Social Benefits of Financial Performance - an Econometric Analysis of Financial Management of Indian Microfinance Institutions (MFIs)

Abstract

The microcredit facilities that are imparted by Microfinance Institutions (MFIs) to the low-income clientele, usually in the form of small loans for microenterprise and income-generating activities have been linked with increasing financial inclusion in India. This study explores the econometric relationship among the aggregate gross loan portfolio, operational efficiency and average number of active borrowers of MFIs in India with the understanding that financial exclusion renders the poor vulnerable to monetary shocks. It was observed that healthy aggregate gross loan portfolio (considered here as a proxy for asset position) and operational efficiency (ratio of administrative expenses to financial revenue) of an MFI does not hamper financial inclusion (number of active borrowers) in the society, rather better financial performance of MFIs improves the financial inclusion at the macro level. Hence, financial performance of an MFI does not come at the cost of social performance. The research paper further provides impetus to the policy makers in India to corroborate the MFIs with large asset values to efficiently allocate their resources to sustain a large number of borrowers.