formal banking institutions to address these problems (Ghatak and Guinnane, 1999). Hence, the functions of screening, monitoring and enforcement of repayment are to a large extent transferred from the financial institution to the group members (Zeller, 1998). This reduces transaction costs and renders banking with poor loan applicants less costly than traditional banking practices for financial intermediaries.

Under imperfect information, joint liability may first of all be used as part of a screening mechanism to mitigate the problems created by adverse selection. A vast literature

investigates this peer selection effect of joint liability (see among others Varian (1990), Ghatak and Guinnane (1999), Ghatak (1999, 2000) Laffont and NGuessan (2000) and Armendriz de Aghion and Gollier (2000)). By drawing on local information networks group lending enables the financial institutions to separate low risk from high risk borrowers. The key is that group-lending schemes provide incentives for similar types to cluster together, the so called assortative matching property (Stiglitz, 1990).

It is argued by Zeller (1998) that the often-postulated risk homogeneity among group members has trade-offs by reducing the groups ability to repay loans in times of distress and

to take advantage of more risky, but more profitable, enterprises by spreading risks among members of the same group. In a context of missing insurance markets, Sadoulet (2000) concludes that groups homogeneous and heterogenous in risk profiles are both formed. The heterogeneous groups result from borrowers desire to maximize the expected returns. Thus risk heterogeneity in groups not only emerges as a second-best due to matching frictions, but also as a rational response to missing insurance markets (Sadoulet and Carpenter, 2001).

In addition, group credit alleviates the moral hazard or incentive problem by inducing members of credit groups to monitor their peers (Wenner, 1989 in Wenner, 1995 and Stiglitz, 1990). In relatively small groups consisting of neighbours, diversion of funds is easily detected and members are in a good position to assess whether the necessary diligence and appropriate production techniques, that maximize the chances of project success, are applied. Furthermore, they have access to superior enforcement technologies in the sense that they can impose social sanctions upon peers who default strategically. As the group members lose access to future credit in case the group defaults, they have an incentive to monitor each other and to enforce debt repayments by threatening with social sanctions. Joint liability

agreements can thus potentially induce peer monitoring, reduce the incidence of strategic default and enhance the lenders ability to elicit debt repayments (Armendriz de Aghion, 1999).

Theories of peer monitoring (besides the above mentioned, see also Besley and Coate (1995), Ghatak and Guinnane (1999) and Conning (1999)) find that as long as social sanctions are effective or monitoring costs are low, joint-liability lending will improve repayment rates through peer monitoring, even when monitoring is costly.

The apparent dependency of the effectiveness of peer monitoring in deterring moral hazard upon the ability to impose social sanctions, leads us to the enforcement issue. The

enforcement problem arises from the lenders limited ability to apply sanctions against a delinquent borrower. Microfinance institutions are widely perceived to face the twin

disadvantages of operating in environments where diversion is easy and collateral is scarce. Groups, however, may have a comparative advantage in the enforcement of loan repayment. While the formal lender usually has limited options to compel repayment from delinquent borrowers, group members can potentially use social sanctions or seize physical collateral of the defaulter. Besley and Coate (1995) show that the wrath of other group members incurred by the defaulter under group lending may constitute a powerful incentive device in tightly knit communities. Hence, if social penalties are sufficiently severe, group lending will

necessarily yield higher repayment rates than individual lending. Without the pressure of

sanctions against a defaulting member, group loan repayment may be either higher or lower than under individual lending.

Furthermore, group members appear to be in a better position to assess the reason for default and to offer insurance services to members experiencing shocks beyond their control, while sanctioning wilful defaulters (Sharma and Zeller, 1997). Besides, under joint-liability

lending, successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient returns (Besley and Coate, 1995). Sadoulet (2000) points out that the ability of borrowers to exclude defaulters from future rounds of loans allows insurance contracts to be sustained and that the existence of a sanctioning mechanism allows their enforcement. Hence, Sadoulet and Carpenter (2001) conclude that joint liability makes promises of insurance credible.

Summarizing, the vast theoretical literature shows that joint liability entails an enhanced repayment performance through its self-selection effect, mitigating the adverse selection problem, through its reliance upon existing social ties and peer monitoring, deterring moral hazard, and through its use of social sanctions and insurance mechanisms, alleviating the enforcement problem. Nevertheless, joint liability also has several disadvantages (Sharma and Zeller, 1997). Members may have an incentive to undertake riskier projects, as the peers are liable for debt repayment; hence the borrower not necessarily bears the full burden of default. Furthermore, as pointed out by Besley and Coate (1995), the borrowers assessment of his/her peers likelihood of defaulting can trigger the borrowers own decision to default. This could lead to a debtor run or domino effect, whereby all group members default on their loan even when some would or could have repaid their individual loans.

Besides, Paxton, Graham and Thraen (2000) remark that in practice members of lending groups rarely are held liable for repayment of loans of other group members, but that instead they are barred from future access to loans. This is in line with the critique of Morduch (1999) that many incentives are perhaps wrongly attributed to the joint-liability component, while they are more likely to be driven by the non-refinancing threat or other mechanisms differentiating microfinance contracts from standard loan contracts. In his view the use of dynamic incentives and regular repayment schedules to help maintain high repayment rates without requiring collateral and without using group lending contracts that feature joint liability is often disregarded.

The so-called dynamic incentives refer to a stream of increasingly larger loans1. The repeated nature of the interactions and the credible threat to cut off any future lending when loans are not repaid can be exploited to overcome information problems and improve efficiency, whether lending is group-based or individual-based (Armendriz de Aghion and Morduch, 2000). Sadoulet (2000) points to what he regards as a popular misconception of the role of social collateral. In his paper the desire to maintain access to credit, not the threat of social sanctions is a primary incentive for repayment. If borrowers do not want to maintain access to future loans, they will form groups with other such borrowers and collude against the bank.

Competition, easing defaulters access to alternative credit sources, may harm the strength of this dynamic incentive. For the same reason, the progressive lending cum non-refinancing threat will work better in areas with relatively low mobility. Borrowers may also be inclined to default on their last loan if the program is known to terminate.

A regular repayment schedule with repayment starting nearly immediately after disbursement enables the lender to screen out undisciplined borrowers and gives an early warning about emerging problems. Besides, the lending institutions are partly lending against the

households other income sources, not just the income stream of the risky project as this does not materialize instantly.

In brief, we conclude that there may be more to microfinance than joint-liability lending. Although the mechanisms and incentive devices through which joint liability may enhance repayment performance have been extensively discussed in the theoretical literature, there seem to be other forces at work as well. Especially the positive impact of a progressive lending mechanism in combination with denial of additional credit upon default and of the use of regular repayment schedules may have been underestimated.

2.2.

Empirical analysis

As mentioned by among others Wydick (1999) and Paxton, Graham and Thraen (2000), empirical testing lags behind the extensive theoretical literature. In a first attempt to fill this gap, Wenner (1995) examines the determinants of performance of 25 Costa Rican credit groups. He finds evidence that the use of inside information on character attributes, such as credit worthiness, in credit groups reduces the incidence of default by individuals. Repayment performance was better in groups engaged in active screening of their members. However, this conclusion should be interpreted with caution. Of the two measures of

Hulme and Mosley (1996) term this progressive lending.

screening used, only one (the existence of a written code) supports this conclusion. The other proxy (informal screening according to reputation) surprisingly and unexpectedly affects delinquency in a highly significant, positive way. The explanation could lie in the fact that this proxy captures some aspects of social ties. As collusion may be more likely and

enforcement more difficult in the presence of previously existing social ties (see among others Wydick, 1999 and Laffont and NGuessan, 2000), this result is hardly surprising. Wenners analysis also suggests that savings mobilisation, which acts as a kind of intra-group insurance, and more isolated communities are linked with better performance.

Sharma and Zeller (1997) also observe the positive impact of relatively remote communities, and even of communities that have higher than average rates of poverty, on the repayment rates in a sample of 128 groups interviewed in Bangladesh. The more remote the village, the less buoyant the local economy and the less alternative sources of credit available, the greater the value placed on the credit services of the group program. This is also apparent from the negative impact that informal mutual self-help networks and insurance groups in the village produce on the repayment performance of the groups examined. The repayment rates are especially high in groups which were initiated by the group members and consist of risk averse women with marginal land holdings. On the other hand, a high proportion of relatives within a group and high loan amounts have a negative impact on group performance. According to Sharma and Zeller (1997) the success of group lending cannot just be attributed to innovations that reduce the cost of screening, monitoring and enforcing loan contracts, but also to the perception of the long-lasting nature of the program by the intended borrowers in small rural communities. Zeller (1998) emphasises the importance of risk pooling and informal intra-group insurance2 in driving the success of 146 groups in Madagascar. Gains in the repayment rates due to risk diversification diminish at the margin, however, because of increased costs of coordination, monitoring, and moral hazard that come with greater heterogeneity in groups. Zellers social cohesion index counting the number of common demographic and social characteristics among group members is found to be significantly linked with the repayment rate. Furthermore, the analysis confirms that clear internal rules of conduct, group size, communities characterized by a relatively high degree of monetarization, the presence of several agricultural input retailers and a lower exposure to covariate risks significantly improve repayment performance. As the latter characteristics are more likely to prevail in

Nevertheless, if a group member strategically defaults on the loan, the group members are observed to enforce repayment by liquidating assets of the defaulting member (Zeller, 1998).

less remote villages, Zellers conclusions are contrary to the findings of Wenner (1995) and Sharma and Zeller (1997).

