is based on a remuneration after verification model (or, ex-post subsidies). To some extent, this feature may be counter-effective since it requires households, who may be liquidity constrained, to construct a toilet prior to subsidy receipt (Rama Mohan, 2017). Micro-credit could support the subsidy program by providing some bridge funding in this context. And indeed, we provide evidence that the credit mainly improves sanitation loan uptake amongst subsidy eligible households living in areas which experienced significant subsidy disbursement delays. However, loans seem to have converted into new toilets only in sites facing relatively small delays in subsidy disbursement.

Moreover, there remain open questions on how large the subsidy should be in order to motivate toilet construction. A subsidy that is too small (relative to the price of the types of toilets households want) will depress demand for toilets, while one that is too high will lead to wastage of resources. This is particularly relevant in rural India where it has been shown that households have an expensive taste for toilet quality relative to similarly poor households in other developing countries (Coffey and Spears, 2017). We find evidence that subsidy eligible households are more likely to take up a sanitation loan where average toilet construction costs are significantly above the subsidy amount. At the same time, conversion of the loan to new toilets seems only feasible where the subsidy-construction cost gap is low.

The paper proceeds as follows: We first provide an overview of the SBM subsidy program as well as the micro-credit intervention. We then discuss in Section 3 the Study design, data and our empirical strategy. Section 4 presents our main findings, followed by an analysis of possible mechanisms in Section 5. Section 6 concludes.

# **2 Context and interventions**

## **2.1 Context**

Our study took place in Latur and Nanded districts in the South-Eastern part of Maharashtra, one of the largest states in India. Though it is also one of the richest states in India, there is evidence of severe inequalities within the State, with Latur and Nanded districts regularly classed to be among the most deprived parts of Maharashtra. Data from the 2012-2013 District Level Household Survey (DLHS-4) indicate that around 21% (18.7%) of households in Latur and Nanded (rural India) owned a Below Poverty Line (BPL) card, 56.6% (46.25%) of households owned land, and that household heads had around 4.16 (3.98) years of education. Agriculture is the main economic activity in the rural areas of these districts, with over 70% of people engaged in the primary sector.

Latur and Nanded districts lag behind rural Maharastra and rural India on average in terms of sanitation coverage. The DLHS-4 data indicate that only around 24% of households owned a toilet on average in those districts, compared to 38% in rural Maharashtra and 56% in rural India. Our study focused specifically on clients of a large MFI, who came from relatively more deprived households in rural Latur and Nanded. Indeed, data from a baseline survey conducted in 2014/15 indicate that around 41.9% of client households had a BPL card, compared to 21% for Latur and Nanded in the DLHS-4 data, and only 44% of households owned land (relative to 56.6% in rural Latur and Nanded). Toilet coverage among these households was similar to that for rural parts of the districts: In 2014-15, our survey data indicate that around 27.5% of households with a client of the MFI had a toilet. Very few households reported using community toilets, meaning that over 70% of these households defecated in the open. This corresponds 4