Repayment Frequency and Default in Microfinance: Evidence from India

This study argues that a more flexible repayment schedule can significantly lower transaction costs without increasing client default. The paper states that:

• Most microfinance contracts require that repayments start immediately after loan disbursement and occur weekly thereafter.
• Economic theory suggests that a more flexible repayment schedule would benefit clients and potentially improve their repayment capacity.
• Microfinance practitioners argue that the fiscal discipline imposed by frequent repayment is critical to:
  • Preventing loan default;
  • Helping clients save;
  • Increasing clients trust in the loan officer and the lending program.
• Weekly collection of repayment installments is one of the key features of microfinance that is believed to reduce default risk and make lending to the poor viable. However, this practice dramatically increases MFI transactions costs, thereby limiting the set of loan sizes and client types that are profitable under this model.

The paper uses data from a field experiment that the authors conducted in urban India, and that randomized client assignment to a weekly or monthly repayment schedule. The study finds no significant effect of the type of repayment schedule on client delinquency or default. The authors conclude that among microfinance clients who are willing to borrow at either weekly or monthly repayment schedules, a more flexible repayment schedule can significantly lower transaction costs without increasing client default.