Efficiency Determinants of Microfinance Institutions in India: Two Stage DEA Analysis

Abstract

Aim: In India, Microfinance Institutions (MFIs) emerged as major player in providing microfinance services and therefore such institutions need to be financially sustainable in order to achieve their double bottom-line objective. Besides, Indian MFIs cannot protect themselves from the curse of loan non-repayment. Therefore, this study aims to measure performance of the Indian MFIs and examine whether sustainability has any significant impact on the efficiency of the MFIs. Design / Research methods: In order to gauge the performance of the Indian MFIs, non parametric Data Envelopment Analysis (DEA) is adopted. Two models of DEA (BCC Model-input oriented and Undesirable Measure Model-output oriented) are applied used for better analysis. Further, to examine the factors influencing efficiency of the MFIs and particularly to answer whether Sustainability has any significant impact on efficiency, Tobit regression is applied in the study. Data of thirty-one Indian MFIs for seven years (2009-2015) are collected from MiX Market for the study. Conclusions / findings: Result of the study shows that average technical efficiency of the MFIs is estimated to be 79 percent under BCC model and 98 percent under Undesirable Measure Model. Indian MFIs can attain production frontier if they can trim their bad output (proxied by Portfolio at Risk 30) to an extent of around 14 percent. Further, the study validates that sustainability (proxied by Operational Self Sufficiency) has positive impact on efficiency. Originality / value of the article: Studies made so far on Indian MFIs have not addressed how the MFIs could become efficient by reducing their undesirable/bad output. Besides, no study so far has analysed the impact of sustainability on efficiency of the Indian MFIs. Therefore, this research tries to fill the existing research gap. Implications of the research: The result of the study can be useful to the Indian Microfinance Industry in improving their performance. The result can further be used by Reserve Bank of India (RBI) to frame yardstick for the clients of the MFIs in connection with borrowing loans from MFIs.