Borrowers’ Distress and Debt Relief: Evidence from a Natural Experiment

Mukherjee, Saptarshi; Subramanian, Krishnamurthy; Tantri, Prasanna L.

doi:10.1086/701902

Cited by 28 publications

(20 citation statements)

References 35 publications

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“…This must be done quickly to mitigate any financial strains that households may face (Gentilini, Laughton, and O'Brien 2018;Parker and Todd 2017;Özler 2020). The third is assistance to affected production sectors and firms through temporary tax cuts, moratoriums on debt repayments, and temporary credit lines (Mukherjee, Subramanian, and Tantri 2018;OECD 2009;Spilimbergo et al 2008).…”

Section: Relief Measuresmentioning

confidence: 99%

Macroeconomic Policy in the Time of COVID-19

Loayza¹,

Pennings²

2020

244

189

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COVID-19 not only represents a worldwide public health emergency but has become an international economic crisis that could surpass the global financial crisis of 2008-09. Right now, containment and mitigation measures are necessary to limit the spread of the virus and save lives. However, they come at a cost, as shutdowns imply reducing economic activity. These human and economic costs are likely to be larger for developing countries, which generally have lower health care capacity, larger informal sectors, shallower financial markets, less fiscal space, and poorer governance. Policy makers will need to weigh carefully the effectiveness and socioeconomic consequences of containment and mitigation policies, responding to epidemiological evidence on how the virus spreads and trying to avoid unintended consequences. Economic policy in the short term should be focused on providing emergency relief to vulnerable populations and affected businesses. The short-term goal is not to stimulate the economy-which is impossible, given the supply-restricting containment measures, but rather to avoid mass layoffs and bankruptcies. In the medium term, macroeconomic policy should turn to recovery measures, which typically involve monetary and fiscal stimulus. However, in many developing countries, stimulus may be less effective because monetary transmission is weak and fiscal space and fiscal multipliers are often small. A more viable goal for macroeconomic policy in developing countries is avoiding procyclicality, ensuring the continuity of public services for the economy, and supporting the vulnerable. Because COVID-19 is truly a global shock, international coordination is essential, in economic policy, health care and science, and containment and mitigation efforts. Critical times call for well-designed government action and effective public service delivery-preserving, rather than ignoring, the practices for macroeconomic stability and proper governance that serve in good and bad times.

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Section: Relief Measuresmentioning

confidence: 99%

Macroeconomic Policy in the Time of COVID-19

Loayza¹,

Pennings²

2020

244

189

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“…On the contrary, the saved debtors had piled up their informal debts and decreased their investments, and their productivity had fallen compared to debtors who had not been saved. Mukherjee et al (2018), analyzing the same debt relief program, showed that the situation of those who found themselves in difficult situations due to exogenous shocks (weather) and not their own faults have significantly improved and became financially more included. Similar conclusions were drawn by on a different sample, performing a randomized controlled experiment on overdue credit card debts in the US.…”

Section: Introductionmentioning

confidence: 99%

Overdue Debts and Financial Exclusion

Berlinger

Dobránszky-Bartus

Molnár

2021

Risks

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We examine the impact of overdue debts in small villages in one of Hungary’s most disadvantaged regions. We find that a significant number of debtors with overdue debts permanently escape from debt collectors. Accordingly, in our sample, overdue debts reduce the likelihood of declared work by 14 percentage points on average. The lack of declared work alone reduces the probability of opening a bank account by 21 percentage points, and overdue debts further reduce it by 9 percentage points. The negative effect of overdue debts on health is almost as large as the positive effect of a high school diploma. In addition, the health-destroying effect extends not only to the debtor but to all members of the household. Therefore, overdue debts create a poverty trap mechanism exacerbating financial exclusion, hence resulting in significant losses for both the individual and society. We recommend paying more attention to smoothing credit cycles and resolving non-performing debt obligations.

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“…It appears that the impacts could be heterogeneous across beneficiaries. Mukherjee, Subramanian, and Tantri (2017) show that the debt waiver engenders costs when it is directed to non-distressed borrowers, but generates substantial benefits when it is directed to distressed borrowers. They find that the default rate of distressed (drought-related) waiver beneficiaries is lower by 16-22 per cent when compared to distressed non-beneficiaries.…”

Section: Impacts On Farmers On Well-being and Repayment Capacitymentioning

confidence: 99%

Loan Waivers and Bank Credit: Reflections on the Evidence and the Way Forward

Narayanan

Mehrotra

2019

Vikalpa: The Journal for Decision Makers

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Executive Summary In the past decade, farm loan waivers have become a policy instrument to alleviate the financial distress of farmers. Despite agreement on the theoretical rationale for such debt forgiveness and its deep contextual relevance, many fear that in the long run, loan waivers might vitiate the repayment culture in the farm sector and undermine the financial status of banks. At present, critiques of large-scale loan waivers rest on limited evidence. This article reviews and synthesizes existing research and available data on the implications of loan waivers, especially for the flow of credit to farmers from banks. On most of the issues, such as farmer well-being and repayment culture, there seems to be mixed evidence on the consequences of debt waivers. Credible evidence on macroeconomic implications is limited, mainly on account of methodological challenges. This article concludes that even if loan waivers are an inappropriate strategy to support farm incomes in sustainable ways, the wide-ranging negative impacts on the formal banking sector are perhaps overstated. A more fruitful approach would be to focus on whether loan waivers can be designed to reduce the possible negative consequences for the formal banking system as well as for macroeconomic system. The article identifies three possible instruments—loan insurance products that will help banks cope with the consequences of large-scale defaults. Second, to explore the creation of a distress fund that will cushion state finances, should there be a need for debt waivers. Third, it would be useful to consider the operation of debt relief commissions to have an ongoing process for debt waivers.

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Borrowers’ Distress and Debt Relief: Evidence from a Natural Experiment

Cited by 28 publications

References 35 publications

Macroeconomic Policy in the Time of COVID-19

Macroeconomic Policy in the Time of COVID-19

Overdue Debts and Financial Exclusion

Loan Waivers and Bank Credit: Reflections on the Evidence and the Way Forward

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