Article

Vision
20(1) 54–65
Efficiency of Microfinance Institutions © 2016 MDI
SAGE Publications

in India: Are They Reaching sagepub.in/home.nav

DOI: 10.1177/0972262916628988

the Poorest of the Poor? http://vision.sagepub.com

Prabhjot Kaur1

Abstract
Microfinance institutions are being criticized for their shift in the objective of serving the poor to the profit-making institutions. Serving
the poor is a relatively costlier issue. Thus, microfinance institutions are being blamed for serving the better off clients. The focus of
this study is to look at the financial efficiency of microfinance institutions in India and analyse their efficiency to reach women and the
poorest of the poor. Application of Data Envelopment Analysis shows, on an average financial efficiency of Indian MFIs is much higher
than their social efficiency. However, study does not find evidence for the presence of trade-off between financial and social efficiency.

Key Words
Andhra Pradesh microfinance crisis, Data Envelopment Analysis, Efficiency of microfinance institutions

Introduction of trade-off between social and financial objectives. There

Microfinance institutions (MFIs) are losing the faith of
poor and, particularly poor women, as they are progres-
sively heading towards the commercialization of their
operations. It is, therefore, immensely important that we
measure social and financial efficiency of these institutions
and analyse what went wrong with them. Andhra Pradesh
microfinance crisis, 2010 is seen as biggest tragedy in the
history of microfinance in India. Crisis was triggered by
the events like over indebtedness among the clients, usuri-
ous rate of interest charged by MFIs, unethical collection
behaviour of the staff and mounting suicides tendencies
among the borrowers. Thus, after the microfinance crisis
in Andhra Pradesh, which eventually spread to almost all
other states, analysing the efficiency of MFIs in Indian
context has become all the more important. In the past,
studies have been conducted to measure the efficiencies of
MFIs operating in different regions like Latin America, Asia,
Africa, MENA region etc. (Gutiérrez-Nieto, Serrano-Cinca,
& Molinero, 2007; Haq, Skully, & Pathan, 2010; Hassan,
Sanchez, & Ngene, 2012). In a recent study, Lebovics,
Hermes, and Hudon (2015) have measured the financial and
social efficiency of Vietnamese MFIs and confirm absence
is clearly dearth of studies that have addressed the issues
related to social and financial efficiency of MFIs operat-
ing in India. One study that has emerged recently in Indian
context is done by Kumar and Sensarma (2015). Their study
has analysed the efficiency of Indian MFIs during the period
2004–11. They find Indian MFIs face trade-off while reach-
ing the poor; however, no such trade-off is observed while
reaching the women. In this study, an attempt has been made
to gain insight of how MFIs in India are performing on
financial and social efficiency front after the microfinance
crisis. For the purpose of analysis, latest and complete data
were available for the financial year 2012. Thus, year 2012–3
has been chosen for the achievement of the objective. This
study also aims to provide benchmarking of MFIs so that
inefficient MFIs can identify the peers whose practices can
be followed to improve upon their efficiency. The rest of
the article is structured as follows. The second section gives
briefing of microfinance crisis in India. The next section
reviews the debate on trade-off between outreach and sustain-
ability of MFIs and literature on efficiency of MFIs. The
fourth section gives model specification and measurement
of efficiencies for different specifications. Results and

