Debt relief for households in developing economies.

This article focuses on the design, effects, and challenges of debt relief policies for households in developing economies, where access to formal credit has expanded significantly due to microfinance and digital lending innovations. It presents a conceptual framework distinguishing between discretionary (ad hoc) and rules-based debt relief, such as debt forbearance, debt forgiveness, and personal bankruptcy, highlighting how these policies influence borrower and lender expectations, credit supply, and moral hazard. Survey evidence from Indian microfinance and bank borrowers exposed to Covid-19-related debt relief programs indicates that most borrowers expect debt relief to improve repayment and future credit access, with forbearance perceived more favorably than forgiveness. The article underscores that well-designed debt relief can provide valuable insurance against economic shocks in contexts with incomplete markets, but its efficiency depends on institutional settings, who bears the costs, and borrower behavior, emphasizing the need for context-sensitive policies and further research on cultural and economic differences affecting debt relief outcomes.