in India complied with the policy and offered repayment deferrals to eligible borrowers.<sup>7</sup> However, all credit bureau reporting was paused in this first phase, and loans covered by the moratorium were not reclassified as restructured or non-performing.

Once the first phase of the moratorium ended, a second phase started where lenders were still encouraged to grant forbearance to borrowers in need. However, the incentives for doing so were reduced, as loans covered by a moratorium now had to be restructured, which entails processing costs and higher risk provisioning requirements but is still preferable to the standard requirement of having to declare loans as nonperforming if they remain in arrears for more than three months. In practice, lenders in this second phase weighed the administrative cost of offering payment deferrals against the credit risk among their customer population.

We conducted our main experiment during this second phase of India’s consumer credit moratorium, when debt forbearance was still widely granted but had become _de facto_ optional from the perspective of the lender. While banks could still avoid classifying loans as nonperforming if they granted forbearance during this time window, this now entailed a non-zero cost of marking these loans as restructured. As a result, banks exercised greater discretion in making customers eligible for repayment deferrals and generally offered forbearance only to customers with a realistic prospect of eventual repayment. This provides an ideal setting for our experiment in which we vary whether customers receive a moratorium offer as well as whether this offer is presented as an initiative of the lender or the regulator.

# **2.2 Beliefs about Debt Forbearance in the Population**

The impact of debt relief policies has been a hotly contested topic of public debate, with proponents emphasizing their stabilizing effects and critics worrying about their potential to generate moral hazard.<sup>8</sup> To provide additional motivating evidence for our study, we conducted a nationwide online survey in India with a sample of respondents representative of the population of consumer loan borrowers in terms of age, income, and gender. In the survey, we elicited borrower opinions about the likely effect of debt forbearance policies.<sup>9</sup> The results show that even in the case of an aggregate shock where forbearance can be reasonably assumed to benefit primarily borrowers in genuine financial distress, respondents overwhelmingly expect that repayment deferrals will generate moral hazard and damage overall credit discipline.

Figure 1 summarizes the main results of the survey.<sup>10</sup> We first asked borrowers whether they

> 7 Lenders were allowed to continue charging interest. The issue of compound interest during the moratorium, i.e. interest on accrued interest, was argued before the Supreme Court of India. Ultimately, borrowers ended up paying simple interest, with the government reimbursing lenders for the difference between simple and compound interest.

> 8 In addition to the debate on repayment flexibility for individual borrowers, there has also been a debate on _regulatory forbearance_ , which describes policies that allow banks to postpone the recognition of credit risks. Chari et al. (2021) examine the effects of such policies enacted in the aftermath of the 2007-2009 global financial crisis in India and show that they led to widespread incentive distortions, “evergreening” of de facto non-performing loans, and credit misallocation.

> 9 Our approach for this descriptive exercise is similar to recent work that has used online surveys with representative populations to examine how people form opinions about social issues and public polices (see, for example, Stantcheva, 2020). We report descriptive statistics for the survey population in Table B.1 in the Supplementary Appendix. Table B.2 provides summary statistics on the responses to the online survey. 10 The full survey instrument and additional results are available in Table B.1 in the Supplementary Appendix.

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