1 Faculty of Management Studies, Delhi, India.

Corresponding author:
Prabhjot Kaur, Faculty of Management Studies, Delhi, India.
E-mail: prabhjot.fms@gmail.com
Kaur 55
interpretation of DEA and conclusion are given in the fifth
and sixth section, respectively.
Microfinance in India
In India, as per the legal status, mostly non-banking
financial companies/intermediary (NBFCs/NBFIs), and non-
governmental organizations (NGOs) are providing micro-
finance services. Credit unions, cooperatives and rural banks
are other institutions that provide microfinance services to
the clients. In 2010, before the outbreak of microfinance
crisis in Andhra Pradesh, Indian microfinance sector was
the largest in the world. With the growth of 62 per cent
per annum in terms of number of clients and with around
27 million accounts, Indian microfinance sector was the
largest in the world. However, microfinance crisis in Andhra
Pradesh in 2010 has reversed the situation. Increasing rate
of suicides of borrowers led to enactment of the Andhra
Pradesh Microfinance Institutions (regulation of money
lending) Act, 2010. The Act restricted MFIs from collec-
tion of loan instalments from door to door and asked them
to conduct monthly meeting instead of weekly. Use of coer-
cive methods of collection was made punishable. Message
that was perceived by the borrowers was that they need not
to repay the loan, and in any case, state government is there
for them to rescue. Act affected micro-lenders’ profitability,
loan recovery and turned their operations unviable. The
crisis in the microfinance sector has left some microfinance
companies with negative net worth, due to which they are
unable to borrow from the banks and hence, their credit
disbursals are affected by the crisis. Banks were also
affected by the crisis as 80 per cent of loans borrowed by
the MFIs were from banks only. Funding constraints, nega-
tive perceptions combined with higher operating costs are
posing challenges to the growth of the industry. Structure
of Indian microfinance is also changing, as there is wide
trend of transformation of NGOs into for-profit NBFCs
(M-CRIL, 2010). In this study for the fiscal year 2012, out
of 87 MFIs studied, 52 are NBFCs, that is on an average
approximately 60 per cent of the sample comprises NBFCs.
For large loans and investments, commercial banks and
equity investors prefer NBFCs to NGOs, which eventually
has resulted into this transformation trend. Microfinance
crisis in Andhra Pradesh and its spill over effects on others
states has brought the sector under intense scrutiny. Against
the backdrop of microfinance crisis The Micro Finance
Institutions (Development and Regulation) Bill, 2012 was
tabled in the national Parliament on 29 May 2012. However,
the Parliamentary Standing Committee on Finance scrapped
the bill in February 2014, on the ground that it is sketchy
and lack consensus and consultations with the stake-
holders. So now, all eyes are on the drafting of the new
microfinance bill to protect the interests of the clients and
to provide better regulatory environment for the operations
of MFIs in India.
Sustainability versus Outreach of
Microfinance Institutions
With the incidents like Andhra Pradesh and increasing
commercialization of microfinance operations debate on
sustainability and outreach of MFIs in India is also gaining
ground. Financial sustainability approach or institutional
approach focuses on the sustainable operation of MFI by
charging reasonable rate of interest to cover the costs of
lending. This approach emphasizes on increase in revenues
from interest income and fee and cutting down the opera-
tional cost. Institutional approach asserts financial sustain-
ability holds the key to serve the large number of poor. On
the other hand, the poverty lending or welfarist approach
supports loans to the poor at the rate affordable to them.
Lending to poor is a relatively costly affair, as they frequently
need loan of small amounts. Thus, as per this approach,
reaching the poorest of the poor, as better known as the
depth of outreach and achieving sustainability goes against
to each other. In the microfinance literature, this phenome-
non is known as mission drift and trade-off between social
and financial goals of MFIs. Schreiner (2002) describes as
depth of outreach and financial sustainability as two polar
opposite targets since depth of outreach implies increased
service to the poor, while emphasis on financial sustain-
ability may force MFIs to either cut back on the disburse-
ment of smaller loans or rely more on subsidies. It has been
argued that since poorest clients need frequent loans involv-
ing small amounts, thus it is relatively costlier to serve the
poorest. However, Gibbons and Meehan (1999) contend
that even among the poorest loan clients, average loan size
tends to increase considerably over the years depending on
their repayment history. They refute the trade-off between
outreach and sustainability and assert that financial sustain-
ability depends on the strength of the financial programme
on the type of clients served. Quayes (2012) analyses 702
MFIs from 83 countries. He categorized MFIs into high
and low disclosures firms and showed a positive comple-
mentary relationship between financial sustainability and
depth of outreach for the high-disclosure MFIs. Thus, this
study negates the trade-off between financial sustainability
and depth of outreach; however, trade-off exists between
breadth of outreach and financial sustainability. Whereas
Fajonyomi, Jegede, and Akinlabi (2012) analyse 80 MFIs
from the period 2005–10 from southwestern Nigeria and
they confirm strong positive relationship between sustaina-
bility and breadth of outreach. In this study, trade-off is
measured by considering their efficiency to reach the
poorest of the poor and efficiency to realize their financial
goals. Efficiency of MFIs in India in post-crisis period
is measured using Data Envelopment Analysis (DEA).
Efficiency of Microfinance Institutions
and Data Envelopment Analysis
Efficiency of production units lies in the judicious use of
