Co-authored by Lindsey Barone, Varad Pande, Kishan Shah
About a third of all rural households in the country defecate in the open. It has long been assumed that low-income families in rural India do not want or cannot afford a household toilet. New research suggests that this is not true. Field work conducted by Dalberg in UP and Karnataka, in partnership with the Asian Development Bank, shows that most rural households that engage in open defecation want a toilet and would be willing to seek and repay a loan to help finance it. In fact, toilet loans were found to have a 99% repayment rate. Among households surveyed, the majority were interested in a loan amount of ₹20,000 to 30,000 to help purchase a toilet, with preferred monthly repayment installments of ₹500-1500.
[M]ost rural households that engage in open defecation want a toilet and would be willing to seek and repay a loan to help finance it.
At the core of the Government of India's Swachh Bharat Mission (Gramin) (SBM (G)), lies a ₹12,000 financial incentive for eligible households to build individual household latrines. This incentive has helped drive the increase in toilet coverage for the poor, yet it is not sufficient for all households. Often families feel that (i) the incentive amount is insufficient to build the quality of toilet they desire, or (ii) the incentive does not work for them as it is often delayed i.e. they are required to pay upfront the cost of the toilet, and the incentive amount is transferred only upon completion of building the toilet. This is often something most households cannot afford. Moreover, the scheme does not cover households that built toilets under previous government programs, even if the toilets have gone defunct.
This opens a tremendous opportunity for financial institutions (FIs) to offer toilet loans that could supplement the government incentive. Three types of loans are particularly relevant:
- Bridge loans: Loans for incentive eligible households that are struggling to meet the upfront cost of purchasing a toilet.
- Top-up loans: Loans for incentive eligible households that wish to buy a better, costlier toilet but affordability is an issue.
- Improvement loans: Toilet loans for households that are not eligible for the incentive but wish to upgrade/ repair their toilets.
We estimate the potential market for toilet loans in rural India to be ₹80,000 crores. However, our analysis suggests that only ~1% of this market is currently being served.
We estimate the potential market for toilet loans in rural India to be ₹80,000 crores. However, our analysis suggests that only ~1% of this market is currently being served. From the perspective of lenders, we found several issues that make toilet loans difficult and costly to service. For example, lenders must often bear the burden of (i) behaviour-change activities to help families transition from OD to using toilets, (ii) monitoring costs to ensure construction of the toilet, and (iii) supporting consumers in a fragmented supply chain—from choosing the right toilet for their need to finding the right mason for the job.
The answer to bridging the gap in sanitation, between government offerings and private sector buy in, exists in plain sight. The guidelines of the SBM(G) scheme allow for partnerships between FIs and the state and district level officials responsible for implementing the scheme, which could address many of these challenges. Based on our discussion with FIs and Ministry of Drinking Water and Sanitation officials, the government can explore three ideas that have the potential to unlock the toilet loan market:
1. Sharing incentive eligibility certificates
FIs are often unsure of consumer eligibility for the government subsidy. As a result, they hesitate to lend to certain households, fearing repayment issues. Access to information on consumer eligibility can create a better and broader loan market; including some of the most economically marginalized groups. To make this happen, the government can create a digital repository of all eligible households (from the baselining survey conducted in 2014) and share 'incentive eligibility certificates' with the FIs, which can alleviate some of their fears around the repayment capacity of a household.
2. Replicating the PMAY model
The Pradhan Mantri Awas Yojana (PMAY) is a Credit Linked Subsidy Scheme (CLSS) for housing loans. The government credits an upfront subsidy (between 4% to 6.5%) to the loan account of the beneficiary, resulting in reduced effective loan and equated monthly installment (EMI). For FIs, it secures a part of the interest repayment and takes care of the eligibility criteria with regard to the incentive. Toilet loans are currently priced at a higher spectrum of interest rates (between 15%-22%). A CLSS can make toilet loans much cheaper and thus accessible to the most economically marginalized groups, who are at present out of the credit net.
3. Activating the revolving fund
Under the SBM(G) guidelines, the District Administration (DA) can create a revolving fund for amounts up to ₹1.5 crore from SBM funds. Once set up, the government can make loans using the initial corpus and subsequent repayments every cycle. The fund thus exists in perpetuity. However, this provision is often overlooked by many districts, largely due to lack of resources and concerns regarding defaults on loans made from the fund. To address some of these issues, state governments can set up a special purpose vehicle (SPV) to offer toilet loans to the most economically marginalised households at a less than market interest rate. The SPV can be registered as a Non-Banking Financial Company with the sole objective of providing toilet loans using the revolving funds. The initial corpus thus creates a virtuous cycle, enabling more households every year to build toilets.
These are new ideas, and the government will obviously want to be cautious. A way forward is for the government to start piloting these ideas in select districts. Our analysis identifies 50 districts in India where efforts to activate FI participation in toilet loans could work—these are districts where there is both high FI penetration and low toilet coverage. In the figure below, we see that most of these districts are in parts of Odisha (20) and Karnataka (10), followed by Uttar Pradesh (7) and Bihar (6).
Our analysis suggests that current lending in the sanitation space is less than ₹700 crores, which opens a large untapped opportunity for FIs. There is a strong first mover advantage in the segment as toilet loans are not only profitable in isolation, but also open doors to sell other loans such as for home improvement, as the income of the borrower increases. FIs can use the toilet loans as a strategic expansion of portfolio to serve the most underserved populations and build strong long-term relationships based on trust and backed by data on credit behaviour. In the process, they will also aid the mission of open defecation-free India.