the Indian government has made a strong commitment to eliminating open defecation through its SBM scheme. Despite a staggering program cost of US$9.3 billion, the largest share of which - 97 per cent in Financial Year 2015-2016 - has been used to cover the programme’s subsidy component (Kapur and Deshpande, 2018), the subsidy is not universal. It is targeted at the most vulnerable of the approximately 600 million people who defecate in the open in India in 2015 (WHO/UNICEF), which in turn makes up 60% of the world population that open defecates.

Micro-credit on the other hand, has experienced phenomenal growth in terms of geographical spread and number of households reached across the developing world and particularly in India. The National Bank for Agriculture and Development alone reported linking over 11 million families to credit through their micro-finance program in 2018. At the same time, micro-credit has been shown to yield positive impacts on health investments (Devoto et al., 2012; Tarozzi et al., 2014; Yishay et al., 2017; ACGMS 2019) leading to international agencies such as the World Bank and USAID calling it a promising solution to (help) tackle the ‘sanitation challenge’. However, despite growing policy interest in such models, at present there is no evidence available on how and to what extent micro-credit can supplement standard health subsidy programs.

In addition to the exogenous variation in access to sanitation loans and their simultaneously introduction with the SBM subsidy scheme, we have access to a combination of unique data sources, allowing us to address this policy relevant question. In particular, we make use of (i) official household level government administrative data on subsidy eligibility, receipts and toilet uptake, (ii) independently collected survey data which include detailed information on households’ sanitation infrastructure and behaviour as well as information on borrowing, (iii) administrative MFI data on sanitation loan uptake from the micro-finance institution providing the newly introduced sanitation loan product as well as official administrative credit bureau data on the amount and date of all loans disbursed by all MFIs active in the study area.

The first key result of the paper is that the sanitation micro-loan is availed of by both subsidy eligible and ineligible households and the percentage uptake within these two groups is statistically equivalent at on average 19 percentage points. We however also observe that while the loan to new toilet conversion rate is about 86% for subsidy ineligible households it is, on average, only about half of this for those eligible for the government subsidy.

Turning to mechanisms, we combine predictions from a theoretical model outlined in ACGMS 2019 and the evidence available on changes in borrowing and investment behaviour, to conclude that sanitation loan uptake and investment of subsidy ineligible households is driven by the new loan product alleviating credit constraints for sanitation. We can conclude that one channel of micro-credit supporting the subsidy scheme is through encompassing _de facto_ vulnerable households not included in the government scheme. However, our results also raise caution that the sanitation loans only partially lift financial constraints these households seem to be facing. We observe that the uptake of sanitation loans is accompanied by a decrease in uptake of education loans. Whether this substitution also leads to a reduction in education investments remains an important question for further research.

For subsidy eligible households, we are not able to identify the exact mechanisms through which the introduction of the sanitation loan induced a significant increase in sanitation loan uptake. However, we provide evidence consistent with micro-credit helping overcome features of the subsidy design which impose possible constraints to its effectiveness. In particular, to minimise misuse of funds, the scheme 3