Macroeconomic Determinants of Technological Change in Indian Microfinance Institutions

Abstract

Performance of Indian microfinance institutions (MFIs) is crucial to ensure access to financial services by the poor who lack access to finance from banks. Improvement in technology of Indian MFIs over a period of time is vital to ensure higher access and expansion of microfinance services to a large number of poor individuals or households in the economy. Better performance of Indian MFIs is also important, as MFIs are social entrepreneurial in nature, expecting fair returns on their investment. This article analyzes the changing trends of technological change in Indian MFIs by using the technological index, decomposed from the Malmquist total factor productivity index (TFP), employing data envelopment analysis (DEA) for a panel of 34 Indian MFIs during the period 2005–2006 to 2010–2011. We further use a static panel data model, such as random effect model (REM), to examine various macro- economic determinants of technological change in Indian MFIs during the period 2006–2007 to 2010–2011. Our result indicates that the technological change in Indian MFIs is positively driven by macroeconomic factors, namely, GDP growth rate and size of the economy, whereas it is negatively influenced by the rate of inflation.