Size and efficiency of MFIs: a data envelopment analysis of Indian MFIs

Abstract

Lack of access to finance is identified as one of the major causes of poverty and unemployment. Microfinance is considered to be one of the important tools for expanding access to financial services like savings, credit, insurance, and remittances. MFIs are social enterprises, and have to manage their financial resources without depending on subsidies and grants. In this context, the efficiency of MFIs becomes an important factor in deciding the sustainability of the organizations. Previous studies on MFI efficiency have been mainly cross-country comparisons. No study has attempted to explore the relation between size and efficiency of MFIs. This paper raises a basic question: ‘Does size of the organizations affect efficiency of the MFIs? The study is based on secondary data. Based on their gross loan portfolio, the study classified MFIs across three categories: small (less than Rs.1,000 m), medium (Rs.1,000 m – 5,000 m) and large (more than Rs.5,000 m). The data was collected for 89 MFIs across these categories on four parameters: two parameters for inputs (asset and operating expense); and two parameters for outputs (loan outstanding and number of active borrowers). By using the data envelopment analysis (DEA) technique the study tries to identify the most efficient MFIs in each category along with average efficiency and minimum efficiency of these categories. The findings reported a clear linkage between the size and efficiency of the organizations. This study justifies the recent step of asset capping for Indian MFIs by the Reserve Bank of India.