inputs to produce maximum output. In context of MFIs,
56
Balkenhol (2007) has defined efficiency in microfinance
as how well an MFI technically transforms inputs (such
as assets, staff and subsidies) to produce the maximum
outputs (such as number of loans, financial self-sufficiency
and poverty outreach). They emphasized since MFIs are
performing both financial and social functions, hence,
efficiency should be measured from both the perspectives.
Conventionally, ratio analysis has been used widely to
measure the efficiency of financial institutions. However,
inability of ratio analysis to capture the multidimensional
aspects of financial activities adequately, encouraged shift-
ing the focus on some better techniques. Ratio analysis
hardly gives information on the best practice and bench-
mark and further, scale of economies cannot be incorpo-
rated in the ratio analysis (Athanassopoulos & Ballantine,
1995; Worthington, 1998). Efficiency of MFIs can better be
measured by using parametric techniques like Stochastic
Frontier Approach, Distribution Free Approach and Thick
Frontier Approach; and non-parametric techniques like
DEA, Free Disposal Hull etc. Berger and Humphrey (1997)
conducted a very comprehensive study and tried to cover
almost all the studies accessible to them at that time, which
used frontier analysis to measure the efficiency of financial
institutions. Out of 130 studies analysed by them, 62 studies
applied DEA. Balkenhol (2007) also supports suitability
of DEA for measuring the efficiency of MFIs as objectives
of MFIs vary from focusing on the poor to profit making.
DEA is a mathematical programming-based approach
for measuring relative efficiency of decision-making units
(DMUs) that have multiple inputs and outputs (Charnes,
Cooper, & Rhodes, 1978).1 One major advantage of DEA is
that it does not require assumption about the form of pro-
duction function.
Gutiérrez-Nieto et al. (2007) used model specification
methodology suggested by Serrano-Cinca and Mar Molinero
(2004), and used 21 specifications under DEA to calculate
efficiencies of MFIs for every possible combination of two
inputs; credit offices and operating expense; and three
outputs; interest and fee income, gross loan portfolio and
number of loans outstanding. They further used Principal
Component Analysis with Property Fitting to understand
why a MFI achieves a level of efficiency under a given spec-
ification. Haq et al. (2010) used DEA to measure the effi-
ciency of 39 MFIs across Africa, Asia and Latin America.
Considering the fact that uncontrollable variables may lead
to waste and mismanagement of resources, they incorpo-
rated percentage of rural population as an uncontrollable
social economic factor in the second stage of their analysis.
Their study found NGO–MFIs to be most efficient under
production approach and hence, suggested promoting these
MFIs in the developing countries as they were achiev-
ing outreach and sustainability objective simultaneously.
However, some studies (Annim, 2012; Nghiem, Coelli,
& Rao, 2006) calculated and compared the efficiency of
MFIs by using both DEA and Stochastic Frontier Analysis.
Vision 20(1)
Model Specification
For the purpose of this study, data have been collected for
the Fiscal Year 2012 for 87 MFIs operating in India from
the MIX Market database. For the year 2012, data for 91
MFIs were available but, after omitting the MFIs with
missing fields, only 87 MFIs have been studied. MFIs
are expected to reach the poor (outreach) while being
financial sustainable, though findings of several studies
highlight that achieving both objectives simultaneously
is not easy. Studies (Cull, Demirgu¨c_-Kunt, & Morduch,
2007; Hermes, Lensink, & Meesters, 2011; Olivares-Polanco,
2005) find a trade-off between outreach and sustain-
ability. Considering the conflicts between financial and
social objectives, in the present study, selection of variables
is made in a way to reflect both financial as well as social
efficiency of MFIs in India. Variables are selected after
going through the literature on social and financial effi-
ciency and debate on using intermediation and production
approach under DEA. The intermediation approach uses
outputs measured in dollars, whereas in production approach
labour and capital are generally used as inputs to generate
deposits and loans as outputs (Avkiran, 1999). In India, not
all MFIs are allowed to accept deposits. Thus, intermedia-
tion approach that uses deposits as input to produce loans
cannot be used here. Selection of inputs and outputs has
been made on the lines of studies done by Flückiger and
Vassiliev (2007) and Guitierrez-Nieto et al. (2009). In this
study, to measure the efficiency of MFIs three inputs used
are total assets, operating cost and number of loan officers.
Financial efficiency is calculated using two outputs: gross
loan portfolio and revenue generated by the MFIs, as success
of generating these two outputs depends on how efficiently
MFIs are utilizing their financial resources. To know the
sustainability, it is imperative to know the costs, thus operating
cost and number of loan officers were taken as two inputs.
Bassem (2008) considered number of women clients as
a proxy for the breadth of outreach. Women are generally
poorer compare to their male counterpart, thus, the number
of women reached is considered as one of the index for
measuring social output/efficiency. Further, poverty index
as suggested by Guitierrez-Nieto et al. (2009) has been
constructed and, is multiplied by number of active bor-
rowers of the respective MFIs to assess the number of
poorest clients MFIs are serving. Hence, the number
of poorest clients reached by MFIs is another index used
to measure social efficiency of MFIs.
ALB i - Min (ALB)
Pi = 1 -
Range (ALB)
where
Pi is poverty index for ith DMU/MFI,
ALB is average loan balance per borrower,
Min (ALB) is the minimum value over all i,
Range (ALB) is the maximum value of ALB over all i minus
the minimum value of ALB over all i. Annexure 3 gives the
description of various inputs and outputs used in the study.
Kaur 57

