Social and Financial Efficiency: A Study of Indian Microfinance Institutions

Abstract

Microfinance institutions (MFIs) provides savings, credit, insurance and remittance facilities to more impoverished people without any collateral. MFIs have twin goals: social outreach and financial sustainability. Outreach refers to how many people are served by MFIs while the capacity of MFIs to serve longer is financial sustainability. The social and financial performance of MFIs is the most debatable issue in the Indian microfinance industry. Social efficiency indicates MFIs’ willingness to support a higher number of poorer consumers while financial efficiency indicates how long financial services can be offered to the poor by institutions. The success of these organizations is very critical for the continuity of funding support for donor agencies and the government. Using data envelopment analysis (DEA) techniques this paper calculates the efficiency of Indian NGO–MFIs. The research also uses Tobit regression to estimate the factors of the efficiency of MFIs. The data is taken from the Microfinance Information Exchange for the period 2009 to 2015. Results indicate that NGO–MFIs are financially more efficient than social ones. Regression findings show that the critical variable for the financial and social efficiency of NGO–MFIs is operational self-sufficiency (OSS). Very few empirical studies are available in the Indian context that discuss the efficiency of Indian NGO–MFIs. The present paper provides standards for performance measures of NGO–MFIs operating in India to assist in improving the performance and growth of microfinance firms.

Efficiency Wage and Productivity in the Indian Microfinance Industry: A Panel Evidence

“…The Indian microfinance sector has made significant progress in reaching out to the financially excluded, and studies have shown that microfinance does have a beneficial impact on the poor's well-being (Amarnani & Amarnani, 2015). However, the lack of access of a considerable chunk of the Indian population to the traditional banking system still leaves a lot of prospects for the MFIs to expand their financial services (Chauhan, 2021). In India, there are two prominent microfinance models, namely, the 'self-help group (SHG)-Bank linkage programme (SBLP)' and the 'MFI' model.…”

Factors Affecting Social and Financial Efficiency of MFIs: DEA and Tobit Approach

“…As per Balkenhol (2007), one-time financial assistance would not help to reduce the poverty of any nation; however, continuity of getting financial aid will help. Efficiency is a crucial instrument to check the performance and sustainability of these institutions (Chauhan, 2021a;Widiarto et al, 2015) Initially, MFIs in India have been operating in various forms like trust, societies, Sec. 25 companies, called NGO-MFIs (non-government organisations-microfinance institutions).…”

“…As NBFC-MFIs have a large client base, the performance of these MFIs is crucial for the betterment of the unprivileged society in the long run. To serve the more significant number of the financially excluded population, these institutions must be financially and socially efficient, as these institutions have double bottom line objectives (Chauhan, 2021a).…”

“…It addresses the failure of the formal banking system in eradicating the vicious circle of poverty (Chowdhury & Mukhopadhaya, 2012; Conning, 1999). It extends credit to the poor or unbankable who are deemed too risky due to lack of collateral and are thus excluded by the formal banking system (Chauhan, 2021a; Di Martino & Sarsour, 2012; Simanowitz & Walter, 2002 Vanroose & D’Espallier, 2013).…”

“…As per Balkenhol (2007), one-time financial assistance would not help to reduce the poverty of any nation; however, continuity of getting financial aid will help. Efficiency is a crucial instrument to check the performance and sustainability of these institutions (Chauhan, 2021a; Widiarto et al, 2015)…”