At the Right Time:Eliminating Mismatch between Cash Flow and Credit Flow in Microcredit

Despite the expansion of microcredit access, its outreach is still limited among farmers. One potential cause is a timing mismatch between cash flow and credit flow. Farmers have little income until their harvest is realized, while standard microcredit requires weekly installment payments. This mismatch causes underinvestment and borrowing for repayment, resulting in lower uptake rates. Furthermore, agricultural investment is sequential, while credit is disbursed as a lump sum. Present-biased (PB) farmers may fail to set aside sufficient money for later investment. To test these predictions, we conducted a randomized control trial modifying standard microcredit targeted at tenant farmers by setting repayment schedules to one-time repayment after harvest and making loan disbursement sequential. Discarding weekly repayment increased uptake and borrower’s satisfaction without worsening repayment rates. Sequential disbursement increased later investments among PB borrowers and reduced loan sizes. We attribute the loan size reduction to the option value: Sequential disbursement allowed borrowers to adjust the total loan size after observing credit demand shocks, eliminating the need for precautionary borrowing. Calibrated models are used to evaluate counterfactual credit designs, showing that letting borrowers set the credit limit is beneficial for PB borrowers, while credit lines will be suboptimal for PB borrowers.