Do Flexible Repayment Schedules Improve the Impact of Microcredit? Evidence from a Randomized Evaluation in Rural India

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.

2006-03-01

2009-12-15

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)

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.

Randomization performed in office by computer

borrowing groups of 15-20 members

Yes

202 borrowing groups

3648 borrowers

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

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.

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.

https://epub.ub.uni-muenchen.de/26608/1/20.pdf