Wydick (1999) analyses the effect of social ties, peer monitoring and group pressure on the provision of intra-group insurance, the mitigation of moral hazard and overall group repayment performance in 137 Guatemalan groups. The success of group lending appears to be driven by peer monitoring and intra-group insurance. The potential of social sanctions plays a secondary and supporting role. In rural groups, the groups willingness to exert peer pressure on defaulting members nonetheless seems to be of primary importance in deterring moral hazard behaviour. In brief, borrowing groups appear to function both as miniature insurance networks and as juries, helping those with verifiable claims of hardship to repay loans, while threatening indolent and risky borrowers with expulsion from the group. The institutions ability to harness previously existing social ties has virtually no effect on borrowing group performance. Groups characterised before their inception by strong

friendship bonds seem more compassionate towards defaulting members. Wydick concludes that in order to reduce problems related to asymmetric information in credit markets, group lending may be less effective in areas where social ties are strong.

Finally, one hundred forty Burkinabe credit groups were surveyed by Paxton, Graham and Thraen (2000)3. They find the domino effect to be a significant determinant of repayment problems. As more members of the group experience repayment problems, the ability and willingness of the other group members to cover the full repayment diminishes. To a large extent the importance of this domino effect can be attributed to the specifics of the program investigated: the program administers individual loans to each member of the group and relies on joint liability as well as sectoral liability (the entire village is blocked from future loans upon default by a single group)4. In line with the findings of Zeller (1998), group solidarity and risk diversification are key features in overcoming problems. The role of group solidarity outweighs coercive peer pressure behaviour. Due to the better information flow within the relatively small groups, most of the reasons for default in the sample could be classified as uncontrollable and not due to irresponsible or negligent behaviour. Therefore, little or no pressure is exerted. With regard to the risk pooling, the presumed positive effects of

homogeneity are offset by the negative effect of covariant risk. Repayment problems are
3

In order to incorporate traditional, easily measurable socio-economic explanatory variables with more untraditional latent variables like the domino effect and homogeneity, Paxton et al. (2000) develop a multistage mean-covariance model. Although they do not specifically address the endogeneity problem, in this way they also control for possible endogeneity of certain characteristics like homogeneity and peer pressure. 4 As the programs we visited in India do not feature this stringent sectoral liability component, we believe this domino effect to be less of a problem in our groups.

more likely to occur in rural areas. Unlike the findings of Wenner (1995) and Sharma and Zeller (1997), access to other sources of credit does not have a negative impact on the groups repayment performance, but serves as an indication of creditworthiness5. In addition, default seems to increase with subsequent loan cycles. This negative effect is counteracted, however, by the positive influence of adequate leadership and training.

In summary, the existing empirical studies highlight the importance of intra-group insurance, risk diversification, social ties and location in driving the success or failure of groups. Group solidarity and risk diversification appear to be unambiguously linked with higher group loan repayment, while the effect of social ties and remoteness is less clear-cut. Social ties tend to exert a negative impact on group performance. Groups being located in interior villages are mostly found to perform better than their urban counterparts. Group pressure and selfselection seem to play a secondary role.

In view of the beneficial impact on program design and hence on program performance and on poverty alleviation, several authors (see among others Zeller (1998), Sadoulet and Carpenter (2001) and Mahmud (2001)) stress that more empirical research is needed on the determinants of group performance. This paper attempts to accommodate this demand through its examination of the driving forces behind the performance of Indian Self Help Groups.

SECTION 3 THE STRUCTURE OF GROUP BASED MICROFINANCE SYSTEMS IN INDIA

In this section we briefly outline the main group-based microfinance system in India, the Self Help Group approach6. Self Help Groups (SHG) normally consist of 10 to 20 predominantly rural female members. The group formation process may be facilitated by a Promoting Implementing Agency (PIA), usually a NGO, or by a microfinance institution (MFI) or bank. Sometimes a SHG evolves from a traditional rotating savings and credit association (ROSCA) or from some other pre-existing group. SHG members belong to the same village. SHG-membership is normally limited to one person per household.

This also stands in contrast with the theoretical point previously discussed where access to alternative credit sources was deemed detrimental to the strength of the non-refinancing threat and hence group performance. 6 This section is based on Harper (2002) and Verhelle (2001).

The rules and regulations governing the operation of the group are ideally set by the group itself in a democratic manner. However, the promoting institution may assist the group in this respect. During their frequent meetings the SHG members make regular (small) savings contributions. These transactions are recorded in the groups register and, when available, in the individual passbooks. The group can decide to keep the savings fund in cash in order to meet urgent credit needs of the members or to put it on a bank account. Sometimes savings in kind are observed as well, mainly in the form of paddy. Upon accumulation of this savings fund, the group may start lending to its members, for purposes, on terms and at interest rates decided by themselves. Generally, intra-group loans are available for production as well as consumption purposes. The interest rate charged to the members often exceeds that of the formal financial system, but undercuts the interest rate charged by local moneylenders. On average, it amounts to 2 to 3% per month. If desired, the group can apply for outside credit from a bank or a MFI, according to the scheme it belongs to7. The outside credit is used for loans given to individual members, but the group is jointly liable for its repayment. The group may also engage in joint income generating activities, for which specific training may be provided by the promoting institution. Moreover, Self Help Groups often serve as a platform to address community problems or to undertake jointly social activities. Clusters and federations may enhance the effectiveness of SHGs by enabling networking, providing support in the advent of adversity and facilitating representation. Groups need not be involved in all of the above functions. They may satisfy their members needs by taking up only one or a few of the activities mentioned.

The Indian government aims at providing by 2008 credit through the formal financial system to one million SHGs by (Harper, 2002). In order to achieve this, several development programs were joined into the Swarnjayanti Gram Swarozgar Yojana (SGSY)-program, which reaches SHGs through the District Rural Development Agencies and government departments and NGOs. This vigorous promotion by the Indian government8 and the collaboration between the banks, NGOs, MFIs and the National Bank for Agriculture and Rural Development (NABARD) apparently bears fruit, as 149 000 new SHGs took up loans in 2000-2001. This amounts to almost three million clients in one year; it suggests that the actual achievements may exceed the targets.

Several SHG models can be distinguished on the basis of the promoting institution and access to and source of outside credit. We refer to Verhelle (2001) for a detailed overview. 8 In 1992 the Reserve Bank of India (RBI) already encouraged banks to consider credit operations to SHGs as an integral part of their rural credit delivery. SHGs were granted exemption from a number of official regulations, like the obligatory announcement of credit use by the individual SHG member.

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By April 2001 approximately 285 000 SHGs had taken loans from 41 Indian commercial banks, 166 regional rural banks and 111 co-operative banks (Harper, 2002). The average loan per SHG and per member stood respectively at 18 000 Rs.9 and 1 100 Rs. With an average membership of seventeen people per SHG, these figures mean that about four and a half million people in India have access to formal savings and credit facilities through their SHG membership. Well over 95% of the SHG loans are repaid on time.

SECTION 4 THE PROMOTING NGOs

All NGOs visited during our field study promote the Self Help Group approach. However there are different sources for funding the NGOs' activities. Half of the groups interviewed are promoted with the help of funds provided by the government-run SGSY-scheme. In principle, these groups are also eligible for formal bank credit through the SGSY-scheme10. The promotion of the other groups is either funded by the NGOs themselves (Chingari Mahila Samiti), by foreign donor agencies (PRERAK and MSKPP) or by the joint IFADWorld Bank-Indian government scheme (Grihinis Swa Shakti groups). In this section we take a closer look at the functioning and objectives of these four NGOs.