For the ith DMU, out of j DMUs, using xn and ym inputs Results and Interpretation
and outputs, respectively, the input-oriented technical effi-
ciency (TE) denoted by i under constant return to scale is Efficiency calculated from financial perspective under
obtained by solving the following linear programming, ‘financial efficiency specification’ by combining all the
suggested by Charnes et al. (1978) as three inputs with two outputs, gives average efficiency of
approximately 84 per cent. Hence, under this specification
TE i = Min i i, m i i inputs can be reduced from the present level by 16 per cent
while maintaining the same level of output. Out of 87 MFIs,
Subject to 11 MFIs, viz. Bandhan, Disha Microfin, FFSL, MMFL,
j Muthoot, SCDS, SEWA Bank, SML, Sanghamithra, Trident
| m j y mj - y mi $ 0, m = 1, ....... M and WSE have scored perfect 1, and hence, are relatively
j =1 efficient on the financial front (Table 3, column 3). HiH
and JFIL have the lowest financial efficiency score of
j
i i x ni - | m j x nj $ 0, n = 1, ....... N 0.30 and 0.34, respectively. Counting the number of times
j =1 efficient MFIs is referred to as benchmarks/peers for other
inefficient MFIs, Muthoot scored the highest, that is 68
m j $ 0, j = 1, ....... J times followed by FFSL 33 times (see Annexure 1). The
DMU that appears in the references sets more than others
i i d (0,1] do, known as the global leader (Avkiran, 1999). Hence,
under financial efficiency specification Muthoot turned out
As indicated by Gutiérrez-Nieto et al. (2007), efficiency to be the global leader.
of MFIs varies with the specifications of input and out- Considering the combination of three inputs and just
put variables, in this study, six specifications have been revenue as output, named as ‘revenue efficiency speci-
considered by combining three inputs with four outputs fication’, in Table 3, eight MFIs scored perfect 1. Trident
as shown in Table 1. Description of inputs and outputs Microfinance is 100 per cent efficient under financial effi-
is given in Annexure 3. Further, Table 2 summarizes the des- ciency specification, but shows the lowest score in generat-
criptive statistics of inputs and outputs used in the study. ing revenue with mere 13.6 per cent efficiency. Similarly,
Performance of key MFIs on output variables is shown SML is financially efficient, but efficiency in generating
in Figures 1–4. revenue is just 54 per cent.

Table 1. Specifications of Efficiency Used Under DEA Model

Efficiency from Financial Perspective

Inputs Outputs
a.  Financial efficiency Total assets, operating cost, number of loan officers Revenue, gross loan portfolio
b.  Revenue efficiency Total assets, operating cost, number of loan officers Revenue
c.  Loan efficiency Total assets, operating cost, number of loan officers Gross loan portfolio
Efficiency from Social Perspective
a.  Social efficiency Total assets, operating cost, number of loan officers Number of active women borrower,
number of the poorest reached
b.  Efficiency to reach women Total assets, operating cost, number of loan officers Number of active women borrowers
c.  Efficiency to reach the poorest Total assets, operating cost, number of loan officers Number of poorest reached
Source: Author’s own.

