Debt moratoria that allow borrowers to postpone loan payments are a frequently used tool intended to soften the impact of economic crises. We conduct a nationwide experiment with a large consumer lender in India to study how debt forbearance offers affect loan repayment and banking relationships. In the experiment, borrowers receive forbearance offers that are presented either as an initiative of their lender or the result of government regulation. We find that delinquent borrowers who are offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default on their loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offered forbearance by their lender also have causally higher demand for future interactions with the lender: in a follow-up experiment conducted several months after the main intervention demand for a non-credit product offered by the lender is 10 percentage points (27 percent) higher among customers who were offered repayment flexibility by the lender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, our results suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support the formation of longer-term banking relationships.

Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive with reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The findings help explain reduced and heterogeneous demand for long-term mortgage contracts.

I use the random assignment of debt relief policies in a large-scale field experiment to test default models emphasizing liquidity and strategic behavior. In contrast to liquidity being the sole trigger, borrowers respond differently to a dollar reduction in current payments when delivered through forbearance or interest rate reduction: forbearance reduces payments twice as much, whereas delinquencies are more responsive to a rate reduction. Compatible with strategic behavior, borrowers default in response to changes in future payments orthogonal to solvency and liquidity. Compatible with the endogeneity of triggers, whether forbearance or interest rates are more effective, and defaults are strategic is tightly linked to borrower balance sheets. I characterize a single strategic default trigger whose location is influenced by distress, precaution, and assets. The findings have implications for targeting loan modifications and modeling the pass-through of interest rates.