Do regulations and governance quality impact performance of MFIs in India?

Abstract

We explore the relationship between performance, regulations and governance quality of Microfinance Institutions (MFIs) through a survey conducted among CxOs and board of directors of top 55 MFIs in India. We study the effect of AP ordinance (2010) (taken as a proxy for regulation), boardroom conflicts (taken as a proxy for governance quality) and the recent demonetization policy of Government of India on the performance of the MFIs in India. The results show that AP ordinance and boardroom conflicts have had a negative impact on the performance of the MFIs. As per public interest theory, regulations are good for correcting market failures and upgrading the existing practices and hence have a positive impact on the performance. However, our research proves that AP ordinance has a negative impact on the performance of the firm and hence does not support the theory in the Indian context. Diversity and experience in the board could lead to conflicts and delayed decision making, having a negative impact on the performance of the firm. Our research survey confirms this theory. Managers’ powers are limited by the external environment, and the state has more powers to set the field. However, our empirical model does not support the negative impact of demonetization on the performance of MFIs. There is a dearth of study on Indian MFI industry, and this paper contributes to narrow that gap.