Other people’s debt: The downside of collateral-free group loans

Mangi Lal, a resident of Nandwel village in Rajasthan’s Udaipur district, was given loans by four different microfinance institutions (MFIs). Mangi received these collateral-free loans as a member of joint liability groups (JLGs). Certain MFIs grant group loans to JLG members on the condition that those who borrow money together repay it at the same time. Mangi had recently been ill and had missed work as well as group meetings for three months. He had also incurred expenses to treat his illness and to tend to necessary social obligations. This meant that he fell behind on repayments.

The MFIs that lent money to some of these groups refused to accept payments from individual members until everyone had repaid their instalments. To avoid defaulting on their own repayments, many people in Mangi’s neighbourhood paid on his behalf without his knowledge. Later, these members began frequenting his house and demanding the money. Since Mangi was unable to repay them, he began leaving for work earlier than usual and returning home late to avoid running into them. But their subsequent visits to his workplace led him to stop going to work altogether. Mangi’s wife also started going to the fields unusually early and would try and stay there for as long as she could. Soon, she and their daughters left for her maternal home to avoid the persistent follow-up visits from group members.

The system of group loans is supposed to inculcate shared responsibility among community members and ease financial access for them. However, in cases like this, it can lead to social embarrassment and even ostracisation. It is therefore necessary that MFIs keep a close eye on the repercussions of loans and repayment processes on the communities they lend to.

Neha Pandey works as research and communications manager at Shram Sarathi.

This article was updated on July 12, 2023, to reflect that Mangi Lal is a member of joint liability groups and not self-help groups.  

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Know more: Learn how financial institutions forced people to repay their loans during the pandemic.  

Do more: Connect with the author at neha.pandey@shramsarathi.org to understand more about and support her work.