Credit lines in microcredit: Short-term evidence from a randomized controlled trial in India

• Published in: Journal of development economics Vol. 146; p. 102497
• Main Authors: Aragón, Fernando M., Karaivanov, Alexander, Krishnaswamy, Karuna
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-09-2020
• Subjects: Credit lines; Flexibility; Microfinance; Randomized control trial; Microfinance; Flexibility; Randomized control trial; Credit lines
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2020.102497

We study the short-term effect of flexible microcredit loans on small businesses. We use data from a randomized controlled trial that offered a credit line product to street vendors in India. The credit line retains standard features of microcredit such as joint liability, female borrowers and weekly meetings, but allows flexible borrowing and repayment, like a credit card. We find a positive effect on the vendors' gross profits: on average, a credit line increases profits by 7 percent compared to a standard microcredit term loan. The profit differential increases with time since loan disbursal, to about 15 percent after 18 weeks. The observed increase in profits appears to be mainly driven by the credit line allowing more flexible borrowing and repayments, and allowing vendors to invest in more profitable goods. Our findings highlight providing flexible loans as a viable strategy for raising the impact of microcredit.
•We study the short-term effect of a new, more flexible, microcredit product on business profits.•The new product works like a credit line: clients can borrow and repay at any time, up to a certain borrowing limit.•We estimate the effect using a randomized control trial among street vendors in India.•We find evidence of a positive effect on profits. This effect seems to be driven by vendors changing the type of products they sell.