Do Flexible Repayment Schedules Improve the Impact of Microcredit? Evidence from a Randomized Evaluation in Rural India
Last registered on April 19, 2017

Pre-Trial

Trial Information
General Information
Title
Do Flexible Repayment Schedules Improve the Impact of Microcredit? Evidence from a Randomized Evaluation in Rural India
RCT ID
AEARCTR-0002048
Initial registration date
April 19, 2017
Last updated
April 19, 2017 2:50 PM EDT
Location(s)
Primary Investigator
Affiliation
LMU Munich
Other Primary Investigator(s)
PI Affiliation
Harvard University
PI Affiliation
Yale University
Additional Trial Information
Status
Completed
Start date
2006-03-01
End date
2009-12-15
Secondary IDs
Abstract
Microcredit institutions typically apply rigid and fixed repayment schedules when disbursing loans in order to reduce transaction costs, simplify procedures, and inculcate fiscal discipline for better repayment behavior. Microcredit clients, however, often have neither the smooth income nor singular moments in which to make lumpy investments throughout the year. This mismatch generates a cash flow disconnect and, given the presumed liquidity constraints of the typical microcredit client, a potential welfare loss. Using data from a randomized evaluation with dairy farmers in rural India, we test the impact of flexible microcredit repayment schedules relative to "normal" inflexible, fixed repayment schedules. Although we are only able to track those who borrow, which introduces potential selection effects, we find amongst those in flexible lending groups some evidence for higher ability to absorb shocks and higher income, which seems to be driven by limited improvements in investment and higher production from milk. On the cost-side, defaults do increase for the lender. Towards the end of the study, the microcredit market encountered crisis, with mass defaults, thus it is hard to generalize with respect to the default results. We conclude with caution, that we have shown suggestive evidence that a more flexible product design, one tailored to the needs of a dairy farmer, may be welfare enhancing for the dairy farmer. Further work is needed to both validate these results, and explore how to balance any trade-off with default.
External Link(s)
Registration Citation
Citation
Czura, Kristina, Dean Karlan and Sendhil Mullainathan. 2017. "Do Flexible Repayment Schedules Improve the Impact of Microcredit? Evidence from a Randomized Evaluation in Rural India." AEA RCT Registry. April 19. https://www.socialscienceregistry.org/trials/2048/history/16708
Experimental Details
Interventions
Intervention(s)
In conjunction with a partner microfinance institution, the researchers conducted an RCT to evaluate the impact of offering loan products with flexible repayment schedules. The sample is 3,648 existing clients of the partner MFI, organized into 202 joint-liability borrowing groups of 15-20 members prior to the experiment. The borrowing groups were randomly assigned to receive an offer of one of four types of loans. The small fixed-schedule loan was the standard loan offered to borrowing groups prior to the intervention. Borrowing groups were offered a Rs. 4000 loan amount, repaid on a fixed schedule at monthly meetings. A large fixed-schedule loan offered borrowing groups a Rs. 6000 loan, also repaid on a fixed schedule at monthly meetings. Next, the coupon flexible loan offered borrowing groups Rs. 6000, but allowed principal repayment on a flexible schedule. After making the first three regular monthly payments, borrowers were allowed to lag behind by up to two principal payments. However, the borrowers still had to attend monthly repayment meetings to make an interest payment. Borrowers’ standing was tracked in a coupon booklet with a lending officer’s help. The last loan type, the dairy-focused loan, offered a loan of Rs. 6000, required borrowers to make double principal payments for the first six months, then allowed borrowers to skip principal payments for any consecutive six months after that while still making interest payments at monthly repayment meetings.
Intervention Start Date
2006-03-01
Intervention End Date
2009-12-15
Outcomes
Outcomes (end points)
Repayment behavior (e.g. repayment problems, haven't paid in a month); Milk production (e.g. milk produced per day, litters sold); Investment in cattle (e.g. household has purchased cattle, purchase price); Consumption expenditures (e.g. per household, per household member); Number of income sources (e.g. livestock, wage); Outside borrowing (e.g. any loans outstanding, amount outstanding)
Outcomes (explanation)
Experimental Design
Experimental Design
The analysis was conducted using the intent-to-treat approach. Immediately after disbursement, the researchers began the first of seven rounds of household surveys, collected at three to five month intervals. The final survey was collected after the end of the loan cycle. Data collected included information on household demographics and conditions, income details, assets and expenditure details, indebtedness, savings and insurance details, as well as detailed information on cattle owned. Researchers used the single difference estimation strategy when comparing results from a single time period, and used the information from all survey rounds in a pooled OLS to compare results over the total loan cycle.

