Each client can obtain only one sanitation loan. The MFI requires clients interested in applying for a sanitation loan to obtain agreement from their spouses before the application is processed. A credit bureau check is conducted for all loan applications, and applications are rejected if the client doesn’t satisfy the criteria set out by the Reserve Bank of India (RBI).<sup>13</sup><sup>_,_14</sup> Table 1 summarises the sanitation loan characteristics.

Table 1: Sanitation loan characteristics

|Amount:|Up to Rs 15,000|
|---|---|
|Interest rate:|22% (later 18%) per annum on a declining balance|
|Loan maturity:|2 years|
|Payment Frequency:|Weekly/Bi-weekly basis|
|Collateral:|None, but joint-liability|
|Cost of the loan:|19.9% - 24.1% of the amount disbursed depending on interest rate|
|Other costs:|Processing fee of 1.1% of principal and Rs 306 for life insurance premium|

# **2.3 Sanitation loan is a labelled loan**

This sanitation loan, as with other loan products provided by the MFI, can be classified as a ‘labelled’ loan. The reason for this is threefold: First, while the MFI provides loans for many different purposes – income generation, education, festival, etc. – none of the loans is bundled with a specific product related to the intended investment purpose and all funds are disbursed directly to the client. This is also the case for the sanitation loan: loans were not bundled with any specific toilet model or material for the construction, and the MFI did not provide any advice or guidance on the construction of a toilet, available masons, types of toilet, etc. Clients were free to install a toilet of their own choice. This is in contrast with other studies of micro-credit loans for health investments (e.g. BenYishay et al. [2017], Tarozzi et al. [2014] and Guiteras et al. [2016]) .

The second aspect that makes this loan a labelled loan, is that the actual use is not closely monitored, or enforced by the MFI. When monitoring is conducted, it relies primarily on reporting by the client or her group members. 15 percent of clients that took a sanitation loan report that no monitoring check whatsoever was done, either at application stage or after loan disbursement; 53 percent report that monitoring was done through a loan official asking herself or a group member; 30 percent of clients report that loan officers visited their home to check whether they owned a toilet when applying or to check its use. Moreover, loan officers’ loan use checks are not monitored or incentivised by the MFI.

> 13The Reserve Bank of India imposes the following requirements on micro-finance customers from October 2015 (preOctober 2015): (1) Annual household income of at most Rs. 100,000 (Rs. 60,000) for rural customers; (2) Total indebtedness of at most Rs. 100,000 (Rs. 50,000) excluding education and medical expenses; (3) 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; (4) Tenure of loan should not be less than 24 months for any loan amount in excess of Rs. 30,000 (Rs. 15,000). In addition, at least 50 percent (75 percent) of the MFI’s portfolio should be comprised of loans provided for income generation.

> 14Other sources of sanitation and home improvement loans were available in our study area. From credit bureau records we know that clients in our sample have taken loans from 27 micro-finance providers before and during the intervention.

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