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Road to Swachh Bharat: Unlock the potential of toilet loans

Financial institutions and banks can help rural India become open-defecation-free. Changes to regulations can unlock bank capital to improve sanitation and realise Modi’s Swachh Bharat dream

analysis Updated: Jul 04, 2017 16:27 IST
A file photo of Prime Minister Narendra Modi wielding a broom with NDMC workers to launch the 'Swachh Bharat Abhiyan' in  New Delhi, 2014.
A file photo of Prime Minister Narendra Modi wielding a broom with NDMC workers to launch the 'Swachh Bharat Abhiyan' in New Delhi, 2014. (PTI)

The Swachh Bharat Mission (Gramin) (SBM(G) has accomplished a lot. Building on the erstwhile Nirmal Bharat Abhiyan, SBM (G) has led to 2 lakh villages being declared open-defecation-free (ODF), and the construction of more than 40 million household toilets. There is increasing momentum to reach the mission’s goal of an ODF India by 2019. Still, there is much work to be done. About 60 million households in rural India do not have access to a toilet and four lakh villages are not yet ODF.

Given the sheer ambition of the goal, it is clear the government cannot do it alone. Financial institutions (FIs) have an important role. Even with SBM (G)’s incentive (Rs 12,000 per household), financing remains a barrier for households. Many households are not eligible for the incentive because their income is too high or because they have already used a previous sanitation incentive. Other households want a toilet which costs more than the Rs 12,000 incentive. Lastly, many times the incentive is not paid until much after construction, and so households need a way of financing toilets in the meantime. Our recent research with rural households in Karnataka and Uttar Pradesh shows that there is indeed widespread demand for sanitation loans.

FIs, ranging from public sector banks, to new challenger banks, to MFIs are already lending in the sanitation space (albeit in a limited way). Banks such as Punjab National Bank (in partnership with India Post Payments Bank) and IDFC, as well as MFIs like Grameen Koota, CashPor, Guardian, and Satin have recognised the opportunity sanitation lending represents. DFIs like the Asia Development Bank are collaborating with banks like Janalakshmi to increase lending for toilets. For many of these banks, sanitation lending is an opportunity to tap a new market for lending and is a customer engagement and retention strategy. The government has recognised the importance that FIs could play in the SBM, and the programme guidelines give government at all levels the ability to work more closely with FIs.

Two years ago, sanitation became a priority sector lending (PSL) category, and the RBI relaxed rules allowing MFIs to lend more towards non-income generating activities. While good first steps, this has not unlocked capital for the sanitation lending space. Our analysis says current lending in the sanitation space is less than Rs 700 crore whereas the potential is nearly Rs 80,000 crore. Our research also shows that two additional regulatory changes could be game-changers for unlocking this market.

There has been little priority sector lending (PSL) lending for sanitation. Many banks find it difficult to fulfil their PSL requirements, and the sanitation lending market seems too small to meaningfully help them reach their PSL targets. Ticket sizes of sanitation lending are too small because there is only limited, though growing, lending in the space. One solution is to put a sub-limit in place which requires commercial banks to allocate some of their PSL towards sanitation. A 1% sub-limit for sanitation would unlock some Rs 90,000 crores for the sanitation lending.

Another option is to use an incentive based approach where water, sanitation, and hygiene (WASH) related lending is given a higher weight in PSL. For example, every 1% a bank willingly lends for WASH could count as 1.5% towards the bank’s total PSL requirements, up to a cap of 5% (the cap reduces the likelihood of banks abusing the policy). Thus, a bank that lends 3% towards sanitation would have that lending count as 4.5% towards PSL. The advantage of weighting is that it incentivises rather than forces banks to lend. It would allow banks that are more efficient and better able to lend towards sanitation to be the ones who lead sanitation lending. Voluntary participation means that there will be less resistance from banks. We recommend this as a temporary measure to align with the push for sanitation under SBM. The RBI may revisit this in two years time.

Another good solution is raising the limit on MFI lending for sanitation. Even though the RBI has allowed MFIs to allocate up to 50% of their lending towards non-income generating lending like sanitation, on average more than 90% of MFI portfolios are still for income-generating loans. MFIs can only make two loans to any given customer, and customers can only take up to Rs one lakh in debt.

For many MFIs and their customers, income-generating loans take precedence, and so they will first lend as much as possible for income generating purposes up to the current limit. This leaves not enough room for sanitation lending, even if the MFI finds it profitable and customers could afford it.

The RBI could allow a temporary exception on limits for sanitation lending. For example, customers could be allowed to take up a loan of up to Rs 25K for sanitation, that would not count towards the two-loan limit from any one MFI and the Rs one lakh from all MFIs. This will incentivise both consumers and MFIs to prioritize sanitation loans. This should also be a temporary change that the RBI may revisit in two years time.

If India is to achieve its ambitious goals under SBM, it will need the support of everyone in the country. FIs have an important role to play, and many are ready to do so. A few changes to existing regulations would go a long way in unlocking bank capital for improving sanitation in India.

Kishan Shah and Varad Pande are consultant and partner respectively at Dalberg, a strategic advisory firm focused on social impact, including water and sanitation.

The views expressed are personal