construction, and can only avail of the subsidy once the toilet is fully constructed and verified as such by local district authorities.<sup>6</sup> Importantly, households can only avail of the subsidy once. SBM provides no financial support to households who want to repair or upgrade a toilet.

From an economic perspective, a renumeration post verification model is a solution to the imperfect commitment problem which exists in this setting. If the Government provided funds prior to construction, it has no commitment device to ensure that the money is indeed spent on toilet construction. However, such a model has a clear limitation: poor households might either not be able to access funds to construct a toilet, particularly in the presence of credit market imperfections; or might be unable to afford to construct a toilet at all. This weakness has been noted by a number of practitioners (e.g. Rama Mohan, 2017), with micro-credit proposed as a potential mechanism through which liquidity constrained households could obtain so-called bridge funding.

SBM officially defines households to be eligible for SBM subsidies if at the time of the SBM baseline survey in 2012-2013 (conducted by communities and verified by district and state officials) they were recorded (a) not to have a toilet, and (b) to be either Below Poverty Line (BPL) or to belong to any of the following marginalised Above Poverty Line (APL) groups (SBM, 2017): (i) Scheduled Castes/Scheduled Tribes (SC/ST), (ii) Persons with disability, (iii) Widow/old age pensioners, (iv) Landless labourers with homestead, (v) Small farmers, (vi) Marginal farmers, and (vii) Female headed households.

We will refer to BPL households and these vulnerable APL groups jointly as _Vulnerable Groups_ (VGs). SBM’s administrative data (see Section 3.2) suggest that overall in rural India, 63% of households were recorded as not having a toilet at 2012-13 SBM baseline. Most of these households were classified as either being BPL (46%) or vulnerable APL (49%), yielding an overall share of 60% of officially subsidy eligible households in rural India at SBM baseline. This study focuses on households residing in two districts of Maharashtra, Latur and Nanded. Whereas the share of subsidy eligible households in Maharashtra was lower than the national average (i.e. 52%) - driven by a higher baseline toilet coverage (45%), baseline toilet coverage in our study districts was particularly low. On average (including MF clients and nonclients), 72% of rural households were recorded as not having a toilet at SBM baseline and, adding to this the VG condition, almost 70% of all rural households in our study area were eligible for an SBM subsidy.

# **2.3 Sanitation micro-credit intervention**

In this setting our implementing partner, a large MFI active in five states in India, pioneered micro-credit for sanitation. It started offering the new loan product to its exclusively female clients in February 2015 (shortly after the launch of the SBM) in five of their branches, covering rural and semi-urban areas in the districts of Nanded and Latur in Maharashtra.<sup>7</sup> Our estimate of the proportion of clients of our MFI

> 6As per the SBM guidelines, states have the authority to introduce variations in the subsidy provision, in particular to allow households to request a share of the subsidy amount prior to the completion of their toilet. This share is meant to be small though and only to be provided when the household can show that significant works have already been completed (e.g. by having dug a pit).

> 7Outside of the study area, the MFI first started offering sanitation loans to their clients in 2009. The MFI has (among other motives) a social mission, committing itself to strive to improve clients’ health. To that end, it has introduced various health related programs, including emergency loans to support clients in meeting unexpected health expenditures among other unanticipated needs. Through customer surveys, which the MFI conducts to understand their clients’ needs, they realized that there was strong demand for credit to construct toilets - 90% of clients expressed an interest in taking sanitation loans -, which most clients lacked. Understanding that such a loan product does not generate income directly and immediately, the MFI decided to meet their customers’ demand and offer the product, but at a lower interest rate than income generating

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