Assessing the Operational Efficiency of Microfinance Institutions in India Using Data Envelopment Analysis

Abstract

In the global landscape, more than one billion individuals at the bottom of the economic pyramid lack access to formal financial services. The increasing demand for a broad spectrum of financial solutions for these underserved populations has driven a market-driven revolution in microfinance. This movement has led to the development and delivery of a diverse array of financial products. Over the past three decades, the microfinance sector has experienced substantial growth and diversification, resulting in the emergence of diverse institutions and delivery models.

Microfinance institutions (MFIs) play a crucial role in serving low-income customers, often extending loans without requiring collateral, in contrast to traditional financial institutions that demand security for lending to the economically disadvantaged. Furthermore, MFIs are actively engaged in providing skill-based training to enhance productivity, organizational support, and consciousness-building training to empower impoverished communities. These institutions employ innovative approaches to reach the poor, including group lending, progressive lending, regular repayment schedules, and alternatives to traditional collateral.

While existing research in the microfinance sector primarily focuses on impact assessment studies, with an emphasis on understanding the effects of microfinance activities on the lives of the poor, particularly women, only a few studies have employed non-parametric linear programming-based DEA (Data Envelopment Analysis) models to evaluate the efficiency of microfinance institutions globally. Notably, the studies assessing the efficiency of Indian MFIs remain limited.

This study is particularly relevant given its focus on the post-crisis period, post-2010. In order to ensure the sustained operation of microfinance institutions in the long term, it is essential for MFIs to reach as many borrowers as possible while minimizing operational costs. Therefore, this research endeavours to measure the input-oriented efficiency of selected microfinance institutions in India during the period spanning from 2011 to 2017.