Table 2. Descriptive Statistics of Inputs and Outputs

Inputs and Outputs Minimum Maximum Mean Standard Deviation

Assets 440,255.58 982,599,686.80 51,985,522.87 129,685,158.59
Operating cost 21,127.48 56,786,954.62 4,047,770.80 8,494,033.75
Loan officers 4 8,719 534.09 1,265.99
Gross loan portfolio 185,120.06 814,457,811.40 51,129,710.74 122,387,483.38
Revenue 61,757.23 201,825,975.70 9,998,999.06 25,492,854.06
No. of women borrowers 1,310 4,433,885 298,193 747,629
No. of poorest reached 224 4,094,630 271,648 683,651
Source: Author’s calculation based on the data collected from MIX market database (www.mixmarket.org).
58
Performance of Key MFIs on output variables for the financial year 2012
Figure 1. Gross Loan Portfolio ($)
Figure 2. No. of Female Borrowers
Analysing loan efficiency, SEWA Bank, Trident Micro-
finance and WSE are relatively efficient in generating
loans. Whereas Muthoot, Bandhan, Disha Microfin and
SCDC, Sanghamithra, MMFL were efficient financially
and in revenue generation but not in placing loans, their
loan efficiency is 36.9, 39.9, 44, 49.8, 59.7 and 60.7 per
cent, respectively.
Vision 20(1)
Figure 3. Revenue ($)
Source: Mix market database.
Figure 4. No. Poorest Reached
Now turning attention to social perspective gives miser-
able results for MFIs in India. Overall, average social effi-
ciency of MFIs in India is 32.5 per cent. Their average
efficiency to reach women and the poorest is low at 32
and 30 per cent, respectively. As against, 11 efficient MFIs
under financial efficiency specification, there are just two
MFIs that are on efficient frontier under social efficiency
Kaur 59

