Research On Group Default Risk Prevention Under Peasants’ Joint-liability Loan

In recent years, the group lending has rapidly developed into the second-largestpeasants’loan pattern in China by virtue of its unique institutional advantages, and playsan important role in easing peasants’ financing difficulty and solving the “three ruralissues” in China. When all members from the same borrowing group choose to defaulton their loans, however, the institutional advantage of social guarantee within this loanpattern will fail to work, and the financial institution making the loan will suffersignificantly serious losses. Therefore, it’s necessary to strengthen the management andcontrol of group default to make the joint-liability loan pattern a powerful tool insupporting the agriculture and peasants.This paper focuses on the group default risk under peasants’ joint-liability loan,and conducts thorough research on its formation and prevention mechanism withvarious analysis methods like game theory, probability theory, empirical cases and newinstitutional economics analysis method. And then the paper puts forward manyinstitutional arrangements to improve and innovate on the peasants’ joint-liability loanaccording to the analysis results. The main contents of the paper are as follows:Based on introducing the general situation of peasants’ joint-liability loan pattern,this paper firstly summarizes the manifestation forms and formation causes of the groupdefault risk with the help of related cases, and then analyzes its formation mechanismsunder different conditions with relevant mathematical tools according to the models ofgame among members from the same joint-liability borrowing team and the gamebetween the borrowing team and financial institution. Next, the paper attempts tointroduce the collaterals into the peasants’joint-liability loan to make a new loan pattern,and conducts detailed analysis on its realistic feasibility and mechanism of groupdefault risk prevention and control. At last, the paper has a brief discussion on effectivemeasures to prevent and control the group default risk under peasants’ joint-liabilityloan from multiple angles based on the above analysis conclusion.According to the analysis, it is pointed out that there are three specific forms of thegroup default risk’s manifestation, namely that members follow each other on defaulting,they may collude with each other, and that their operating environment mightdeteriorate. The group default risk is caused by many factors, such as borrowingpeasants’ weak consciousness of law and credit, ineffective management of financial institution on the loan, and single agricultural industrial structure in the same region.From the perspective of game theory, whether the group default of joint-liabilitypeasants happens or not mainly depends on the perfection level of local credit market,the value of futher refinancing and intensity of social constraints. Moreover, theproblem that the social guarantee will fail to work when all borrowing members defaultcan be effectively solved when the collaterals are introduced into the peasants’joint-liability loan pattern to act as material guarantee, and the increasing collateralcapacity of peasants in recent years in our country makes the new loan pattern feasibleto a certain extent. Finally, in order to effectively prevent and control the group defaultrisk, the paper puts forward a series of practical suggestions and institutionalarrangements to rural financial institutions and relevant government departments basedon their own degrees of participation and role playing.In theory, this paper conducts analysis on the formation and prevention mechanismof peasants’ group default risk from multiple angles with game and mathematical tools,which will be an important supplement to current research on peasants’ joint-liabilityloan pattern. And from the practical point of view, this paper puts forward some policysuggestions on preventing the group default risk according to the analysis results, whichcan provide useful reference for rural financial institutions to make peasants’joint-liability loan smoothly in the future.