Productivity Change and Technical Efficiency in Indian Microfinance Institutions

Abstract

Majority of Indian rural poor lack access to finance and depend on informal sources of finance (e.g., moneylenders). Microfinance Institutions (MFIs), which provide small financial services (loans, savings and insurance) to the poor without any collateral, have emerged as a major source of finance. Greater access and expansion of microfinance services require MFIs in India to enhance their productivity and organizational effectiveness over time. This article examines the changing trends and sources of productivity growth in Indian MFIs, by computing the Malmquist Total Factor Productivity (TFP) index for a panel of 34 Indian MFIs during 2005–2006 to 2010–2011, using Data Envelopment Analysis (DEA). The TFP index is decomposed to identify two important sources of productivity change, namely, changes in technical efficiency and technology of the sample MFIs. Technical efficiency change is further decomposed to measure pure technical efficiency change and scale efficiency change in the sample MFIs. The decomposition of TFP index indicates that the productivity of sample MFIs has declined over time, which shows that the Indian MFIs need to achieve significant innovations in technology to enhance their productivity. However, technical efficiency of MFIs has increased on average, which indicates that the managerial and operational effectiveness of MFIs has improved over time.