Table 3. Efficiency Score of MFIs Under Six Specifications

MFI/DMU Legal Financial Social Revenue Loan Efficiency to Efficiency to Reach

Name Status Efficiency Efficiency Efficiency Efficiency Reach Women the Poorest
(1) (2) (3) (4) (5) (6) (7) (8)
AML NBFI 0.997 0.474 0.488 0.764 0.474 0.397
ASA India NBFI 0.771 0.458 0.771 0.327 0.458 0.458
Adhikar CU/CO* 0.74 0.433 0.685 0.338 0.433 0.427
Annapurna Mahila Credit NBFI 0.769 0.201 0.769 0.278 0.201 0.187
Co-op Society
Annapurna Microfinance NBFI 0.946 0.227 0.932 0.353 0.227 0.192
Pvt. Ltd
Arohan NBFI 0.787 0.255 0.787 0.317 0.255 0.255
Arth NBFI 0.915 0.317 0.898 0.364 0.317 0.292
Asirvad NBFI 0.991 0.340 0.991 0.426 0.34 0.307
Asomi NBFI 0.746 0.300 0.746 0.285 0.3 0.287
BASIX NBFI 0.701 0.422 0.558 0.430 0.297 0.422
BFL NBFI 0.595 0.309 0.594 0.225 0.302 0.309
BJS NBFI 0.956 0.367 0.956 0.339 0.367 0.353
BMVS NBFI 0.629 0.154 0.629 0.169 0.154 0.144
BSS NGO 0.887 0.269 0.881 0.418 0.269 0.227
Bandhan NGO 1 0.278 1 0.399 0.278 0.241
Belstar NBFI 0.852 0.222 0.837 0.330 0.222 0.191
CDOT NGO 0.66 0.222 0.660 0.243 0.222 0.207
CMML NGO 0.702 0.270 0.592 0.348 0.27 0.241
Cashpor MC NBFI 0.883 0.285 0.871 0.351 0.285 0.258
Chaitanya CU/CO 0.855 0.183 0.854 0.299 0.183 0.152
DBIS CU/CO 0.853 0.418 0.853 0.317 0.418 0.414
DCBS CU/CO 0.817 0.259 0.817 0.300 0.259 0.238
Disha Microfin NBFI 1 0.286 1 0.440 0.286 0.243
ESAF NBFI 0.942 0.216 0.942 0.340 0.216 0.183
Equitas NBFI 0.991 0.436 0.991 0.506 0.436 0.403
FFSL NBFI 1 0.446 0.969 0.699 0.446 0.377
Fusion Microfinance NBFI 0.866 0.326 0.866 0.385 0.326 0.299
GFSPL NBFI 0.964 0.199 0.955 0.429 0.199 0.147
GMF NGO 0.994 0.410 0.846 0.504 0.41 0.371
GMSSS NGO 0.843 0.063 0.778 0.333 0.063 0.011
GU NGO 0.553 0.279 0.448 0.285 0.279 0.264
GUARDIAN NGO 0.685 0.390 0.638 0.292 0.39 0.387
GVMFL NGO 0.908 0.310 0.903 0.328 0.31 0.291
Grameen Sahara NBFI 0.739 0.202 0.727 0.292 0.202 0.183
HiH NGO 0.308 0.122 0.308 0.103 0.122 0.119
IDF Financial Services NBFI 0.769 0.333 0.719 0.321 0.333 0.318
IMPACT NGO 0.862 0.265 0.831 0.349 0.265 0.24
IRCED NGO 0.644 0.151 0.596 0.297 0.151 0.117
JFIL NBFI 0.345 0.076 0.341 0.128 0.067 0.076
JFSPL NBFI 0.968 0.177 0.962 0.356 0.177 0.139
Jagaran MF NBFI 0.871 0.470 0.871 0.330 0.47 0.47
KBSLAB Rural Bank 0.736 0.070 0.736 0.245 0.049 0.07
LBT NGO 0.972 0.396 0.972 0.369 0.396 0.38
M-power NGO 0.809 0.206 0.809 0.261 0.206 0.186
MFS NGO 0.809 0.299 0.774 0.341 0.299 0.276
MMFL NBFI 1 0.520 1 0.607 0.52 0.481
Mahasemam NBFI 0.949 0.417 0.949 0.312 0.417 0.415
Mahashakti NBFI 0.744 0.192 0.736 0.308 0.192 0.161
Muthoot NBFI 1 0.318 1 0.369 0.318 0.292
NEED NBFI 0.817 0.178 0.801 0.299 0.178 0.151
NFPL NGO 0.901 0.317 0.893 0.343 0.317 0.296
Navachetana NBFI 0.865 0.208 0.865 0.287 0.208 0.187
Nightingale NGO 0.916 0.356 0.916 0.404 0.356 0.33
PRAYAS NGO 0.956 0.399 0.947 0.437 0.399 0.371
RGVN(NE) NBFI 0.906 0.270 0.906 0.295 0.27 0.253
(Table 3 continued)
60 Vision 20(1)

(Table 3 continued)

MFI/DMU Legal Financial Social Revenue Loan Efficiency to Efficiency to Reach

Name Status Efficiency Efficiency Efficiency Efficiency Reach Women the Poorest
(1) (2) (3) (4) (5) (6) (7) (8)
SCDS NGO 1 0.480 1.000 0.498 0.48 0.452
SCNL NBFI 0.864 0.200 0.861 0.368 0.2 0.18
SEWA Bank NBFI 1 0.941 1 1 0.941 0.521
SKDRDP NBFI 0.822 0.382 0.776 0.518 0.259 0.382
SKS NGO 0.752 0.488 0.652 0.385 0.488 0.481
SMCS NGO 0.878 0.301 0.872 0.401 0.301 0.27
SMGBK NGO 0.875 0.330 0.875 0.307 0.33 0.317
SMILE NBFI 0.804 0.253 0.791 0.305 0.253 0.23
SML NGO 1 0.538 0.544 0.704 0.538 0.48
SMPL Other 0.829 0.186 0.829 0.288 0.186 0.178
SNFL NGO 0.729 0.687 0.644 0.335 0.629 0.687
SVCL NBFI 0.821 0.254 0.810 0.309 0.254 0.231
Sahara Utsarga NGO 0.926 0.313 0.926 0.304 0.313 0.299
Sahayog NGO 0.825 0.134 0.825 0.297 0.134 0.098
Saija NBFI 0.748 0.245 0.716 0.311 0.233 0.245
Samasta NBFI 0.809 0.246 0.807 0.322 0.246 0.22
Sanghamithra NBFI 1 0.523 1.000 0.597 0.523 0.502
Sarala NBFI 0.946 0.499 0.946 0.293 0.489 0.499
Seba Rahara NBFI 0.836 0.339 0.836 0.308 0.339 0.327
Sonata NBFI 0.743 0.199 0.741 0.272 0.199 0.175
Spandana NBFI 0.919 0.465 0.461 0.689 0.465 0.454
Suryoday NBFI 0.918 0.311 0.918 0.421 0.311 0.276
Swadhaar NBFI 0.995 0.211 0.995 0.367 0.211 0.178
Trident Microfinance NBFI 1 1 0.136 1 1 1
UFSPL NBFI 0.69 0.396 0.680 0.328 0.396 0.388
Ujjivan NBFI 0.953 0.238 0.953 0.378 0.238 0.201
Utkarsh NBFI 0.869 0.261 0.869 0.331 0.261 0.236
VFS NBFI 0.789 0.329 0.788 0.315 0.329 0.315
WSDS NGO 0.685 0.181 0.609 0.296 0.181 0.151
WSE NGO 1 1 1 1 1 1
YFS NBFI 0.722 0.236 0.673 0.342 0.198 0.236
YMF Other 0.806 0.139 0.806 0.314 0.13 0.139
AVERAGE 0.842 0.325 0.799 0.381 0.320 0.299
Source: Author’s calculation based on DEA.
*CU/CO refers to Credit Unions and Cooperatives.

