The Challenge
Slow and opaque systems for resolving debt disputes create major barriers for both lenders and borrowers around the world.1 When repayment conflicts escalate into lengthy litigation, lenders face higher recovery costs while borrowers—like small and medium enterprises—lose opportunities to renegotiate and stabilize their businesses. This can weaken credit markets, reduce access to finance, and limit firm growth.2
These challenges to debt repayment for entrepreneurs are notably present in India. The court system offers mediation as a faster, non-adversarial alternative to litigation. However, evidence from a pilot of this intervention in Mumbai—which accounts for one-quarter of the country’s industrial production—found that only 45 percent of enterprise borrowers had knowledge about legal recourse, and just 3 percent knew mediation was available. Moreover, many fear punitive enforcement, and a large share of defaulters cannot be contacted through existing address records. These information gaps not only deter distressed borrowers from engaging with lenders but also make it harder for lenders to distinguish inability to pay from deliberate nonpayment. As such, understanding how stronger information provision can improve access to debt dispute mediation and reduce intentional debt default is essential.
The Evaluation
In collaboration with J-PAL South Asia, researchers are conducting two randomized evaluations in Mumbai, India to measure whether providing stronger information can improve enterprises’ debt recovery dispute resolutions in court-led mediation services and reduce their deliberate debt default.
The first intervention will assess the impact of information in resolving debt recovery disputes in court-led mediations. A total of 2,400 entrepreneurs in debt default who have been referred to pre-litigation mediation have been randomly assigned to the following groups:
- Generic information: Simple brochures in the local language explaining mediation procedures to reduce fear, confusion, and misinformation.
- Legal counseling: Law student volunteers provide individualized guidance on legal rights, insolvency protection, and the documents needed for repayment negotiation.
- Comparison: No intervention.
Researchers will measure response rates and successful settlement in debt default cases, followed by impacts on entrepreneurs’ production and investments for business expansion.
The second intervention will assess whether information reduces entrepreneurs' deliberate debt default behavior. To increase the salience of default penalty, the information will contain anonymous outcomes from the first intervention's debt recovery mediation cases. Researchers have randomly assigned five enterprises from the same geographic area as each entrepreneur in the first intervention to either receive the information or serve as a comparison group."
Results
Results will be available in 2026.
Sources
1. Rao 2020; Bau and Matray, 2023
2. Kaya, Orcun. "The impact of late payments on SMEs’ access to finance: evidence from credit rationing and loan terms." Economic Modelling 141 (2024): 106896.
Research Partner
