Remuneration-post-verification subsidies and microcredit have been postulated as potential solutions to imperfect capital markets and commitment problems that impede lumpy human capital investments, but little is known about the merit of combining these financing mechanisms. We draw on a cluster RCT in rural India of a sanitation labelled microcredit program, implemented by chance around the onset of a large sanitation policy comprising partial subsidies – Swacch Bharat or ‘Clean India’ Mission. Linking our survey data to government, MFI and credit bureau administrative data, we make two contributions: first, we provide rigorous evidence of the impacts of labelled microcredit on household sanitation investment and borrowing behaviour. By testing empirical predictions of a simple model, we demonstrate that this ubiquitous credit characteristic plays an important role in achieving impacts. Second, we show that sanitation labelled microcredit can complement renumeration-post-verification subsidy provision by relaxing sanitation credit constraints for subsidy ineligible households, and by providing bridge and complementary funding for subsidy eligible households.

This working paper is an updated version of these two working papers: WP21/09 Labelled loans and human capital investments and WP19/10 Can micro-credit support public health subsidy programs?