Microfinance institutions can increase their efficiency by minimizing default rates among their borrowers. These clients are usually too poor to offer any property as collateral, so micro-lenders need to use alternative methods to encourage repayment. The most common methods are: (1) threatening to not offer loans in the future to clients who are in default and (2) using mechanisms in which peers exert pressure on the client so that he/she repays the loan. The best mechanism to encourage repayment should not only increase the efficiency of the MFI, but also maintain the good payback status of borrowers so that they can take out future loans.

We have partnered with PRISMA, a microfinance organization in Peru, to identify ways to implement these methods more effectively. PRISMA has recently deployed a new strategy in its individual loan program for loan recovery that involves sending written notifications to defaulters. This strategy makes use of both the promise that good payers can receive additional loans from PRISMA in the future and the pressure that loan recipients face from their loan guarantors.

In the study, clients are randomly assigned to two groups. Two thirds of the clients receive written notifications if they fall in default (treatment group), while the rest of the clients do not receive any additional written notifications (control group). Within the treatment group, clients receive letters with either "gain" or "loss" frames, telling the client either that rectifying his credit standing will allow him access to credit in the future or telling him that his continued default will keep him from accessing loans in the future and threatening legal action. Additionally, in some cases both the sponsor and the client receive a letter, while in other cases only the client does.