overall picture that emerges is consistent with the interpretation that forbearance offers extended by the lender highlight the value of the banking relationship and create incentives to engage with the lender in an effort to preserve the option of doing business with the lender in the future.

If this interpretation is correct, one additional implication is that borrowers with fewer outside options should have higher demand for continued interactions with the lender. To test this, we examine whether borrowers with a shorter credit history and borrowers who live in areas with fewer banks—two proxies for more limited outside options—respond differently to the product offer. Results by number of banks are shown in Table B.13, and for credit histories in Table 6. We find suggestive evidence that supports this conclusion: point estimates indicate that borrowers without a formal credit history and borrowers in areas with fewer banks are more likely to repay their loans and more likely to accept the non-credit product offer in the follow-up experiment, though standard errors around these estimates are large so that they should be interpreted as merely suggestive.

Taken together, the results from our two complementary experiments suggest that, rather than damaging credit discipline, repayment flexibility offered by one’s lender can improve loan repayment in the short term and foster the establishment of banking relationships in the longer term. Importantly, we show that the demand for future engagement with the lender is not explained by motives that could create moral hazard in future interactions with the lender. Hence, repayment flexibility offered by a bank can be interpreted as an _investment_ in the banking relationship that can be profitable because it helps the bank identify customers with the highest willingness and ability to repay and ties them into longer term banking relationships. This is analogous to studies on relational contracting (Fehr and List, 2004) that have shown that investments into relationships by one contracting party can generate information about the contracting party and promote trust and trustworthy behavior.

# **5 Conclusion**

This paper uses a nationwide randomized experiment in India to estimate the effects of debt moratorium offers on borrower beliefs and loan repayment. Contrary to widely held assumptions, we find that the debt forbearance offers extended as part of our experiment do not change borrower beliefs in a way that could give rise to moral hazard. On the contrary, when lenders are able to take credit for granting repayment flexibility and moratorium offers are framed as an initiative of the lender, loan repayment improves substantially once the moratorium expires. We can rule out a number of confounding mechanisms, including reminder effects and the relaxation of financial constraints and additionally show that forbearance offers also have no negative spillover effects on the repayment of other loans. Using data on the universe of outstanding loans for borrowers in our sample, we show that forbearance causes borrowers to prioritize loan repayments to the lender that offered forbearance and away from other lenders. This substitution result has interesting implications for the relationship between competition and credit discipline, which we leave for future work to explore.

Moreover, our findings suggest a mechanism through which repayment deferrals presented as an initiative of one’s lender improve loan performance. Consistent with the interpretation that the offer reminds borrowers about the value of a continued relationship with their lender, borrowers in 26