examine the immediate impact of forbearance offers on borrower expectations and credit discipline, as well as their potential impacts on relational contracting and longer-term banking relationships.

We find that borrowers who receive a moratorium offer presented as an initiative of their lender are 4 percentage points (7 percent) _less_ likely to default on their loan than borrowers who are not offered a moratorium. The offer has no statistically significant impact on loan repayment if it is presented as an initiative of the regulator. Turning to the impact of forbearance offers on banking relationships, we show that borrowers who are granted repayment flexibility by their lender are significantly more likely to want to engage with the lender in the future. In the product adoption experiment, borrowers who received a moratorium offer from their lender in the main experiment have 10 percentage points (27 percent) higher demand for a non-credit product offered by the lender than participants who had received a forbearance offer with identical terms presented as an initiative of the regulator. At the same time, borrowers who received a forbearance offer presented as an initiative of their lender had the same demand for personal loans marketed by the lender as borrowers in the regulator condition, which suggests that the demand for future interactions with the lender is not driven by expectations of lenient enforcement or expectations that it is easier to renegotiate contracts with this lender, which could give rise to moral hazard. Overall, the results suggest that allowing lenders to take credit for forbearance policies can alleviate financial distress without damaging the lender’s reputation for credit enforcement and strengthen longer-term banking relationships for relational contracting reasons (i.e. the anticipation of benefits from a continued banking relationship).

Our experiment takes advantage of a unique policy context that enables us to provide causal evidence on the response to forbearance offers in a real stakes environment. Measuring the effects of debt forbearance on borrower behavior is challenging for several reasons. Payment deferrals are typically endogenous to borrower and lender characteristics, and episodes of debt forbearance also tend to coincide with large economic crises that further confound the impact of repayment flexibility on borrower behavior and expectations. We overcome these challenges by working with a leading consumer finance lender at a time when a national consumer debt moratorium policy was in place in India. Importantly, the policy guidance at the time of the experiment encouraged lenders to provide further relief but did not strictly _require_ them to offer repayment deferrals to all customers. This feature of the policy enables us to issue moratorium offers that are fully compliant with the terms of the national policy and to randomize whether a customer is offered debt relief as well as the manner in which moratorium offers are presented. The offers in our experiment are fully truthful, because the experiment takes place at a point in time when both the statement that the moratorium is offered as a result of regulatory guidance and the statement that it is offered by the lender are true.

In the first part of the paper, we examine how randomized moratorium offers affect borrower expectations and loan repayment. In addition to the main effects on repayment of the loans covered by the moratorium offers, we examine the impact of forbearance offers on _overall credit discipline_ . To do so, we combine repayment data from our partner firm with credit bureau information that captures the _universe_ of loan payments for customers in our sample. We establish that borrowers who receive a moratorium offer from their lender prioritize payments for loans covered by the moratorium and are significantly less likely to default, which holds both for those with and without outstanding loans 2