Flexible Debt Relief and Credit Behavior: Evidence from Loan-Level Data

This paper evaluates a flexible debt relief program that combines traditional debt forbearance with “principal-first†repayment incentive – whereby the very first baht of loan repayment during the program goes towards principal reduction. Using loan-level data from the National Credit Bureau and a fuzzy regression discontinuity design, we find that while the built-in forbearance reduces overall repayment probability, 49% of program participants maintain repayment. In addition, the principal-first feature successfully increases repayment intensity at the cutoff among those who make meaningful repayments. At the same time, the program significantly mitigates credit deterioration and generates positive spillovers, prompting borrowers to reallocate freed-up liquidity toward non-relief loans with stricter enforcement. These findings demonstrate that embedding repayment incentives within debt forbearance introduces contract flexibility that effectively reveals borrowers’ latent repayment capacity. This allows the design to function simultaneously as a critical safety net for financially distressed borrowers and an active incentive for capable borrowers to accelerate debt reduction.