Sanitation Financing: Opportunities and Potential
Founders, Water.org
THE SWACHH BHARAT Mission (SBM) is a story for our times: at once a bold public commitment, a grand people’s movement, a large-scale behaviour change campaign, and a catalyst for broader forces of finance (households and self-help groups have taken out loans worth hundreds of crores to build toilets). It is not a story with one hero; it has more heroes than we can count. The scale of its success is documented throughout this book in truly staggering numbers.
The big picture of this achievement is amazing to reflect on, but for the moment let’s not look at the big picture. Let’s cut to the perspective of a single rural family. From here, the need for water and sanitation credit comes into focus.
The scene is like this: A woman with a family, living in an Indian village, wants a toilet. She knows that an incentive of Rs 12,000 is available under SBM to help her build one, and some of her neighbours have used this to install their first toilets.
However, she also knows that Rs 12,000 may not cover the whole cost of constructing her toilet – the toilet she aspires to build. She doesn’t want a basic toilet; she wants a toilet that her family will use and look after for many years to come. It may cost more than what the incentive covers if she adds a bathing facility, and she knows she will only receive the incentive in full once she provides photos of the finished toilet. Even for a basic toilet, she needs start-up funds first – and for her this is difficult to mobilize immediately. And additional funds to build her dream toilet. She is caught in a gap. No matter how much she believes in the cause of Swachh Bharat to immediately construct a toilet, her family either has to go to a loan shark and risk falling into a debt trap or is left going out to the fields every morning until she can save enough money.
A Gap the Size of the Future
It is these small gaps at the household level that made the aspirations of a movement like Swachh Bharat even more challenging, in spite of the massive efforts undertaken by the Government of India to create awareness on the need for a toilet, change existing behaviours to end open defecation and support creation of infrastructure through a healthy incentive. Once we cut back to the big picture, and multiply this by potentially millions of households, these added up to a large challenge indeed.
Globally, achieving the first two targets of Sustainable Development Goal 6 on water – access to safe drinking water, and adequate and equitable sanitation and hygiene for all, including an end to open defecation – will require finances of about $114 billion every year up to 2030. How far are we from that? The gap in financing is still three times the total spending in the sector. And this severe shortfall has severe consequences. More than 2 billion people globally lack access to basic sanitation. Worldwide, women and girls spend 266 million hours every day finding a place to defecate. Every 90 seconds, a child dies of a waterborne disease.
In India, the incentives mobilized under SBM have worked wonders in helping bridge the gap and shift the numbers. Yet this public movement has been so successful precisely because it acknowledges that it is not acting alone. A variety of alternative sources of finance was critical to carry households the rest of the way across the gap. Such market-based solutions allow the Central and state governments to use every rupee of public funding right and targeted – incentivize sweeping behaviour change, enable a call to action and help the people most in need. Thus, quietly, alternative finance has become the other side of the incredible story of SBM.
Micro-lending in the Swachh Bharat Era
It is a story that the organization we founded, Water.org , has been living for more than two decades, though never on the scale achieved in India during the years of SBM.
We are deeply committed to helping households at the base of the economic pyramid solve their water and sanitation problems. To do this, we partner with and catalyse a diversity of financial institutions that can reach those households. When we began partnering with Indian microfinance institutions (MFIs) in 2008, progress was slow but steady. The MFIs were willing to be convinced that people would borrow money to get a water connection or to construct a toilet, and that those people would be able to repay the loan. But they did need convincing.
The launch of SBM changed everything. When a small loan from a financial institution is combined with an incentive from SBM, millions of households can easily borrow all or most of the start-up funds they needed to build the toilet of their dreams, and still be confident of repaying. The gap became much narrower. We realized what a powerful alignment this could be: an enormous public commitment and a historic popular movement committed to helping economically weaker sections of society realize their dream toilet, combined with civil society organizations and lenders who work with the households.
Realizing the potential, Water.org approached the Ministry of Drinking Water and Sanitation (MDWS) to work together to scale micro-lending for sanitation. When Prime Minister Narendra Modi launched the Swachh Bharat Mission to achieve an Open Defecation Free (ODF) India by 2019, he invited civil society, corporate businesses and individual citizens to partner with the Government to achieve this dream and assured support. MDWS has been a champion that quickly recognized the need for micro-loans and has supported Water.org to scale its efforts across the country. With MDWS leading the way, we have contributed to policy changes which incentivize lending for water and sanitation, partnered with Government agencies at the national and state levels and advocated to various financial institutions to create water and sanitation products. Overall, this partnership has helped make record progress in building the solutions to achieve sanitation for all.
