Indian MFI at crossroads: sustainability perspective

Abstract

Purpose – The purpose of this paper is to examine the factors affecting the financial sustainability of the Indian Micro Finance Institutions (MFIs) post-Andhra Pradesh (AP) crisis Design/methodology/approach – Regression analysis is used to test the significance of the independent variables on the variable of interest, i.e. the operational self-sustainability. Three-stage regression analysis, i.e. Partial F-test, residual analysis and Box–Cox-type transformations is applied to see the impact of the variables on financial sustainability of the Indian MFIs. The study is based on the data of the Indian MFIs during three fiscal years from 2010-2011 to 2012-2012 reported in the Microfinance Information Exchange (MIX). Findings – The authors’ results indicate that in 2010-2011, the linear regression model seems to be good fit to the data, whereas in 2011-2012 and 2012-2013, the appropriateness of the linear regression models seems questionable (the error distribution seems to be skewed). It is observed that square root of the dependent variable exhibits adequate fit for 2011 and 2012. Therefore, a substantial change in the model for estimating sustainability of Indian MFIs is observed in the post-AP crisis era. It is observed that portfolio quality and capital management are important determinants for the financial sustainability of the MFIs. Practical implications – This study identifies the factors affecting the sustainability of the Indian MFIs, especially after the reforms following the AP crisis in India. The study suggests that from 2012-2013, the factors such as write-off ratio, capital-to-asset ratio, ratio of financial revenue to assets and provision for loan impairment-to-asset ratio are the main factors which have significant impact on the operational self-sufficiency (OSS) of Indian MFIs. This indicates that the quality of portfolio must be improved to reduce the vulnerability of the Indian MFIs. Social implications – After the AP crisis, the performance of Indian MFIs is stabilized to a greater extent. The various performance indicators are improving. Originality/value – The paper provides a detailed comparative analysis of the factors effecting financial sustainability of the Indian MFIs, before and after the regulatory reforms in 2011. A substantial change is observed after 2011-2012. Such a study on the Indian microfinance sector seems to be new (to the best of the authors’ knowledge).

An investigation into the financial sustainability of Islamic Saving, Credit Cooperative Society (SACCOS) in Tanzania

“…Sustainability is a broad concept which means a capacity to maintain a well-defined performance continuously (Spodick, 2016). Dutta and Das (2014) state that the idea of sustainability has different dimensions such as impact sustainability, legal policy environment sustainability, market sustainability, mission sustainability, programme sustainability, institutional sustainability, financial sustainability and human resource sustainability. On the other hand, sustainability can also be categorized as organizational, managerial and financial (Thapa, 2010).…”

“…capacity to cover all of its expenses by its revenue and to generate a margin to finance its growth" (Ayayi and Sene, 2010). Alternatively, MFI's financial sustainability can be defined as the ability of MFI to produce revenue out of its operations to cover all its expenses in current time and also in future when it needs to expand (Acharya and Acharya, 2006;Borbora and Kumar Sarma, 2007;Dutta and Das, 2014;Marwa and Aziakpono, 2015). Financial sustainability as one of the fundamentals of sustainability denotes the firm's capacity to stand on its own feet financially.…”

“…There are different determinants of sustainability of an organization. Previous studies categorized these determinants into various groups which include institutional factors, capital asset, revenue, efficiency, growth, portfolio quality, macroeconomic factors and environmental and business strategy (Dutta and Das, 2014;Marwa and Aziakpono, 2015). Example of institutional factors includes; the age of MFI, lending model, product type and legal status.…”

“…Growth category comprises the number of borrowers, size of MFI, an outreach of the MFI and gross loan portfolio. Portfolio quality includes portfolio at risk and writes off, while macroeconomic factor comprises inflation and lending rate (Dutta and Das, 2014). Dutta and Das (2014) reported that portfolio quality and capital management are significant determinants for Indian MFIs.…”

“…Portfolio quality includes portfolio at risk and writes off, while macroeconomic factor comprises inflation and lending rate (Dutta and Das, 2014). Dutta and Das (2014) reported that portfolio quality and capital management are significant determinants for Indian MFIs. Moreover, Bhanot and Bapat (2015) found that Indian MFIs financial sustainability is significantly affected by gross loan portfolio, borrower per staff member, portfolio at risk and return on assets.…”