Experiments on Repayment Schedules in VWS, West Bengal

This study examines the impact of introducing flexibility in repayment schedules on entrepreneurial activity and loan default in peri-urban Kolkata, West Bengal.

Microfinance is hailed as one of the most promising tools in poverty alleviation efforts in the developing world. However, recent evidence suggests that it has limited effects on enterprise growth among the poor. This can be party attributed to the way microfinance products are designed, both in size and structure, to minimize default. Due to their rigid structure, they do not encourage client investments into microenterprises. Most microfinance contracts mandate that repayment begins almost immediately after the loans are disbursed. This study was conducted to examine the influence of repayment frequency on household’s welfare and economic activity as well as the delinquency rates of the microcredit clients of VWS.
This study was conducted in peri-urban Kolkata in collaboration with Village Welfare Society (VWS), West Bengal. Comprising of a total of 845 clients, 169 groups with five members each were formed. Out of these groups, 85 were randomly assigned to the standard VWS contract with immediate repayment, while the remaining 84 groups were randomly assigned to the tweaked contract with a two-month grace period. Aside from the two-month grace period, the loan contract was identical, and clients were required to repay fortnightly over the course of forty-four weeks. Information on household business activities, demographics etc. was gathered through a baseline survey followed a year later by an endline survey. In the endline survey the clients provided information on how they had spent their VWS loan. Default and delinquency were calculated by using VWS administrative data cross-checked with loan officers.

Findings from the study have important implications for designing microfinance products for this segment. The study suggests that introducing flexibility in repayment schedules present a trade-off for banks and clients. Clients who were given a grace period, invested more in their businesses and in illiquid components, while simultaneously increasing their risk of default. Hence, results support the predominant view that strict repayment schedules discourage default.

Key Findings

For all clients, those with and without a grace period, the most significant use of their loan, 80%, was on businessrelated activities; the second largest category was house repairs. But there are also notable differences in spending between the two groups of clients. For example, clients with the two-month grace period spent roughly 8% (Rs. 462) more on business items, than clients without the grace period. When business expenses are further broken down, clients with the grace period spent more on inventory and raw materials than clients without a grace period. Additionally, while the rate of new business formation among the clients is low, around 2% of clients, the likelihood of starting a new business is doubled among the clients with the grace period. Thus it appears that the two-month grace period encourages clients to invest more in their business and to spend more on illiquid, and possibly more risky, inputs such as raw materials. A second category of findings relate to client delinquency and default. The research team examined and compared patterns of delinquency between clients with and without the grace period. Clients with grace period were on average, between 6 to 8 percentage points more likely to default on their loan than clients without a grace period. Four months, or sixteen weeks, after the final loan installment was due, 3% of non-grace period clients had failed to repay and 11% of grace period clients had failed to repay.

Thematic area

Financial Inclusion

Project Leads

Rohini Pande, Erica Field


West Bengal


Village Welfare Society (VWS), West Bengal