Chingari Mahila Samiti was founded by Ms Sita Devi and six other women. The branch of this small NGO we visited has only two permanent staff members. It is located in Mandir Hasoud, approximately 35 km from Raipur, the capital of Chhatisgarh. The main objective of this NGO is empowerment of women. Chingari Mahila Samiti attempts to achieve this by encouraging women to attend village assemblies, by making sure that the government schemes are implemented correctly and that benefits accrue to the right people and finally, by supporting the formation of Self Help Groups. Ms Sita Devi is a dynamic lady, who completed herself only lower primary education. She is involved in SHG activities since 1992. Of the seventy villages covered by this NGO, the branch we contacted covers twenty. The NGO promoted 65 groups till date; thirty groups have been promoted during the last three years. This branch we contacted currently supports seventeen groups. It has stopped its support of thirteen groups, which are now working independently. The Self Help Groups are

The average exchange rate during the period of field study (Jan.-April 2003) amounted to 51.868 Rs./. 10 Upon the positive appraisal of the groups savings and intra-group credit performance by the block officer and bank manager, the group may be accorded a loan up to 25 000 Rs. of which 10 000 Rs. may be used as a revolving fund. This credit is disbursed by a commercial bank. No interest is paid on the revolving fund amount, while 13.5 to 14% interest is charged per annum on the remaining loan amount. Repayment of the SGSY-credit is due after one year, but instalments are flexible. Following timely repayment, another loan up to 125 000 Rs. may be sanctioned. The subsequent loan amount even increases further.

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mainly used as a political platform to address injustices and malpractices at the village level. Hence, the main focus of the SHGs is social and political upliftment11. Besides, Chingari Mahila Samiti encourages the SHGs it supports to undertake income generating activities like goat rearing, group farming and selling of spices.

The two branches of the rather recently established NGO PRERAK (motivator) operate with 18 staff members in 50 villages. The seven fieldworkers of the branch we visited in Gariaband, approximately 150 km from the state capital Raipur, work in the surrounding jungle area. PRERAK pursues the social upliftment of tribal and landless people by striving for the recognition of their land rights, by raising people's awareness, by providing irrigation facilities and by facilitating income generating activities. Five years ago, PRERAK formed its first SHG. All forty women of the village Parsoelie joined the group and initially contributed half a Rupee per month12. PRERAK so far promoted 150 predominantly female groups. It is trying to get the groups registered under the SGSY program13. One third of the groups opened a savings account at a the bank, but none of the groups obtained bank credit. PRERAK gives a grant of 1000 Rs. to each group. All SHG leaders receive management and record keeping training. Many groups undertake joint income generating activities (mahua collection14, pig and goat rearing, paddy trade). In 2002 one hundred groups established their own federation. The federation provides credit facilities to the affiliated groups without imposing interest rate charges or fixed repayment installments.

The Bilaspur-based NGO MSKPP places a strong emphasis on women empowerment. It covers approximately 200 villages in four blocks. MSKPP employs 21 fieldworkers. Since its involvement in SHG activities in 1995-1996, it promoted approximately 300 groups of which sixty are now working independently. Several groups are registered under the SGSY scheme and about fifty groups obtained SGSY-credit. At the end of 2002 thirty SHGs formed a
In 1998 the women of several SHGs manifested against the males alcohol abuse in Mandir Hasoud. The sarpanch (mayor) reacted by destroying the NGO office and the houses of the women who demonstrated. After finding no support from the legislative authorities they went on a hunger strike and in the end were promised compensation to be able to reconstruct their houses. Till date only a few women received this compensation. Many angry family members of the SHG members subsequently prohibited them from participating in the group activities. This led a split in some groups. Nevertheless, most of these members rejoined a SHG later on. Another example of the political commitment of the groups is the case of one group interviewed that is fighting against the government to obtain recognition of land ownership rights. 12 In the meantime (three years ago) the group split into three smaller groups in order to be eligible for the SGSY registration and credit. 13 The increased focus of PRERAK to link the groups with the SGSY program led to the forced split of several groups, which seems to have harmed the groups performance. 14 The Mahua flower is found in the forest from March to May and is used as an ingredient in liquor. Initially, several groups separately sold their collected Mahua flower. Later on they collaborated in order to obtain a more favourable price. PRERAK provides linkages with the market.
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cluster. Most groups interviewed seem to be highly credit-oriented. Hardly any income generating activities are undertaken at the group level due to a lack of expertise in establishing market linkages and in accessing the necessary inputs. However, the demand for this kind of activities is present. The primary objective of Grihini15, an NGO which employs 16 people, is rural womens empowerment through SHGs. Since December 2001 forty Self Help Groups have been promoted under the World Banks Swa Shakti program. In the meantime they also formed 106 groups under the SGSY scheme. The main difference between both schemes is the credit orientation of the SGSY groups, while the Swa Shakti groups are more socially oriented. Grihini closely monitors the groups by attending the monthly meetings and keeping the records. Hence few groups work independently. Eight groups obtained credit under the SGSY scheme. No income generating activities are undertaken at the group level, but especially the Swa Shakti groups are participating in village development activities. The Swa Shakti groups receive training on health-related and miscellaneous other issues. At the time the fieldwork was undertaken, two clusters each comprising five to six Swa Shakti groups started their operations16. The existence of SGSY and Swa Shakti groups in the same village seems to exert a negative impact on the Swa Shakti groups; some quarrels had arisen due to the different treatment regarding outside credit. But Swa Shakti groups seem to generate positive externalities as their existence inspired other villagers to form a group.

SECTION 5 THE DATA

We begin this section with a brief description of the data collection and of some relevant group characteristics. We then describe the variables measuring SHGs performance and the potential determinants of performance.

5.1

Data Collection and Preliminary Data Analysis

The data used in this paper were obtained first-hand during the first months of 2003 through a survey of 63 Self Help Groups. Group interviews were carried out by one of the authors in cooperation with the four NGOs described in the previous section. These NGOs operate in Raipur or Bilaspur district, both in the newly formed state Chhatisgarh17 . One third of the
15

Grihini was founded by a Hirmi-based cement factory belonging to the Danish multinational L&T. 16 In the near future, Grihini is planning to form another five clusters. Upon termination of the Swa Shakti program next year, the NGO will attempt to link the groups directly with a bank. 17 Until November 2000 the area which now forms Chhatisgarh was part of the central Indian state Madhya Pradesh.

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groups interviewed were promoted by the two smaller NGOs Chingari Mahila Samiti and PRERAK (ten groups each); the remaining 48 NGOs were supported by the other two NGOs. With the help of NGO fieldworkers and a map of the respective areas of operation, we randomly selected interior villages and villages along main roads. Within each village we randomly selected the groups to be interviewed. We interviewed a representative sample of groups from the two distinct group schemes SGSY and Swa Shakti implemented by Grihini. Unlike some of the empirical studies mentioned in section 2.2, we conducted the interviews with as many group members as possible in order to prevent the bias implicit in information obtained from just one person, usually the group leader. At the same time, this allowed us to observe the group interaction. All data were cross-checked with the information obtained from the NGO fieldworkers and NGO records.

Only one (urban) group had four men among its twenty members. All other groups had an exclusive female membership. On average, a groups had existed for 23 months, ranging from one month to seven years. On average a group had 13 members. Seven percent of them had joined the group after its creation. On average two members had dropped out. The average age of a group member was 37 years; the average age range was 27 years. On average a group had as many Scheduled Caste (SC) (22%) as Scheduled Tribe (ST) members (20%), while more than half of the group members (55%) belonged to the Other Backward Casts (OBC)18. A minority, on average 3%, belonged to the upper/other castes. Twelve percent of the members were widows and 4% were either single or divorced/abandoned. The majority of the group members (57%) were illiterate. Nineteen percent could read and write their names, the so called neo-literates. Thus the percentage of members who had received some formal schooling was somewhat less than one quarter. For 89% of the members agriculture was the main occupation, while 7% migrated to find work. Of the 52 groups for which we obtained data on landholdings, 35% of the members did not own any land. Seven percent of the SHG members lived in the same household as another member of the same group. An average SHG members household consisted of six people.

Almost one quarter of the groups was changing its leadership in the course of time. On average an SHG leader was 38 years old, neo-literate. In 26% of the groups he belonged to the household of an important villager.

18 In the Indian Constitution of January 26, 1950 certain underdeveloped castes, tribes and other parts of the population are referred to as Scheduled Caste (SC), Scheduled Tribe (ST) and Other Backward Casts (OBC). They were accorded certain privileges such as job reservation in government employment (Vidyarthi and Rai, 1985 in Verhelle, 2001).

14

On average it took 25 days for a group to be formed19; some groups already came into existence after one day, while for others it took 3 months to be started up. Almost half of the groups interviewed belonged to the SGSY-scheme and fourteen percent were formed under the Swa Shakti program. Sixteen percent of the groups encountered some opposition from villagers or family members. On average, a group holds 2644 Rs. of savings in its bank account, 409 Rs. in cash and 100 Rs. in kind (ranging from zero to respectively 33 000 Rs., 6400 Rs. and 3600 Rs.). Four groups did not a bank account, while thirty-six groups did not have cash holdings. Excluding the latter groups raised the average cash holdings to 954 Rs. Only three PRERAK groups saved in kind; the average value of these savings was 2100 Rs. The average amount of outside credit of a group was 3302 Rs. But for the 16 groups with outside credit, the average was 13000 Rs. Ten groups dido not undertake intra-group credit activities. In the groups undertaking such activities on average twelve intra-group loans had been given. Intra-group credit activity was on average started one year after the start up of the groups. The average total of loans ever given to members and non-members was 9671 Rs., implying that on average a loan of 662 Rs. Half of the intra-group loans were used for household expenditures, one fifth for agriculture, 15% for festivals and social activities, 13% for business purposes and the remaining 2% for miscellaneous expenses. Ten groups provided group loans to non-members; these amounted to 30% of the total amount of loans given by these groups. Over the whole sample only 6% of the total amount of loans given by SHGs were awarded to non-members.