specification and 92 per cent of the MFIs have registered
efficiency below 50 per cent. Bandhan, Disha Microfin and
Muthoot are financially efficient, but shows remarkably
poor social efficiency performance, their social efficiency
is low to the tune of 27.8, 28.6 and 31.8 per cent, respec-
tively. Talking about efficiency to reach to the women and
the poorest, only 8 per cent MFIs have shown efficiency
above 50 per cent. This clearly shows the poor the perfor-
mance of MFIs in India is, when it comes to serve women
and the poorest.
WSE is the only MFI, who scored perfect 1 under all six
specifications and hence efficient from financial as well
as from social perspective.
Analysing efficiency from different specifications using
DEA gives us a broader view of institutions’ performance
and provide new insights of focus areas to improve upon
their efficiency. For example, take the case of Bandhan.
Looking at just the financial efficiency dimension, Bandhan
is located on efficient frontier. However, looking at the
social efficiency dimension, it is found to be performing
dismally low. Hence, this requires a further introspec-
tion of the reasons accountable for the difference in
efficiencies under different specifications. Possible reasons
for Bandhan to be relatively inefficient on social efficiency
front could be found in its spread of operations in east
and northeast regions. Bandhan, headquartered in West
Bengal, has around 400 branches in the eastern states like
Bihar, Chhattisgarh, Jharkhand and Odisha. It has also
spread its operations in northeast states like Assam, Tripura,
Meghalaya, Sikkim, Manipur and Mizoram. Owing to the
geographical constraints, for financial institutions, it is
difficult to reach in east and far northeast regions. P. Vijaya
Bhaskar, Executive Director of RBI, throws a light on
the problem of financial exclusion in central, eastern and
northeastern regions, and highlights that these three regions
are home to 64 per cent of all financially excluded farmer
households in the country.2 Lack of infrastructure and con-
nectivity to the rest of the country is a big hurdle in the
Kaur 61