The analysis finds suggestive evidence of increased income for borrowers using the dairy-specific loan. The main channel seems to be investment in a higher grade of dairy cattle. However, the increase in income did not translate to higher household consumption. There is also some evidence that both flexible repayment schedule loans led to better ability to deal with negative shocks. For lending institutions, both the incidence and level of default increased. However, circumstances in the microfinance industry in India at this time may indicate that these results are not generalizable.

Take-up compliance was roughly 76%, with 18% of borrowers taking up no loan, and 6% noncompliance. There was no differential attrition across treatments. However, the response rate was significantly lower those that did not accept a loan. This differential response rate makes it difficult to distinguish between compositional differences and incentive effects. In addition, the experiment took place just prior to the “microcredit crisis” in India, further complicating interpretation.
Experimental Design Details
Randomization Method
Randomization performed in office by computer
Randomization Unit
borrowing groups of 15-20 members
Was the treatment clustered?
Yes
Experiment Characteristics
Sample size: planned number of clusters
202 borrowing groups
Sample size: planned number of observations
3648 borrowers
Sample size (or number of clusters) by treatment arms
52 groups in the larger fixed loan, 53 groups in the dairy-specific flexible loan, 52 groups in the coupon-flexible loan, 45 groups in the smaller fixed loan
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
IRB Approval Date
IRB Approval Number
Post-Trial
Post Trial Information
Study Withdrawal
Intervention
Is the intervention completed?
Yes
Intervention Completion Date
December 15, 2009, 12:00 AM +00:00
Is data collection complete?
Yes
Data Collection Completion Date
December 15, 2009, 12:00 AM +00:00
Final Sample Size: Number of Clusters (Unit of Randomization)
202 borrowing groups
Was attrition correlated with treatment status?
No
Final Sample Size: Total Number of Observations
2976 borrowers
Final Sample Size (or Number of Clusters) by Treatment Arms
52 groups in the larger fixed loan, 53 groups in the dairy-specific flexible loan, 52 groups in the coupon-flexible loan, 45 groups in the smaller fixed loan
Data Publication
Data Publication
Is public data available?
No
Program Files
Program Files
Reports and Papers
Preliminary Reports
Relevant Papers
Abstract
Microcredit institutions typically apply rigid and fixed repayment schedules when disbursing loans in order to reduce transaction costs, simplify procedures, and inculcate fiscal discipline for better repayment behavior. Microcredit clients, however, often have neither smooth income nor singular moments in which to make lumpy investments throughout the year. This mismatch generates a cash flow disconnect and, given the presumed liquidity constraints of the typical microcredit client, a potential welfare loss. Using data from a randomized evaluation with dairy farmers in rural India, we test the impact of flexible microcredit repayment schedules relative to "normal" inflexible, fixed repayment schedules. Although we are only able to track those who borrow, which introduces potential selection effects, we find amongst those in flexible lending groups some evidence for higher ability to absorb shocks and higher income, which seems to be driven by limited improvements in investment and higher production from milk. On the cost-side, defaults do increase for the lender. Towards the end of the study, the microcredit market encountered crisis, with mass defaults, thus it is hard to generalize with respect to the default results. We conclude with caution, that we have shown suggestive evidence that a more flexible product design, one tailored to the needs of a dairy farmer, may be welfare enhancing for the dairy farmer. Further work is needed to both validate these results, and explore how to balance any trade-off with default.
Citation
Czura, Kristina, 2015. "Do flexible repayment schedules improve the impact of microcredit? Evidence from a randomized evaluation in rural India," Discussion Papers in Economics 26608, University of Munich, Department of Economics.