To give some supportive statistics from our context: 26 percent of clients that took a sanitation loan reported using it for the construction of a new toilet, despite already owning one (verified by survey interviewers) before the intervention began.

This links to the third aspect important for our classification of labelled loans, namely that the MFI does not enforce or incentivise loan use in any specific manner, such as through larger loan sizes or lower interest rates; or through incentives and sanctions for loan officers. As with many other MFIs, senior management’s core focus is on minimising default and late repayment. Conversations with the top management of the MF partner, and staff involved in loan approval – which occurs in the head office – indicate that past loan use is not taken into consideration when approving a loan application. By contrast, new loans are not approved if a client is late in repaying an existing loan/has a past loan that is in default. In line with this, we find that 34 percent of clients who took a sanitation loan and did not have a toilet either at the roll-out of the sanitation loan program or at the time of our endline survey took a subsequent loan over the course of our experiment.<sup>15</sup> Thus, it is vital to also consider the role of the label when analysing the effectiveness of this sanitation micro-loan intervention.

# **3 The Experiment**

## **3.1 Experimental Design**

Our study covers 81 Gram Panchayats (GPs) within Latur and Nanded districts in rural Maharashtra, India. GPs are the smallest administrative unit in India, and are charged with the delivery of a number of programs, including the Government’s flagship Swachh Bharat Mission (SBM) policy. The study GPs were selected based on two criteria: (i) the MFI had existing operations and (ii) no sanitation activities had been undertaken by the MFI in the GP.<sup>16</sup> A total of 133 GPs satisfied this criterion. Of these, 120 were randomly selected to be part of the study. 39 of these GPs were randomly selected to receive another program, and are studied in a companion research paper.

Study GPs were randomised into the treatment and control groups through stratified randomisation, with 40 selected to receive the sanitation credit program and 41 selected as controls. Stratified randomisation was used in order to boost power. Strata were defined based on the Branch of the MFI and size of the village (specifically, a village was classified as ‘small’ if it had fewer than 480 households and ‘large’ otherwise). Figure 1 shows the location of each of the study GPs, with an indication of their ‘treatment’ status in the study.

> 15More strikingly, 89 percent of clients who took a sanitation loan and had a toilet before intervention implementation also took a subsequent loan from the same MFI. Though these clients could have used the sanitation loans to repair or upgrade their toilets, as we show in Section 6.2 this form of sanitation investment makes up only a small part of sanitation investments. Clients typically report tusing the sanitation loans for the construction of new toilets.

> 16Note also that the set of GPs in which the MFI is operational is a result of a careful selection exercise by MFI head quarters (e.g. to be selected a GP has to be politically stable, have a certain number of women, etc) and can therefore not be considered representative for the state of Maharashtra, nor for Nanded and Latur districts.

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