Why are some entrepreneurs perpetually in debt? Around the world, individuals pay high interest rates to moneylenders or microfinance institutions in order to finance their working capital. In many cases, however, the micro-enterprises are not growing. Hence it is unclear in the long run why these businesses need financing. Why are these entrepreneurs unable to save sufficiently from their income to finance their businesses through accumulated prior earnings? Given the high rates of interest, such an approach would no doubt lead to higher consumption for the entrepreneurs and their families. In this study, we study the characteristics of vendors who repeatedly fall into debt.

Using a randomized controlled design, the study aims to assess the impact of two interventions—financial training and debt pay-off (a grant equal to working capital) on vendors’ borrowing and saving behaviors. In India, the sample population consists of 1000 small scale fruit/vegetable/flower vendors in Chennai who have been selected on the basis of two criteria – buying goods on credit at a premium or taking a daily loan for working capital. Baseline data and three follow-up surveys collect information on business activities, debt, and household expenditures.