Working Paper: CEPR ID: DP17994
Authors: Stefano Fiorin; Joseph Hall; Martin Kanz
Abstract: Debt moratoria that allow borrowers to postpone loan payments are a frequently used tool intended to soften the impact of economic crises. We conduct a nationwide experiment with a large consumer lender in India to study how debt forbearance offers affect loan repayment and banking relationships. In the experiment, borrowers receive forbearance offers that are presented either as an initiative of their lender or the result of government regulation. We find that delinquent borrowers who are offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default on their loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offered forbearance by their lender also have higher demand for future interactions with the lender: in a follow-up experiment conducted several months after the main intervention, demand for a non-credit product offered by the lender is 10 percentage points (27 percent) higher among customers who were offered repayment flexibility by the lender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, our results suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support the creation of longer-term banking relationships not only for liquidity but also for relational contracting reasons. This provides a rationale for offering repayment flexibility even in settings where lenders are not required to provide forbearance.
Keywords: debt forbearance; banking relationships; moral hazard
JEL Codes: G2; G5; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt moratorium offered by lender (F34) | Likelihood of default on loan (G33) |
| Debt moratorium offered by regulator (G21) | Repayment behavior (G51) |
| Forbearance from lender (G21) | Demand for noncredit product (G19) |
| Forbearance from lender (G21) | Loan repayment (G51) |
| Forbearance from lender (G21) | Longer-term banking relationships (G21) |
| Perception of relational contracting (L14) | Prioritization of repayment (G51) |