Does Meeting Repay? Early Repayment and Default in

Microfinance: Evidence from India 

May 16, 2008IFMR - CMF

Anup Roy & Emmerich Davies

Our Research Sought to Answer One Question: Does Introducing

Greater Flexibility in Meeting and Repayment Schedules Increase

Loan Default Rates?

The short answer is NO!...

Village Welfare Society & the Centre for Microfinance: In

Partnership Since 2006

What Have We Done with VWS so far?

• 2006: Began First Intervention

• 2007: First Results from First Intervention and Began Second Intervention

• 2008: Began Third Intervention and Social Altruism Lottery

There was No Difference in the Rate of Default Between Clients

on Weekly & Monthly Repayment Schedules

Clients on More Frequent Repayment Schedules were Far

More Likely to Repay Earlier

Clients on Weekly Repayment Schedules Showed Far Higher

Measures of Social Capital

Clients on Weekly Repayment Schedule Were Able to Allocate

Labour and Smooth Consumption Better

2 4 6 8hours

WeeklyMonthly

How many Hours did you work Yesterday?

Three more Questions Arose During the First Intervention:

1.  Would Introducing Even More Flexibility Lead to More Productive Investments? The Motivation for our Second Intervention

2. Do Different Repayment Schedules Create Different Incentives for Clients to Repay Early? The Motivation for our Third Intervention.

3. Do Less Frequent Meetings lead to Declining Trust and Reliance on Fellow Groups Members in Times of Need (i.e. Less Social Capital Within Groups)? The Motivation for our Lotteries

The Second Intervention Investigates Whether Introducing a Lag Between the Disbursement

of the Loan and the First Repayment Leads to More

Productive Investments

Control Treatment•Begin Repayment As Soon as Loan is Disbursed

•Two Month Lag Before Begin to Repay

The Third Intervention Tries to Control for the Different Interest

Rates Between Different Repayment Schedules

Control Treatment•Weekly Meeting and Repayment Schedule with 12.5% Interest Fee

•Five Weekly Meeting and Repayment

Schedule with Interest Fee

depending on loan size

Why Hold Lotteries?

•One of the most interesting questions in Microfinance today is how do group dynamics encourage repayment and financial discipline

•Wanted to see whether increased frequency of interaction translate into economically relevant social capital

•Designed lotteries in such ways that women could share risks amongst group members

Two Aborted Attempts in Designing a Lottery and then Success

•We are trying to design a lottery to test the effect of group risk-sharing

•We have run three pilots in the field, and believe we are ready to launch a full lottery amongst all 1,200 first intervention clients

Two Aborted Attempts in Designing a Lottery and then Success

Results from all Pilots

• Second Pilot Drawings

Questions?