their borrowing behaviour in one of two ways: (i) increase overall borrowing, potentially accompanied by a change in the composition of borrowing, and/or (ii) not change overall borrowing, but change the composition of the borrowing portfolio.

**Model predictions** The model laid out in ACGMS 2019 predicts 5 possible cases, which are summarised in Figure 4. If households are insensitive to the loan label and the sanitation loan simply relaxes a credit constraint (case 1), we would expect the sanitation loan uptake to be accompanied by an increase in sanitation investments and/or other (business) investments. The sanitation loan would be taken in addition to other credit the household was already taking, resulting in an increase in overall borrowing. We would not expect to see a shift away from any other loan types. The impact on toilet impact is ambiguous if the credit constraint is not sufficiently relaxed to allow the household to make all the investments it wants to make.

The lower interest rate (in the absence of a strong effect of the loan label) would induce households to shift away from more expensive loans (e.g. business loan offered by the MFI) towards the sanitation loan, even if the household did not intend to alter its investments. Overall borrowing could increase or remain unchanged, depending on household investment decisions: if the interest rate reduction didn’t induce households to change their investment decisions, we would expect to see no change in overall borrowing, though there should be a shift away from more expensive sources of credit to cheaper sources of credit (case 2). If the lower interest rate allowed or incentivised households to increase their investments, we would expect to see an increase in investments, accompanied by an increase in overall borrowing (case 3).

If instead households are sensitive to loan labelling (and are therefore credit constrained for sanitation in the absence of a sanitation loan), then we would expect to observe an increase in toilet uptake, combined with either an increase in overall borrowing (case 4), or a particular change in borrowing composition - a shift away from another loan type labelled for an investment that is less desired than sanitation (case 5). The latter would only happen if the household continues being overall credit constrained, in spite of the availability of additional credit.<sup>29</sup> Whether or not we will be able to identify the underlying mechanism of impacts will depend on whether or not we find an increase in overall borrowing or a change in borrowing composition. If we observe an increase in overall borrowing, then that is not a sufficient condition for exclusion for any of the three possible mechanisms, as either case 1, case 2 or case 4 in Figure 4 could apply. If, there is no increase in overall borrowing, but there is a shift away from another loan type, then we can identify the channel by investigating the nature of the shift. In particular, while the lower interest rate can explain substitution away from more expensive loans (case 4), it cannot explain substitution away from loans with a similar or lower interest rate. The latter would be consistent with households responding to the loan label (case 5).

**Results** To examine changes in borrowing behaviour, we consider a number of dimensions of borrowing. First, we consider impacts on MFI loan uptake, overall from any MFI and from the implementing MFI in particular, using official credit bureau data and administrative data from the implementing MFI. Next, we assess impacts on borrowing from other formal institutions (including commercial banks, cooperatives,

> 29This is possible, for instance, because of the various loan caps imposed by the RBI and by the MFI.

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