5.2.

Measurement of SHGs performance

Worldwide micro-credit groups are mainly formed in order to obtain outside credit. The joint liability aspect of group-lending contracts facilitates the access to outside credit for group members. But in India Self Help Groups conduct several activities. We can distinguish five different categories. In the SHG-context savings constitute the core activity. Once the savings fund of a group is thought to be large enough or in case some members are faced with urgent credit needs, the group can decide to start up intra-group lending. Unlike many group-lending schemes, the Indian SHG scheme thus primarily relies on the savings of its members to satisfy their credit needs. Thirdly, a group can apply for outside credit. This is the only SHG activity which has been extensively documented and analysed as it is the SHG equivalent of the group-lending aspect prevalent in other micro-credit systems. In addition, many SHGs also undertake joint income generating activities in order to increase the groups savings fund or to raise their members' income. Although this could harness and strengthen the group cohesion, failure or disputes arising from the distribution of profits from these activities can
19

This is defined as the number of days in between the day they were informed about the SHGconcept or contacted by a fieldworker and the day they made their first savings contribution.

15

have an enormous detrimental impact upon a group. Lastly, Self Help Group can be used as a platform through which Indian women jointly can undertake social activities. This is also true for male groups, but is of higher importance to women as they often lack the required social status to undertake these activities on their own. This encompass a whole range of activities, including community development activities, raising awareness on (discriminating) traditional customs or practices, the availability and use of social services. Such activities may be the subject of discussions or of actions taken against social injustices.

Unlike the empirical studies mentioned in section 2.2 we therefore not only analyse the SHGs outside credit performance, but also its performance with respect to the other four undertakings. In this subsection we discuss the variables measuring the SHGs performance; in the next subsection we turn to the description of potential determinants of performance.

The first variable investigated is the savings performance, measured by actual savings over planned savings. Each group initially decides upon the amount and the frequency of savings contributions. Multiplying the savings contribution by its monthly frequency, the number of members and the number of months since inception (taking into account changes in the savings contribution and drop outs) gives us the amount the group should have saved at the time the interview was conducted. Comparing this amount with the group' actual savings, i.e. its cash holdings and the balance on its bank account, adjusted for intra-group loans, nonrepaid outside loans and profits from income generating activities, gives us an indication of the groups savings discipline. As can be seen in table 1 the SHGs in our sample had saved on average only 72% of the amount agreed upon.

We capture a groups performance with respect to the intra-group lending activity by three variables. First, we use the proportion of the intra-group loan amount in arrears. Most groups are very flexible with respect to intra-group loan repayments and do not impose a strict repayment schedule. We impose the following schedule: repayment after three months for the first 200 Rs. of credit taken and one month extra for every 100 Rs. exceeding 200 Rs. This seemed to be a not too strict repayment schedule. According to this measure on average 15% of the intra-group loans is in arrears. Secondly, we use a dummy equal to one if at least one intra-group loan is in arrears as measured by the above criteria. We call this the incidence of internal loan delinquency. According to his measure almost half (47%) of the groups involved in intra-group credit are confronted with some repayment problem. Our third measure of intra-group credit performance is the percentage of members who ever accessed credit from the group. This measure captures the outreach of the intra-group credit activity. We can hardly claim a group to perform well with respect to intra-group credit activity if

16

credit is only available for one or two members, even if these repay their loans on time. So far on average 44% of a groups members have obtained a credit. This suggests that on average intra-group credit is quite accessible to group members.

As to outside credit we use two measures. The first is the ratio of outside credit to the actual group savings. This provides an indication of the access to outside credit and of its order of magnitude. On average outside credit was equal to 1.7 times the actual group savings. For the subsample of sixteen groups which so far had obtained an outside credit the ratio was on average equal to six. In contrast to the intra-group loans, the repayment schedule for outside credit is stipulated in advance. For the subsample of the 16 groups which had obtained outside credit, we therefore also use a second indicator of outside credit performance, i.e. the percentage of credit repaid on time. On average sixty one percent of the outside credit had been repaid on time by these groups.

As a performance measure for income generating activities we use the number of income generating activities undertaken by a group. Table 1 shows that on average a SHG undertook as few as 0.37 income generating activities, or approximately one activity per three groups. This small number is due to the large number of SHGs who are not involved in such activities. Only 20 of the 63 SHGs in our sample undertook one or more income generating activities.

In the same way we measure the groups performance with respect to social activities by the number of social activities undertaken. This number is obtained as the sum of positive answers on the following questions: Is the group undertaking community development activities, discussing traditional customs or practices like the age of marriage or giving dowry, discussing the availability and use of social services (e.g. education, particularly for girls, health care or effectiveness of water provision), discussing family problems, discussing roles and decision-making of women and men in the household, taking action against social discrimination? On average, almost two social issues were either discussed or action was taken to remedy them. Only four groups did not undertake any of the above mentioned activities.

Finally, although the performance of groups on each of these distinct features may provide us with useful insights, an index of global performance may be interesting. We opted for the use of a technique of unequal weighting, i.e. the synthetic indicator of the performance proposed by Melyn and Moesen (1991). This technique involves the application of weights which are specific for each observation, in our case each SHG, in such a way that the outcome is most

17

favourable for the observation. It boils down to the solution of a linear programming problem with constraints on weights. The lack of adequate information about the true objectives of each group induces this benefit of the doubt weighting. In this way, the different objectives pursued by a SHG can be incorporated into the performance indicator. As shown by table 1 the performance indictor SHGPI 3 encompasses performance indicators of four distinct categories, while SHGPI 5 incorporates two measures of intra-group lending and excludes outside credit20 .

5.3.

Description of potential determinants of performance

Next, we turn to the potential determinants of performance. They are shown in table 2. These variables will be used as explanatory variables in the regressions discussed in section 6.

The first potential determinant is the degree of self-selection within a group. We measure this by the sum (1 for each positive answer) of whether the group reports it self selected, whether the group explicitly reports people have been refused to join, whether members dropped out (except in case of death or permanent migration) and whether new members joined later21.

The second determinant we consider is social homogeneity. In a segmented society like the Indian one, it is indeed conceivable that persons with a homogeneous background have better information on each other. To measure social homogeneity we consider six characteristics, i.e. age, caste, marital status, education, occupation and land holdings of the group members. Our measure consists of the sum of scores (1 for each positive answer, 0 otherwise) on the following questions: whether the age range within the group is smaller than or equal to 15 years, whether all members belong to the same caste or two castes at most with members of one caste representing at most 10% of the group, whether all members are homogenous in marital status or have at most two distinct marital statuses with members of one marital status representing less than 10% of the group, whether all members attained the same educational status or two distinct ones with members of one educational status representing at most 10% of the group, whether the group reports at most 10% of the members exercising some other kind of income earning activity or occupation than the other group members, and finally whether the group reports at most 5% of the members differing in their land holdings from the other members. On average, the group members have in between two and three of those characteristics in common.
20

In Verhelle (2003) some other SHGPI were used on which the following econometric analysis is based. See table A1 in the Appendix for the description of the other SHGPI. 21 We use a broad measure of self-selection, including ex ante and ex post self-selection, because it is apparent from own observation that much of the screening of members actually occurs ex after a group has been formed. See also Wydick (2001).

18

Next we consider peer monitoring. As a proxy for this variable we use the frequency of group meetings. This frequency promotes an SHGs monitoring ability and activity. Most groups meet once or twice a month.

The fourth potential determinant of group performance is group solidarity or intra-group insurance. We measure this variable by a dummy equal to one if the group members state that they help one another in times of need in other ways than through giving the needy member an intra-group loan. Many groups report paying jointly a members periodical saving contribution or providing some rice or other food item in case a member is affeced by an emergency. In almost half of the groups interviewed we observed the existence of some kind of intra-group insurance.

Fifth we consider group pressure. This is measured by a dummy equal to one if the group states that they are willing to exert pressure on a member who is not living up to her obligations. Less than half of the sample SHGs (38%) expressed their willingness to exert peer pressure.

