Experiments on repayment schedules in VWS, West Bengal

Principal Researchers: Profs. Rohini Pande and Prof. Erica Field (Harvard)
Partner Organization: Village Welfare Society (VWS), West Bengal

Project Publications: # Pande, Rohini and Erica Field, November 2007. Repayment Frequency and Default in Microfinance: Evidence from India CMF Working Paper Series No 20. # Feigenberg, Ben, Erica Field and Rohini Pande. October 2009. Building Social Capital through Microfinance CMF Working Paper Series No 35. # Field, Erica, Rohini Pande and John Papp. Does Microfinance Repayment Flexibility Affect Entrepreneurial Behavior and Loan Default? CMF Working Paper Series No 34

Most of the MFIs operate on the received wisdom that weekly repayment schedules and the consequent system of weekly center meetings are critical for ensuring low levels of default. However, this imposes a very high cost structure on the MFI and requires it to maintain a very large staff to client ratio. Also weekly repayment schedules may not suit the income flows of households engaged in some activities, for example with monthly revenue streams or businesses that sell on credit. Instead, if infrequent repayments do not produce an increase in default rates, or if the cost of the increase in default is lower than the savings in transaction costs, it may be worthwhile for the MFI to examine it as an alternative to the weekly model. The Centre, in collaboration with Village Welfare Society (VWS), West Bengal, has started a study in April 2006 that examines the influence of repayment frequency on household’s welfare and economic activity as well as the delinquency rates of the microcredit clients of VWS. Using a randomized design, the study estimates the impact of 1) various repayment schedules and 2) a loan moratorium on investment decisions.

For 1), weekly and monthly repayment schedules in the first phase and weekly and five-weekly repayment schedules in the second phase will be compared to test the hypothesis that repayment quality may decrease among older clients. The rationale behind 2) is that the repayment schedule that requires the first installment immediately afte the loan disbursement, a convention many MFIs use, prevents clients from using the full value of loan for business investments, which typically generate returns with time lag. The study examines whether a moratorium of 2 months encourage them to use money for business investments with greater but less immediate returns. The study will focus on the following variables: repayment rates, the organization’s transaction costs, and the capacity of households to smooth consumption and to manage their own cash flows. This understanding will not only provide useful inputs for MFIs on how to reduce costs, but will also be critical to the design of credit products and even of other products, such as savings and insurance, that aim to help households smooth consumption.

CMF Research Associate: Anup Roy

See some related CMF documents:
# VWS Policy Memo [PDF]
# Download Progress Brief 3 [PDF]
# Phoning in It: Using Cell Phones to do Daily Consumption Surveys (Eye on Microfinance, Issue 9)
# Social Capital and Female Empowerment: findings from two microfinance studies, Dr. Rohini Pandei, CAB 2010 [PDF]
# Repayment Flexibility and Microfinance and Client Outcomes, Dr. Rohini Pande, CAB 2010 [PDF]
# Evaluating Microfinance: Randomize! (Eye on Microfinance, Issue 1)