Determinants of Sustainability of the Micro-Finance Sector in India

Abstract

India takes pride in the largest microfinance programme in the world. This paper aims to fill a void by exploiting data from third party agencies to study the efficiency parameters influencing financial health of MFIs (microfinance institutions). The authors use the “goodness of fit” test to find out the important factors determining the performance capabilities of microfinance institutions. Performance parameters OER (operating efficiency ratio), OSS (operational self sufficiency), ROE (return on equity), and ROA (return on assets) are tested with financial and social performance indicators to understand if any correlation exists. The study finds that the only significant factor affecting sustainability of MFIs is OER in India. OSS, ROE, and ROA had no significant impact on sustainability of these MFIs during the study period. Understanding the viability of microfinance and the factors that affect it can guide the design of policies that ensure benefits for the poor.