The dynamic incentive of promised access to progressively larger outside credit is our sixth potential determinant of performance. This variable is again measured by a dummy equal to one for SHGs which belong to the SGSY scheme and zero otherwise. As explained in section 4 the SGSY-schemes distinctive feature is the promise made at the groups start of provision of outside credit upon excellent savings and intra-group credit performance. Upon approval of its first loan application an SHG under the scheme can obtain a first bank loan of up to 25 000 Rs. If this is repaid on schedule a second loan can be obtained for up to 125 000 Rs. Later loans can consist of even higher amounts. The inclusion of several microfinance schemes within our data set gives us the possibility, not available in other empirical studies, to estimate the efficacy of a particular program feature like this dynamic incentive of promised access to increasingly larger outside credit. On the other hand, we should keep in mind that groups belonging to the SGSY-scheme may also share other distinguishing features, e.g. a higher proportion of below poverty line members. Of the 63 groups interviewed 30 belong to the SGSY-scheme.

Finally two control variables are added to the analysis. These are remoteness from basic infrastructure services and the number of SHGs in the village. The first control variable is measured by the mean distance in kilometres of the SHGs meeting place from ten basic infrastructure services, i.e. the nearest health centre, bank, kindergarten, primary school,

19

middle school, high school, panchayat, market, fair price shop and bus stand. For our sample SHGs the average mean distance is 3.5 kilometres. The second control variable measures possible external effects that SHGs may have on other SHGs in the same village. On average three SHGs operate in a sample village.

We now discuss the expected sign of the effect the potential determinants may have on the performance indicators. On the basis of the theoretical literature we expect self-selection, group solidarity and the dynamic incentive of promised increasing outside credit to have an unambiguous positive effect on the performance indicators. Although some authors argue that social ties have a positive impact on group performance, others point to enforcement and collusion problems in the presence of social ties between members, resulting in poorer group performance. Therefore the sign of the effect of social ties on group performance is not a priori clear. Peer pressure is expected to have a positive effect on enforcement of obligations, but it could negatively affect group cohesion and investment choice. Therefore again the sign of its effect on group performance is not a priori clear. The same remark apply to peer monitoring.

The expectations regarding the sign of the effects of potential determinants apply directly to the performance on group savings, intra-group credit and outside credit. But we will also test for the existence and sign of their effects on the groups income generating and social activities.

Remoteness from basic infrastructure services is expected to work against group performance. Scarce resources are diverted to cover the inherently higher transportation costs and fewer investment and market opportunities are available. Besides in remote villages people usually lack access to services like banks and primary health care. Nevertheless, because of the absence of alternative financial services and the limited mobility of people living in remote areas, these are thought to be the optimal environment to use dynamic incentives in micro finance programs (see among others Morduch, 1999). of the effect of the remoteness variable cannot a priori be defined.
22

22

. Again the sign

The coefficient of the interaction term of the SGSY-dummy, representing the dynamic incentive of a promised stream of increasingly larger loans, and the basic infrastructure index shows the effect of this dynamic incentive in remote villages. We do not report the results here as the inclusion of this interaction term brings along a multicollinearity problem. This is not surprising given our limited number of observations. At first sight, however, the results seem to support the hypothesis of a more positive impact of a promised sequence of progressively larger formal loans in interior villages. The estimates are tentative of significant, positive correlation of the SGSY-basic infrastructure index interaction term with intra-group loan repayment, outside credit performance, the number of income generating activities undertaken, the number of social activities undertaken and most general performance indicators. In the case of intra-group loan

20

Many authors postulate a negative impact of increased competition in micro finance on a groups performance. If drop-outs can easily get credit or other micro financial services under another scheme, incentives weaken and the sustainability of the groups is at stake. We check for this by examining the effect of the number of SHGs, regardless of the scheme they belong to, within the same village.

SECTION 6 ECONOMETRIC ANALYSIS OF DETERMINANTS OF SUCCESS

Next we turn to the regression analysis. We test for the existence of a link between each of the eight individual performance indicators and the potential determinants we described in the previous section, and for the sign of the link23.

Before turning to the regression results, we note that it is not possible to extend our results beyond the groups observed. Indeed selection into the Self Help Group scheme is probably non-random, but based on characteristics such as below poverty line status, gender and limited landholdings. Therefore selection bias in the estimators constitutes a problem which we are unable to accommodate. Another potential source of sample selection bias, namely the fact that groups choose on the basis of certain characteristics or factors whether or not to undertake all or some of the five activities mentioned in section 5.2 has been taken care off by using an appropriate estimation technique.

6.1

Regression results: first approach.

The regression results are given in table 324. In this table we mention only the sign of the links (absence of sign implies a positive link) and its statistical significance. Consider e.g. the cell in column four, row three of table three. The negative sign means that there exists the existence of social ties is associated with a lower percentage of members who have had access to intra-group loans. The triple star means that the probability that this link is not systematic and due to chance only is less than 1%. A single and double star mean that the
repayment for instance, the negative effect of the promise of outside credit on the percentage loans too long outstanding is larger in remote areas. Besides the coefficient on the basic infrastructure index remains highly statistically significant and positive, suggesting that groups living in remote areas have a higher loan fraction in arrears. 23 This section gives a concise overview of the econometric analysis in Verhelle (2003). Full details on estimation techniques, biases and impact of potential determinants can be found in Verhelle (2003). 24 Numeric results, with inclusion of the selection part of the equations and results for the other SHGPI, can be found in tables A2 to A7 in appendix.

21

statistical significance of a link is established at respectively the 5% and 10% confidence levels. Except for one of the regressions capturing the groups outside credit performance, all models seem to have some explanatory power. The Wald test statistic of these models exceeds the critical value of 15.5. Therefore we can reject the null hypothesis that all coefficients except the constant term are equal to zero.

As the table shows the results we obtain for the different performance measures are quite diverse. We first consider the six financial performance indicators as well as the two synthetic indicators.

1.

Self-selection has only a limited effect on financial performance. It is positively

associated with group savings, but it raises the probability of arrears. The latter is contrary to what was a priori expected. 2. Group solidarity (or intra-group insurance) seems crucial in driving the results. It has

a statistically significant negative impact on group savings, which could be the result of the reliance on intra-group solidarity. But it is associated with higher access of members to intragroup credit and of the group to outside credit. It is also associated with higher values of the synthetic group performance indicators. 3. The dynamic incentive of promised access to increasingly larger outside credit also is

a decisive determinant of group performance. It is associated with a better repayment performance for intra-group credit and with higher outside credit obtained. But it is negatively linked with the outside repayment of outside credit. We see no easy explanation for this negative link. A tentative explanation could be that the SHGs under the SGSYscheme perceive the scheme as temporary only. But we have no evidence to support this hypothesis. Observe also that there is no statistical evidence of a link of this variable with the overall performance indicator. 4. Social ties are found to have detrimental effects on the groups performance. They

raise the probability of intra-group loan arrears and the arrears on outside credit and they are negatively associated with overall performance. 5. Compared to the other group characteristics, peer monitoring, proxied by the

frequency of meetings, and peer pressure play only a limited role in explaining group performance. Monitoring affects savings positively, but peer pressure has a negative bearing on the probability of intra-group loans in arrears. 6. Both control variables, i.e. the distance to infrastructure services and the existence of

several SHGs in the village, are associated with several performance indicators in a

22

statistically significant way. The regression results indicate that SHGs remote from basic infrastructure perform worse than other SHGs except for their outside credit repayment performance. These findings are in line with the theoretical presumptions of the difficult working environment of groups in remote areas hampering in general their performance, but enhancing their performance with respect to outside credit repayment due to the threat of being cut off from future outside credit upon default. Finally, the presence of other SHGs in a village has predominantly positive effects, except for performance on intra-group credit repayment.

We now turn to the two remaining performance indicators, income generating activities and social activities. The former are positively associated with self-selection and by frequency of meetings and negatively with intra-group insurance and the promise of progressively increasing outside credit. Again, we have no easy explanation for this negative link. SHGs in remote villages and the presence of other SHGs seem to stimulate IGAs. Social activities are negatively associated with social ties and positively with intra-group insurance.

Overall, social ties, intra-group insurance and the dynamic incentive of a promised progressively larger stream of outside credit play a crucial role in determining the groups performance. But some of the negative associations are difficult to explain. Besides the remoteness and externalities from the presence of other SHGs in the village also determine SHGs succes.

6.2

Regression results: second approach

The results presented in section 6.1 may be biased due to endogeneity. More specifically, the frequency of meetings, the variables for group solidarity and peer pressure, and the SGSYdummy may be affected by the same random factors as those affecting the SHGs performance. This may result in biased estimates25. We statistically correct for this problem by using instrumental variables (IV) estimation. This means that we replace the actual value of those explanatory variables by the their estimated value. The latter is obtained by using regression equations in which those explanatory variables are regressed on a number of new variables, called instrumental variables26. Table 4 gives the revised empirical results when IV-estimation is used to correct for possible endogeneity27.

