Technical efficiency and its determinants in microfinance institutions in India: a firm level analysis

Par Surender Singh, S. K. Goyal, Supran Kumar Sharma
The study employs data envelopment analysis to investigate the technical efficiency and the components of microfinance institutions (MFIs) in India using data of selected 41 microfinance institutions of India covering a period of five years (2005-2009). The study also investigates the factors determining efficiency level of microfinance institutions (MFIs) in India. Using both input oriented and output oriented methods of assessing constant returns to scale and variable returns to scale technologies, the mean technical efficiency worked out to be 40.6 per cent which indicates that 59.4 per cent inputs (output) can be reduced (increased) without sacrificing the output (with the same level of inputs). The findings pinpoint that 24 and 10 sampled MFIs in India are realizing economies of scale under input oriented measure and under output oriented measure, respectively. The Tobit regression analysis concludes that total assets, location and borrowers per staff turned out to be significant determinants of technical efficiency in the microfinance institutions of India. The study suggests that new firms can achieve higher level of efficiency with strong fundamentals, rational policy and management. Further, the MFIs should concentrate on their efforts on ground level by increasing the customer base, rather than size in terms of staffing. There is a huge scope and potential for MFIs to amplify their operations in Northern India.
JEL Codes: D24, D21, C23
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