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> Posted by Rohini Pande, Professor of Public Policy, Harvard University

The issue of financial stress is an important one since there has been widespread concern in India and elsewhere that debt to microfinance lenders is causing distress to many borrowers. Financial stress is well-documented as an important factor leading to mental health problems. Mental health problems, in turn, are among the most important causes of morbidity in the world, and studies in developing countries have found strong associations between common mental disorders and economic problems. A 2010 World Health Organization Report warns that poverty and mental health disorders can create a “vicious cycle” where not only do they exacerbate each other, but also lead to reduced development and increased vulnerability. However, the net impact of limiting a borrower’s debt level on her level of stress is unclear. On one hand, curbing indebtedness may reduce stress; on the other, if less credit worsens her economic well-being, then this may increase stress.

With Erica Field of Duke University, I led a study to shed light on this question. We asked whether small changes in contract design could help alleviate borrower reports of stress. The answer, published in the PLOS ONE journal, seems to be yes.

We conducted the study in 2008 with Village Financial Services in Kolkata, India. This MFI recruited clients and formed 148 five-member loan groups comprising 740 clients. We randomly assigned the groups to the control arm of the study, where groups made the standard weekly payments, or the treatment arm, where groups paid on a monthly basis. For a seven-week period starting a few months after loan disbursal, team members interviewed a random sample of 105 weekly and 105 monthly clients regarding their state of mind every 48 hours via cell phones distributed specially for the study. We administered 5000 surveys over the course of the study, asking clients questions regarding their confidence in their ability to repay the loan, their anxiety about loan repayment, whether they argued with their spouse about finances, and the time they spent thinking about repayment.

The results were striking: Clients on a monthly schedule were 51 percent less likely to report feeling “worried, tense, or anxious” about repaying, were 54 percent less likely to report a lack of confidence about repaying, and reported spending less time thinking about their loan compared to weekly clients.

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