Do flexible repayment schedules improve the impact of microcredit? Evidence from a randomized evaluation in rural India

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.