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

Author

Listed:
  • Worarit Vannavanit
  • Sommarat Chantarat
  • Lathaporn Ratanavararak
  • Kazushi Takahashi

Abstract

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.

Suggested Citation

  • Worarit Vannavanit & Sommarat Chantarat & Lathaporn Ratanavararak & Kazushi Takahashi, 2026. "Flexible Debt Relief and Credit Behavior: Evidence from Loan-Level Data," PIER Discussion Papers 253, Puey Ungphakorn Institute for Economic Research.
  • Handle: RePEc:pui:dpaper:253
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    References listed on IDEAS

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    1. Kim, You Suk & Lee, Donghoon & Scharlemann, Tess & Vickery, James, 2024. "Intermediation frictions in debt relief: Evidence from CARES Act forbearance," Journal of Financial Economics, Elsevier, vol. 158(C).
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    3. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
    4. Michael Dinerstein & Constantine Yannelis & Ching-Tse Chen, 2024. "Debt Moratoria: Evidence from Student Loan Forbearance," American Economic Review: Insights, American Economic Association, vol. 6(2), pages 196-213, June.
    5. Guido Imbens & Karthik Kalyanaraman, 2012. "Optimal Bandwidth Choice for the Regression Discontinuity Estimator," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 933-959.
    6. Erica Field & Rohini Pande & John Papp & Y Jeanette Park, 2012. "Repayment Flexibility Can Reduce Financial Stress: A Randomized Control Trial with Microfinance Clients in India," PLOS ONE, Public Library of Science, vol. 7(9), pages 1-7, September.
    7. Saptarshi Mukherjee & Krishnamurthy Subramanian & Prasanna Tantri, 2018. "Borrowers' Distress and Debt Relief: Evidence from a Natural Experiment," Journal of Law and Economics, University of Chicago Press, vol. 61(4), pages 607-635.
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    Keywords

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    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G50 - Financial Economics - - Household Finance - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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