in our study population is around 7%.<sup>8</sup> Although a number of MFIs provide credit to poor households in the study area, there are only few institutions providing credit specifically for non-income generating purposes and none provided credit for sanitation when the study started.

The sanitation loan offered amounts of up to Rs 15,000 (USD211), which is 25% higher than the SBM subsidy amount. Over the study period, it charged an average interest rate of 20 percent per annum at a declining balance with a 2-year maturity.<sup>9</sup> Even though clients had the choice of repaying on either a weekly or bi-weekly basis, in practice almost all chose to make weekly repayments. Compared to other non-productive loans offered by the MFI, the sanitation loan amount is higher and carries a similar or lower interest rate over a longer repayment period. Business loans are typically larger in size, but have a higher interest rate. All loans are provided based on a joint-liability principle (lending groups consist of 5 - 10 members) and there is no collateral requirement. Each client can obtain only one sanitation loan, and only if she has been a client of the MFI for at least one year. If these conditions are met, sanitation loans can be taken alongside other outstanding loans. However, any client wishing to take a sanitation loan must satisfy criteria set out by the Reserve Bank of India, which seeks to ensure that clients are not over-indebted, and can afford to repay their loans.<sup>10</sup> For more detailed information about the MFI and its sanitation loan product we refer to Augsburg et al. [2018]. The loan could be used to construct a new toilet, or to upgrade or repair an existing toilet. It was not linked to any specific toilet, and the MFI did not provide any advice or guidance on the construction of the toilet. Clients were free to construct the toilet of their own choice.

# **3 Study Design, Data and Empirical Strategy**

## **3.1 Study design**

The original evaluation exploited a planned expansion of the sanitation loans by the MFI to new areas. For evaluation purpose, the new loan product was initially introduced to clients living in 40 Gram Panchayats (GPs), randomly selected out of 81 GPs in which the MFI had operations at that time. Apart from the introduction of the new loan product, business continued as usual, with all clients, in both the GPs where the sanitation loan product was offered (treatment) and in GPs where it was not offered (control), continuing to have access to other loan products. These included income-generating loans, emergency loans, education and festival loans. The randomisation of GPs into treatment and control was stratified by MFI branch and village size. Figure 1 displays the geographical distribution of the study communities, loans, thereby cross-subsidizing these special purpose loans. This was done on the understanding that a happier and healthier client would ultimately be better placed to pay back other loans.

> 8This estimate is obtained by dividing the number of clients recorded in the partner MFI administrative records in November 2014 (assuming one MFI client per household - as per the MFI’s guidelines) by the number of households listed in the village during the 2011 Government of India population census.

> 9The MFI reduced the interest rate on the loan from an initial 22% to 20% and finally 18% while the experiment was ongoing.

> 10From October 2015 (pre-October 2015), the relevant criteria for clients are: (i) annual household income of at most Rs. 100,000 (Rs. 50,000) for rural customers; (ii) total indebtedness of at most Rs 100,000 (Rs 50,000) excluding education and medical expenses; (iii) Overall loan amount should not exceed Rs 60,000 (Rs 35,000) in the first cycle and Rs 100,000 (Rs 50,000) in subsequent cycles. There are additional criteria related to the tenure of large loans, and the composition of the MFI’s portfolio of outstanding loans.

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