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How Do Borrowers Respond to a Debt Moratorium ? Experimental Evidence from Consumer Loansin India

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  • Fiorin,Stefano
  • Hall,Joseph
  • Kanz,Martin

Abstract

Debt moratoria that allow borrowers to postpone loan payments are a frequently used toolintended to soften the impact of economic crises. This paper reports results from a nationwide experiment with a largeconsumer lender in India, designed to study how debt forbearance offers affect loan repayment and bankingrelationships. In the experiment, borrowers receive forbearance offers that are presented either as aninitiative of their lender or the result of government regulation. The results show that delinquent borrowers whoare offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default ontheir loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offeredforbearance by their lender also have causally higher demand for future interactions with the lender: in a follow-upexperiment conducted several months after the main intervention demand for a non-credit product offered by thelender is 10 percentage points (27 percent) higher among customers who were offered repayment flexibility by thelender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, theresults suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support thecreation of longer-term banking relationships not only for liquidity but also for relational contracting reasons. Thisprovides a rationale for offering repayment flexibility even in settings where lenders are not required to provide forbearance.

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  • Fiorin,Stefano & Hall,Joseph & Kanz,Martin, 2023. "How Do Borrowers Respond to a Debt Moratorium ? Experimental Evidence from Consumer Loansin India," Policy Research Working Paper Series 10358, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10358
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    1. Michael Dinerstein & Constantine Yannelis & Ching-Tse Chen, 2024. "Debt Moratoria: Evidence from Student Loan Forbearance," American Economic Review: Insights, American Economic Association, vol. 6(2), pages 196-213, June.

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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G5 - Financial Economics - - Household Finance
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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