Adverse Selection in Credit Markets: Evidence from South Indian Bidding Roscas

This paper examines Roscas (rotating savings and credit associations), the popular model of savings in developing countries where participants contribute at regular meetings and bid to receive the accumulated contribution. With the help of a test, the authors attempt to:

• Assess whether information asymmetries contribute in making early bid for the pot and as a result put the clients in situations where they have to pay a higher rate of interest;
• Examine whether the impact the new ceiling on bids imposed by the Indian government has had on the overall functioning of the Roscas;
• Compare the difference in default rates between early and late recipients of the pot before and after this policy shock.

Lastly, the paper presents the following findings:

• Default rates are similar in later rounds of Roscas, pre and post ceiling;
• Those in the rural areas default considerably more compared to those in the urban areas as the average burden of risk in the former is higher too;
• Adverse selection is more pronounced in urban areas and in the newly established branches.