25

For a more thorough explanation of the endogeneity issue, we refer to section IV.4. in Verhelle (2003). 26 The following variables are used as instruments for the monitoring variable: the percentage of new members, the percentage of young female divorced or abandoned members living in an

23

extended family, the duration of meetings and a dummy equal to one if 90 percent or more of the population of a village belongs to one particular caste. See Verhelle (2003) for full details. 27 The revised results, based on IV-estimation, together with the selection part of the equations can be found in tables A5 to A7 in appendix.

24

28

The instruments diyextf and hocavil both take on the value 0 in the 16 and 11 observations respectively.

25

With respect to our previous results few conclusions remain29. 1. Self-selection and peer monitoring play only a limited role, with monitoring

exerting positive effects only. 2. The dynamic incentive of promised, increasingly larger outside credit and

remoteness remain crucial and their results are still parallel but with opposite signs. The promise of outside credit is still the only group characteristic beneficial to the intra-group credit repayment. 3. The number of SHGs in a village appears to have a strong effect on group

performance. Hence, the conclusions concerning the crucial role played by the dynamic incentive of promised outside credit and the control variables, remoteness and other SHGs in the village, are unchanged.

The major differences with the previous analysis can be summarized as follows: 1. After instrumentation, self-selection only exerts a small positive effect. It is Peer pressure also

not detrimental to intra-group credit repayment anymore.

exclusively affects the group performance in a positive way and gains a lot of importance. 2. Social ties are less important in determining a groups performance and have

an ambiguous, but predominantly negative effect. 3. Although group solidarity may affect group performance in a positive way, it

does not seem to play a crucial role in explaining group performance. 4. The existence of other SHGs in the village appears to inflict predominantly

negative externalities upon the groups performance. Hence, peer pressure emerges as an important factor underlying successful group performance, while the decisive role of social ties and group solidarity in determining group performance has vanished.

29

The regression results suggest that there is matching (endogeneity), in the sense of groups with a particular group characteristic being also more likely to possess another group characteristic. Controlling for this endogeneity rather seriously affects the conclusions, urging for caution in the interpretation of the empirical analyses found in the literature so far.

26

SECTION 7 CONCLUSION
Rural financial markets in developing countries face three major problems: adverse selection, moral hazard and enforcement. Under the imperfect information paradigm, formal lenders discriminate against small borrowers because of the high cost of information acquisition and their weak enforcement capacity. This has led to the search for alternative financial service delivery systems for poor borrowers all over the developing world. The most popular alternative has been microfinance.

In recent years, an overwhelming number of theoretical models arose to explain the extraordinary repayment performance of microcredit groups. The vast majority

attributed the success of microfinance to its innovative group-lending and joint-liability component. Joint-liability was heralded as the driving force behind self-selection

alleviating the adverse selection problem, the use of inside information through harnessing social ties and peer monitoring deterring moral hazard, and the imposition and use of social sanctions and group solidarity circumventing the enforcement problem. Recently, some economic theorists point to the importance of other

innovations like dynamic incentives. Among these, emphasis was laid on the use of a stream of progressively bigger loans combined with denial of new credit in case of default.

So far empirical analysis to quantify the roles of these overlapping and competing mechanisms is scant. We therefore believe the contribution of this paper to be threefold. First, given the huge amount of resources being pledged to support for

microfinance and the scarce empirical evidence of the determinants of microfinance performance, the need for empirical testing of the theoretical propositions has been felt by many authors. This paper contributes to this empirical literature by providing evidence on determinants of microfinance group performance in India. Second, unlike previous empirical studies we are able to apportion the effect of promised increasingly larger outside credit cum credit denial. Due to data problems the impact of this

dynamic incentive could not investigated by other studies. Third, none of the empirical studies hitherto specifically accommodates the endogeneity problem, which could render the estimates inconsistent. This paper takes a useful first step in that direction.

We find strong and robust evidence that the promise of progressively larger outside credit has a positive impact on group performance. As this mechanism is not

necessarily group based (although it is in our data set), this may provide support for the

27

view that there is more to microfinance than group lending and joint liability. This evidence is further strengthened by the finding of a more powerful effect of the nonrefinancing threat in remote villages. Communities characterized by low competition in financial services and low mobility may indeed be thought to be sensitive to a scheme of progressive lending cum credit denial upon default. In addition, as expected, groups located at some distance from a main road seem to perform worse in their other undertakings. Although we initially found evidence of predominantly positive

externalities of the existence of other Self Help Groups in the same village, controlling for endogeneity suggests a negative impact. Furthermore, when endogeneity is taken into account, a highly significant positive effect of peer pressure on the groups performance is evident. Peer pressure first only seemed to play a secondary and supporting role compared to intra-group insurance, but correcting for endogeneous matching shows its importance as a driving force behind the groups performance.

Checking for endogeneity, social ties do not seem to play a crucial role in determining group performance. Group solidarity, which at first seemed to be the crucial

determinant of a groups success, does not appear to be important either. Hence, accomodating the endogeneity problem seems to alter the results quite substantially. Thus one should be careful with the interpretation of the uninstrumented estimation results. In sharp contrast to the enormous amount of theoretical models attributing the success of microfinance to self-selection and peer monitoring, these mechanisms hardly seem effective in our data set.

In brief, our results are suggestive of the importance of promising progressively larger outside credit and threatening with credit denial upon default as a driving force behind group performance of the 63 Chhattisgarhi groups surveyed. Peer pressure within these groups affects group performance positively as well, while the existence of other Self Help Groups in the same village seems to bear a negative impact on the groups performance.

28

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Melyn, W. and Moesen, W. (1991), Towards a Synthetic Indicator of Macroeconomic Performance: Unequal Weighting when Limited Information is Available, Public Economics Research Paper, 17, p.24 Morduch, J. (1999), The Microfinance Promise, Journal of Economic Literature, 37, p. 1569-1614. Morduch, J. (1999), The Microfinance Promise, Journal of Economic Literature, 37 (4), p. 1569-1614 Paxton, J., Graham, D., Thraen, C. (2000), Modelling Group Loan Repayment Behavior: New Insights from Burkina Faso, Economic Development and Cultural Change, 48, p.639655. Rai, A.S. and Sjstrm, T. (2001), Is Grameen Lending Efficient?,CID Working Paper, 40, 28 pp. Sadoulet, L. (2000), The Role of Mutual Insurance in Group Lending, Unpublished ECARES Paper, 42 pp. Sadoulet, L. and Carpenter, S.B. (2001), Endogenous Matching and Risk Heterogeneity: Evidence on Microcredit Group Formation in Guatemala, Unpublished ECARES Paper, 36 pp. Sharma, M., Zeller, M. (1997), Repayment Performance in Group-Based Credit Programs in Bangladesh: An Empirical Analysis, World Development, 25/10, p.1731-1742. Stiglitz, J.E. (1990), Peer Monitoring and Credit Markets, The World Bank Economic Review, 4/3, p.351-366. Van Tassel, E. (1999), Group Lending under Asymmetric Information, Journal of Development Economics, 60/1, p.3-25. Varian, H. (1990), Monitoring Agents with Other Agents, Journal of Institutional and Theoretical Economics, 146, p.153-174. Verhelle, C. (2001), Impact van de Self Help Groups in India op de Welvaart van de Leden en hun Gezin, licentiaatverhandeling departement economie, KULeuven, 117 pp. Verhelle, C. (2003), Determinants of Microfinance Group Performance: an Empirical Analysis of Self Help Groups in India, MSE paper, Department of Economics, KULeuven, 72 pp. Wenner, M. (1995), Group Credit: a Means to Improve Information Transfer and Loan Repayment Performance, Journal of Development Studies, 32, p.263-281. Woolcock, M.J.V. (1999), Learning from Failures in Microfinance: What Unsuccessful Cases Tell Us about how Group-Based Programs Work, American Journal of Economics and Sociology, 58/1, p. 17-43. Wydick, B. (1999), Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala, The Economic Journal, 109, p. 463-475. Wydick, B. (2001), Group Lending under Dynamic Incentives as a Borrower Discipline Device, Review of Development Economics, 5/3, p. 406-420.

