Repayment Frequency and Default in Microfinance: Evidence from India

Pande, Rohini; Field, Erica (2008)


Pande, Rohini, and Erica Field. 2008. “Repayment Frequency And Default In Microfinance: Evidence From India”. Journal Of European Economic Association April-May 2008 6 (2-3): 501-509.
In stark contrast to bank debt contracts, most micro-finance contracts require that repayments start nearly immediately after loan disbursement and occur weekly thereafter. Even though economic theory suggests that a more flexible repayment schedule would benefit clients and potentially improve their repayment capacity, micro-finance practitioners argue that the fiscal discipline imposed by frequent repayment is critical to preventing loan default. In this paper we use data from a field experiment which randomized client assignment to a weekly or monthly repayment schedule and find no significant effect of type of repayment schedule on client delinquency or default. Our findings suggest that, among micro-finance clients who are willing to borrow at either weekly or monthly repayment schedules, a more flexible schedule can significantly lower transaction costs without increasing client default.