Costs and Benefits of Debt Moratoria: Evidence from a Natural Experiment in India

We provide evidence of both the costs and benefits of debt moratoria using the Indian debt waiver program of 2008. We utilize unique loan account data on agricultural borrowers. We exploit exogenous variation in rainfall to separate beneficiaries into distressed and non-distressed borrowers. First, by alleviating debtoverhang problems, the waiver leads to drastic improvements in loan performance of distressed borrowers. However, consistent with moral hazard, the waiver has no effect on loan performance of non-distressed borrowers. Second, non-distressed borrowers suffer from credit rationing post the waiver. Finally, while banks’ overall non-performing assets decreased post the waiver, agricultural non-performing assets increased.