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Table 1: Descriptive statistics of variables measuring SHGs performance

Variable Abbreviation: Savperf Outsdttl Obs Mean 63 53 53 63 61 16 63 63 53 .72 .15 .47 .44 1.66 .61 .37 1.81 .55 St. Dev. .58 .28 .50 .36 7.16 .36 .58 1.34 .11

actual savings / planned savings intra-group loan amount in arrears / total intragroup loan amount Intlodel incidence of internal loan delinquency Membcre % of members received credit Outcred amount of outside credit / actual savings Ocoutsrep % outside credit repaid at due date Igamm n of IGA undertaken by SHG Socactmn n of social activities undertaken by SHG SHGPI 3 SHG Performance Index composed of savings, % members received credit, proportion outside credit taken and social activities SHGPI 5 SHG Performance Index composed of savings, % intra-group loans in arrears, % members received credit and social activities SOURCE: Verhelle (2003)

53

.75

.10

Table 2: Descriptive statistics of potential determinants of performance

Variable Explanatory variables: Self-selection Selfselm Social ties Homog Peer monitoring Freqmeet Group solidarity ingrins Group pressure peerpr Dynamic incentives sgsy Control variables infrstkm Obs Mean St. Dev.

degree of self-selection homogeneity w.r.t. age, caste, marital status, education, occupation and land ownership frequency of meeting (n of times per month) dummy = 1 if provision of intra-group insurance dummy = 1 if group shows willingness to exert peer pressure dummy = 1 if group belongs to SGSY scheme

63 63

1.25 2.37

.82 1.15

63 63 61

1.46 .48 .38

.65 .50 .49

63 63 63

.48 3.42 3.05

.50 3.43 1.28

mean distance (km) from basic infrastructure services vilnrshg n of SHGs in the village SOURCE: Verhelle (2003)

32

33

Table 3: Regression analysis of potential determinants on SHGs performance

Variables measuring SHGs performance: (Tobit) Self-selection Social ties Peer monitoring Intra-group insurance Peer pressure Promised outside credit Remoteness Externalities Obs (n) Wald (Prob) Log likelihood ** 61 22.15 (0.0046) -48.700 (-)* *** *** 61 60.32 (0.0000) 1.888 ** (-)** ** (-)*** *** *** 53 24.92 (0.0016) -11.889 *** 61 40.15 (0.0000) -37.005 61 8.93 (0.3486) -74.031 61 61.19 (0.0000) -1.643 ** (-)** (-)*** *** (-)*** *** ** 61 58.83 0.0000 -11.685 61 16.32 (0.0380) -81.186 *** 53 63.68 (0.0000) 56.465 53 39.43 (0.0000) 51.673 (-)*** * ** * Savings % intragroup loans in arrears (Heckman ML) Incidence of internal loan delinquency % members accessed intra-group credit (Tobit) % outside credit to savings % outside credit repaid on time (Heckman ML) N of IGA N of social activities SHGPI 3 SHGPI 5

(Probit) *

(Tobit)

(Heckman ML) ***

(Ordered Logit)

(Tobit)

(Tobit)

(-)***

(-)* ** (-)**

(-)*

(-)*

***

**

Standard errors are in parentheses. Statistical significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. This means that in case the study would be repeated in less than respectively 1%, 5% and 10% of the studies we would encounter a zero impact.

34

Table 4: IV regression analysis of potential determinants on SHGs performance

Variables measuring SHGs performance: Self-selection Social ties Peer monitoring Intra-group insurance Peer pressure Promised outside credit Remoteness Externalities Obs (n) F stat (Prob) R 60 1.32 (0.2559) 0.09 *** *** 52 6.57 (0.0000) 0.48 (-)*** *** ** 52 6.05 (0.0000) 0.24 ** 60 4.17 (0.0007) 0.20 60 0.38 (0.9263) 16 0.66 18 10.82 (0.0008) 60 2.15 (0.0468) (-)*** *** ** 52 4.97 (0.0002) 0.22 52 4.12 (0.0013) 0.26 * Savings % intragroup loans in arrears Incidence of internal loan delinquency % members accessed igcredit % outside credit to savings % outside credit repaid on time N of IGA N of social activities SHGPI 3 SHGPI 5

*** ** *** ** * ** * (-)*** *

Standard errors are in parentheses. Statistical significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. This means that in case the study would be repeated in less than respectively 1%, 5% and 10% of the studies we would encounter a zero impact. Instruments are the percentage members joined later (membnew), the % divorced or abandoned young group members living in an extended family (diyextf), the natural logarithm of the number of months of the groups existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). The monitoring (freqmeet), group solidarity (ingrins), peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.

35

APPENDIX

Table A1: Summary statistics of all variables used in the regression analyses Table A2: Regression analysis of potential determinants on groups savings and intra-group credit performance Table A3: Regression analysis of potential determinants on groups outside credit, income generating and social activities performance Table A4: Regression analysis of potential determinants on constructed Self Help Group Performance Indices Table A5: IV regression analysis of potential determinants on groups savings and intragroup credit performance Table A6: IV regression analysis of potential determinants on groups outside credit, IGA and social activities performance Table A7: IV regression analysis of potential determinants on the constructed SHG Performance Indices

36

Table A1: Summary statistics of all variables used in the regression analyses
Variable Dependent variables: savperf outsdttl intlodel membcre outcred ocoutsrep igamm socactmn SHGPI 1 Obs Mean actual savings / planned savings intra-group loan amount in arrears / total intragroup loan amount incidence of internal loan delinquency % of members received credit amount of outside credit / actual savings % outside credit repaid at due date n of IGA undertaken by SHG n of social activities undertaken by SHG SHG Performance Index composed of savings, % intra-group loans in arrears, proportion outside credit taken and IGA (as defined above) SHG Performance Index composed of savings, % intra-group loans in arrears, % outside credit repaid at due date and social activities SHG Performance Index composed of savings, % members received credit, proportion outside credit taken and social activities SHG Performance Index composed of savings, % intra-group loans in arrears, % members received credit and IGA SHG Performance Index composed of savings, % intra-group loans in arrears, % members received credit and social activities 63 53 53 63 61 16 63 63 53 .72 .15 .47 .44 1.66 .61 .37 1.81 .65 St. Dev. .58 .28 .50 .36 7.16 .36 .58 1.34 .08

SHGPI 2

11

.70

.12

SHGPI 3*

53

.55

.11

SHGPI 4

53

.74

.10

SHGPI 5*

53

.75

.10

Explanatory variables: Self-selection selfselm Social ties homog Peer monitoring freqmeet Group solidarity ingrins Group pressure peerpr Dynamic incentives sgsy Control variables infrstkm vilnrshg

degree of self-selection homogeneity scale w.r.t. age, caste, marital status, education, occupation and land ownership frequency of meeting (n of times per month) dummy = 1 if provision of intra-group insurance dummy = 1 if group shows willingness to exert peer pressure dummy = 1 if group belongs to SGSY scheme mean distance (km) from basic infrastructure services n of SHGs in the village

63 63

1.25 2.37

.82 1.15

63 63 61

1.46 .48 .38

.65 .50 .49

63 63 63

.48 3.42 3.05

.50 3.43 1.28

*Note: SHGPI 3 is equal to SHGPI 1 in the text, while SHGPI 5 refers to SHGPI 2 in the text.

37

Table A2: Regression analysis of potential determinants on groups savings and intragroup credit performance
Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Savperf (Tobit) .419* (.225) .236 (.164) .467** (.204) -.611** (.266) .248 (.355) -.666 (.457) .095 (.071) .267** (.108) -1.082 (.991) Outsdttl (Heckman ML) .034 (.035) .026 (.025) -.035 (.043) -.008 (.060) .020 (.057) -.117* (.064) .071*** (.010) .077*** (.025) -.304** (.123) Intlodel (Probit) 1.197* (.621) .091 (.334) 1.048 (.759) 1.091 (.780) 2.264** (.981) -5.016*** (1.388) 1.363*** (.508) 1.935*** (.582) -12.711*** (3.746) Membcre (Tobit) -.041 (.057) -.134*** (.051) .056 (.098) .223* (.120) .121 (.106) .087 (.129) -.023 (.022) .132*** (.043) .239 (.218)

Selection equation: Lndur Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept

1.675** (.718) .642 (.770) -.940* (.482) .914 (.631) -2.550* (1.386) -.446 (.734) .692 (.985) -.192 (.159) .493 (.475) -1.546 (2.357) -.602** (.292) -.115* (.061) 61 60.32 (0.0000) 1.888

Correlation coefficient () Sample selection term () Obs (n) Wald (Prob) Log likelihood

61 22.15 (0.0046) -48.700

53 24.92 (0.0016) -11.889

61 40.15 (0.0000) -37.005

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively.

