Village Financial Services (VFS) is a microfinance institution operating in peri-urban neighborhoods of Kolkata, India. Most of the loans VFS offers resemble traditional micro-credit contracts, made to groups of women and repaid weekly. Access to credit or savings, both formal and informal, is limited in these neighborhoods, and VFS faces almost no competition from other lenders. VFS works exclusively with women, most of whom have a household income of less than two dollars a day. There is a high rate of business ownership, and selling and tailoring saris are common occupations.
Researchers examined variations microfinance contract design in partnership with VFS. They compared weekly and monthly repayments in one evaluation, tested a two-month grace period before initiating repayment in another, and expanded the repayment frequency experiment to evaluate the effect on financial stress in a third.
Monthly repayments: Researchers examined how repayment frequency affected default and late payment rates. VFS offered loans of Rs. 4000 (about 100 USD) with a fixed Rs. 400 interest payment to 1026 first-time borrowers in 100 groups. These were randomly assigned to one of three different repayment schedules: (1) standard weekly repayment, i.e., 30 groups repaid Rs. 100 every week for 44 weeks; (2) monthly repayment, i.e., 38 groups repaid Rs. 400 every month for 11 months; and (3) monthly repayment with weekly meetings, i.e., 32 groups repaid monthly, but met with a loan officer every week for the first three months.
Two-month grace period: Researchers examined how delaying the first payment until two months after disbursing the loan affected investment in businesses and loan repayment. Eight hundred and forty-five clients in 169 loan groups received loans ranging from Rs. 4000 (about 90 USD) to Rs. 10,000 (about 225 USD). The groups paid the same amount in interest but were assigned to two different repayment schedules: (1) standard schedule such that 85 groups began repayment two weeks after receiving the loan; and (2) grace period such that 84 groups began repayment two months after receiving the loan.
Monthly repayments with a focus on financial stress: Researchers replicated the repayment frequency experiment and included additional questions on levels of financial stress. Seven hundred and forty clients in 148 groups were assigned to weekly or monthly repayment frequencies. A subgroup of 213 clients was surveyed by cell phone every 48 hours for seven weeks, and they were asked questions about their confidence in their ability to repay the loan, their anxiety about loan repayment, arguments with their spouse about finances, and the amount of time they spent thinking about loan repayment.
Data related to this intervention can be found here.