How Is a Toilet Not Like a Luxury Car?
In particular, a few enablers have shaped the lending ecosystem to such an extent that we must give them a turn in the spotlight. The first of these has been Priority Sector Lending (PSL). Since the 1970s, PSL has powered financial inclusion in India by mandating banks to allocate 40 per cent of their lending to priority sectors. These have included vital necessities like housing and education – but not, for many decades, water or sanitation. Without priority sector allocation, a loan for a toilet would have to compete in the same arena as a loan for a luxury car. Banks were seldom interested. Then, in 2012, the Reserve Bank of India began re-examining the mandate of PSL. Water.org and our partners such as Sa-Dhan, an apex association of MFIs and other community institutions, realized that a change in the forty-year-old guidelines could reshape the lending ecosystem for household water and toilets. With the launch of SBM two years later, that case became clear to everyone. With the support of MDWS, water and sanitation were officially included within PSL in 2015 – the first such change in its history. The Mission to end open defecation now had the banks on its side.
The other significant enabler has been the proud Indian tradition of self-help groups (SHGs). Both Government and non-Government SHGs have been invaluable to this. Millions of Indian women have come together in SHGs under the National Rural Livelihoods Mission (NRLM), operated by the Ministry of Rural Development, and its state-level counterparts (SRLMs). These women enhance their collective capacity to access finance by taking out group loans from local banks. Through their affiliation with the NRLM, they receive preferential interest rates. And being a group, the women are able to support one another when individual members face the difficulties and vagaries of rural life. From Water.org’s perspective, this collective borrowing has been a major factor in the extraordinary rate of repayment we have recorded for our partners’ water and sanitation loans, which stands at over 99 per cent in India.
Banks have supported this journey not just by lending to MFIs or by providing credit linkages to SHGs; they have also shown the way by directly lending to households in need and by lending through their business correspondents.
Market-driven Achievements
A repayment rate of over 99 per cent is exceptional for any lending effort at the base of the economic pyramid, on any scale. It is absolutely extraordinary considering that we have catalysed, through our partners, more than 21 lakh loans, in 21 states, to benefit more than 1 crore Indians to date. The finance mobilized? Over Rs 3,000 crore.
More than a third of these borrowers have an income of under Rs 6,500 per month, and two-thirds under Rs 9,000. They are mostly women, majority rural, and they know exactly what they need. Of the 21 lakh loans, 14 lakh have gone to households wishing to install toilets.
Perhaps this should not be surprising, given the nationwide momentum of SBM and everything we know about the benefits a toilet can bring to a household. But it has been surprising. It has made lenders re-evaluate what it really means to invest in a ‘non-productive’ asset like a toilet.
Our partners have told us that water and sanitation loans strengthen their overall portfolios, because one of the major reasons for default on other types of loans is illness – and people are healthier and more productive when they can invest in safe water and sanitation. Fewer days are lost to sickness, and fewer hours of the day are lost gathering water and seeking a place to relieve oneself. This is a truth that people know well. It is this truth that has turned SBM into a people’s movement like few others the world has seen before.
What Else Is Possible?
India has shown the world how fast a sanitation revolution can happen. It has been unbelievably rewarding to be a part of this revolution, and to help more than 1 crore Indians change their daily lives through access to water and sanitation. India has become a guiding light for other countries confronting basic needs all over the world, including the other countries where Water.org works.
While looking back on the historic success of SBM, we are also in a good position to assess what needs to be done next to sustain an Open Defecation Free future. Water and sanitation credit will play an even more important role post the completion of SBM. It is not sustainable for the Government to continue to provide significant incentives for the creation of water and sanitation infrastructure indefinitely. However, financing will be needed for construction of toilets in new households, refurbishment of toilets that have become dysfunctional, addition of bathing facilities, access to piped water, clean drinking water, etc. Financing will also be needed for budding sanitation entrepreneurs wanting to set up faecal sludge management units, waste collection and treatment businesses and other sanitation enterprises. To plug this funding gap, and ensure the ODF movement is sustained, steady flow of affordable credit is critical.
To achieve this, few measures are necessary:
We know that lending to people with limited spending power to meet their water and sanitation needs is a commercially viable and sustainable business proposition. And given the enormous global financing gap, we know it is necessary. This is true in countries with zero public support, but also in countries with very strong public support, like India. It is here, where public commitments, market-driven solutions, and household investments all work together, that our shared goals – be they the Sustainable Development Goal on water and sanitation for all, or the goal of sustaining an open defecation free country – stand within reach, and no gap is too wide to cross. Investment in sanitation pays dividends that can sustain a market and empower lives; and with so many lives changed, it is transforming India.