38

Table A3: Regression analysis of potential determinants on groups outside credit, income generating and social activities performance
Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Outcred (Tobit) -6.887 (4.432) -4.565 (2.793) -2.795 (2.494) 13.855** (6.023) -.139 (4.850) 23.475** (9.980) -2.299** (1.130) -1.105 (1.700) 3.678 (10.799) Ocoutsrep (Heckman ML) .059 (.078) -.109* (.058) -.133 (.083) -.118 (.153) -.016 (.095) -.649*** (.188) .056*** (.014) .062 (.048) 1.073*** (.217) Igamm (Heckman ML) .525*** (.097) .117 (.080) .291** (.113) -.471** (.193) -.094 (.134) -1.119*** (.254) .116*** (.027) .161** (.068) .002 (.480) Socactmn (Ordered Logit) -.284 (.387) -.393* (.230) .484 (.316) 1.230* (.707) -.035 (.699) -.379 (.716) -.106 (.099) -.165 (.226) -4.064*** (1.326)

Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept

2.896** (1.249) .813*** (.278) -1.393** (.570) -.391 (.347) .592 (.494) .464 (.650) .122 (.707) 2.455** (1.006) .0326 (.097) .018 (.259) -6.396

3.021** (1.403) .490** (.217) -.700 (.468) .561* (.336) -.427 (.410) 1.540*** (.579) .268 (.554) .425 (.721) .244** (.114) -.072 (.225) -7.251** (2.905) -1*** (6.81e-11) -.281*** (.058) 61 58.83 0.0000 -11.685

Correlation coefficient () Sample selection term () Obs (n) Wald (Prob) Log likelihood

1*** (3.37e-12) .155*** (.043) 61 61.19 (0.0000) -1.643

61 8.93 (0.3486) -74.031

61 16.32 (0.0380) -81.186

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. The insignificant coefficients of the intercept term of the other cut off points in the ordered logit regression are not reported for the sake of brevity.

39

Table A4: Regression analysis of potential determinants on constructed Self Help Group Performance Indices
Dependent variable: SHGPI 1 (Tobit) SHGPI 2 (Heckman ML) .188 (.140) -.026 (.055) -.026 (.053) -.190 (.211) .187** (.095) .103 (.402) .012 (.009) .022 (.062) .445 (.319) SHGPI 3 (Tobit) SHGPI 4 (Tobit) SHGPI 5 (Tobit)

Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept

-.008 (.011) -.006 (.006) .001 (.012) -.000 (.018) -.015 (.018) .070*** (.023) -.023*** (.003) -.023*** (.006) .784*** (.035)

-.010 (.013) -.018* (.010) .015 (.018) .087*** (.027) .021 (.025) .015 (.031) -.005 (.005) .041*** (.009) .415*** (.055)

-.016 (.012) -.005 (.009) .029 (.018) .045** (.023) .027 (.021) .011 (.029) -.019*** (.005) .000 (.008) .755*** (.044)

-.012 (.013) -.008 (.010) .015 (.021) .046** (.023) .016 (.020) .030 (.030) -.020*** (.005) .002 (.009) .763*** (.044)

Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept Correlation coefficient () Sample selection term () Obs (n) Wald (Prob) Log likelihood

8.782*** (1.899) .391 (.439) -1.380 (1.180) -.450 (.655) .848 (1.225) 1.221 (1.625) .790 (1.147) 7.704*** (2.179) -.002 (.186) .251 (.584) -18.656 -1*** (8.83e-11) -.083*** (.025) 61 21.46 (0.0060) 6.151

53 64.83 (0.0000) 62.896

53 63.68 (0.0000) 56.465

53 52.59 (0.0000) 54.386

53 39.43 (0.0000) 51.673

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively.

40

Table A5: IV regression analysis of potential determinants on groups savings and intra-group credit performance
Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Savperf (IV) .151 (.103) .049 (.054) .201 (.207) -.003 (.334) -.061 (.322) .053 (.237) .006 (.035) .025 (.056) .050 (.460) Outsdttl (1 stage: Probit) st

Outsdttl (2 stage: IV) .034 (.043) .054* (.031) -.103 (.123) -.032 (.151) -.104 (.133) -.180 (.180) .078*** (.018) .090*** (.027) -.339 (.242) -.204 (.124)
nd

Intlodel (IV) -.013 (.107) .096 (.066) .315 (.293) -.219 (.297) .354 (.225) -1.111*** (.267) .150*** (.044) .204** (.078) -.835** (.385)

Membcre (IV) -.039 (.070) -.059 (.049) .013 (.206) -.011 (.267) .292 (.185) -.262 (.235) .021 (.032) .134** (.054) .173 (.276)

Selection equation: Lndur Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR (Prob) Log likelihood Obs (n) F stat (Prob) R

1.470** (.670) .601 (.748) -.807* (.420) .871 (.645) -2.557* (1.359) -.090 (.751) .550 (.999) -.182 (.153) .487 (.461) -1.308 (2.340) 22.26 (0.0081) -12.570 61 -

60 1.32 (0.2559) 0.09

52 6.57 (0.0000) 0.48

52 6.05 (0.0000) 0.24

60 4.17 (0.0007) 0.20

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. Instruments are the percentage members joined later (membnew), the % divorced or abandoned young group members living in an extended family (diyextf), the natural logarithm of the number of months of the groups existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). The monitoring (freqmeet), group solidarity (ingrins), peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.

41

Table A6: IV regression analysis of potential determinants on groups outside credit, IGA and social activities performance
Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR (Prob) Log likelihood Obs (n) F stat (Prob) R Outcred (IV) -1.166 (1.332) -.727 (.683) -2.313 (2.778) -3.696 (3.649) 3.154 (4.152) 1.515 (2.966) -.195 (.404) .206 (.608) 8.181 (5.856) 60 0.38 (0.9263) Ocoutsrep (1st stage: Probit) Ocoutsrep (2nd stage: IV) .169 (.270) .010 (.162) -.193 (.188) -.246 (.742) .044 (.056) -.069 (.048) .102 (.197) .875*** (.249) 16 0.66 Igamm (1st stage: Probit) Igamm (2nd stage: IV) .791*** (.220) .494** (.205) 1.189*** (.355) -.099 (1.014) .005 (.490) -2.481*** (.816) .211*** (.057) .153 .218 -.322 (.498) -2.483 (1.621) 18 10.82 (0.0008) Socactmn (IV) -.762 (.468) .024 (.339) 2.606** (1.299) 3.023* (1.792) 1.364 (1.648) -.564 (1.857) -.195 (.276) -.529 (.383) -.555 (1.491) 60 2.15 (0.0468) -

4.861** (1.928) .890** (.374) -1.854*** (.680) -.351 (.253) .709 (.599) .597 (.664) .353 (.593) 3.017*** (.956) -.014 (.108) .014 (.271) -8.771*** (3.269) 39.20 (0.0000) -15.504 61 -

1.110 (1.152) .475* (.250) -.433 (.379) .438* (.256) -.277 (.372) 1.576*** (.564) .240 (.580) .237 (.618) .176* (.096) -.168 (.224) -4.540** (1.925) 32.82 0.0003 -20.596 61 -

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. Instruments are the percentage members joined later (membnew), the % divorced or abandoned young group members living in an extended family (diyextf), the natural logarithm of the number of months of the groups existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). The monitoring (freqmeet), group solidarity (ingrins), peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.

42

Table A7: IV regression analysis of potential determinants on the constructed SHG Performance Indices
Dependent variable: Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg IMR Intercept Selection equation: Leadwlth Leadedu Selfselm Homog Freqmeet Ingrins Peerpr Sgsy Infrstkm Vilnrshg Intercept LR (Prob) Log likelihood Obs (n) F stat (Prob) R SHGPI 1 (IV) -.013 (.023) -.014 (.012) .045 (.053) .080 (.062) .000 (.052) .179** (.068) -.035*** (.009) -.041** (.016) .745*** (.057) 52 5.00 (0.0003) 0.42 SHGPI 2 (1st stage: Probit) SHGPI 2 (2nd stage: IV) .031 (.048) -.040 (.036) .054 (.066) .243** (.103) .012 (.007) .028 (.028) .120 (.066) .282 (.169) 52 3.75 (0.0025) 0.25 SHGPI 3 (IV) -.030 (.020) .010 (.015) .067 (.058) .067 (.070) .086** (.040) -.038 (.064) -.001 (.007) .030** (.013) .378*** (.085) 52 4.97 (0.0002) 0.22 SHGPI 4 (IV) -.017 (.021) -.007 (.013) .043 (.052) .071 (.080) .069* (.039) .040 (.084) -.022** (.010) -.007 (.015) .725*** (.051) 52 3.64 (0.0031) 0.38 SHGPI 5 (IV) -.019 (.027) -.018 (.016) .070 (.074) .143* (.075) .005 (.062) .164* (.086) -.035*** (.010) -.019 (.020) .727*** (.062) 52 4.12 (0.0013) 0.26

8.738*** (1.135) .390 (.388) -1.292* (.695) -.330 (.315) .832 (.707) 1.351 (.961) .511 (.704) 7.630*** (1.556) .004 (.108) .247 (.375) -18.727 . 11 0.66

Standard errors are in parentheses. Significance at 1, 5 and 10% significance level denoted by ***, ** and * respectively. Instruments are the percentage members joined later (membnew), the % divorced or abandoned young group members living in an extended family (diyextf), the natural logarithm of the number of months of the groups existence (durmeet) and a dummy = 1 if the village is homogeneous in caste (hocavil). The monitoring (freqmeet), group solidarity (ingrins), peer pressure (peerpr) and dynamic incentive (sgsy) variables are instrumented.

43

44