northeast region. Thus, relative inefficient use of resources

for not reaching the poorest may be attributable to the loca-
tion of branches in the remote areas.
A similar introspection can be made in case of Trident
Microfinance. Hyderabad-based Trident Microfinance is
efficient under all the specifications except in the case
of revenue efficiency, which is showing efficiency below
15 per cent. Possible reason could be found by analysing
the financial statement of the MFI that shows as against
income of `939.23 lakh for the fiscal year 2011, the MFI
had recorded a total income of `477.52 lakh for the fiscal
year 2012. This drastic fall in income is attributable to the
Andhra Pradesh microfinance crisis, 2010.3 Thus, analysing Figure 5. Scatter Diagram Depicting the Relationship Between
Financial and Social efficiencies.
efficiencies using DEA gives wider scope to understand the
performance of MFIs from different perspectives. Source: Author’s own.
Further, this study provides the identification of peer
MFIs that can be looked upon to improve upon the effi-
the evidence of existence of trade-off between financial
ciency of individual studied MFIs (see Annexures 1 and 2).
and social efficiency. Kumar and Sensarma (2015) confirm
For example, to be financially efficient AML can follow
a trade-off while reaching the poorest of the poor for
Muthoot, SML and Trident Microfinance.
MFIs in India; however, their study negates the presence
of any trade-off while reaching the women borrowers.
Correlation between Efficiencies Scatter diagram (Figure 5) further illustrates the patterns
of relationship observed between social and financial
Examining the correlation between financial efficiency and efficiency.
social efficiency gives moderate but positive correlation
(see Table 4). Institutionalist approach asserts that financial
and social efficiency are complementary to each other. Conclusions
In order to serve social objectives, MFIs first have to be Analysing efficiency of MFIs in India from financial and
financially sustainable. The conclusion follows the findings social perspective gives eye-opening results. Average social
of Gutiérrez-Nieto, Serrano-Cinca, and Molinero (2009) efficiency of MFIs is 32 per cent as against average finan-
that support given the choice of financial efficiency and cial efficiency of 84 per cent. Their efficiency to reach the
social efficiency, institutions would first prefer financial poorest and women is as low as 30 and 32 per cent, respec-
sustainability in order to be capable of serving the poor tively. The results show on social efficiency front, on an
on continual basis. There are just two socially efficient average MFIs can reduce their inputs by 68 per cent and can
MFIs, and they are financially efficient too. However, still reach the same number of women and poorest clients.
reverse is not true. Revenue efficiency and loan efficiency MFIs like Bandhan have shown 100 per cent efficiency on
are negatively related to social efficiency and efficiency financial front but on social efficiency front, their efficiency
to reach the poorest, respectively, though correlation is is even less than 30 per cent. MFIs in India are performing
not statistically significant. Thus, correlation matrix helps their financial objectives in a much better way than their
to understand the underlying mechanism by which MFIs social objectives. However, looking at the positive correla-
are distributing their funds among different objectives tion between social and financial efficiency suggests social
and setting their priorities. Thus, this study could not find objectives of MFIs follow their financial objectives.

Table 4. Pearson Correlation Between Efficiencies

Financial Social Revenue Loan Efficiency to Efficiency to Reach

Efficiency Efficiency Efficiency Efficiency Reach Women the Poorest
Financial efficiency 1.000
Social efficiency 0.414** 1.000
Revenue efficiency 0.687** –0.001 1.000
Loan efficiency 0.599** 0.811** 0.059 1.000
Efficiency to reach women 0.436** 0.993** 0.020 0.810** 1.000
Efficiency to reach the poorest 0.356** 0.964** –0.064 0.717** 0.952** 1.000
Source: Author’s calculation.
Note: **Correlation is significant at the 0.01 level (2-tailed).
62 Vision 20(1)

Therefore, study finds lack of evidence of existence of trade- Peer Group in Case of Financial
off between social and financial efficiency as suggested by DMU Name Efficiency
welfarist approach. However, it can be said that MFIs in DCBS Muthoot, SCDS
India give priority to financial objectives over social Disha Microfin Disha Microfin
objectives. Thus, financially sustainable MFIs should ESAF Disha Microfin, Muthoot
gear up their resources on the second bottom line, that Equitas Disha Microfin, FFSL, MMFL, Muthoot
is, social objective. They should step up their efforts to FFSL FFSL
benefit the poorest and women, which is one of their Fusion Microfinance Disha Microfin, MMFL, Muthoot
core objectives. GFSPL Disha Microfin, FFSL, MMFL, Muthoot
GMF FFSL, Muthoot, SCDS, Trident
The study has policy implications for donors and rating Microfinance
agencies as it is always in their interest to know how effi- GMSSS Bandhan, Muthoot, SML
ciently funds are being distributed among financial and GU Muthoot, SCDS, Trident
social objectives. Further, study has relevance for the indi- Microfinance
vidual MFIs too, as benchmarking of MFIs has been done GUARDIAN Muthoot, SCDS, Trident
to identify the peer for every studied MFI to improve their Microfinance
GVMFL Disha Microfin, FFSL, Muthoot
financial and social efficiency.
Grameen Sahara FFSL, MMFL, Muthoot, Sanghamithra
Limitation of this study is that it pertains to only finan- HiH SCDS
cial year 2012. However, on social and financial efficiency IDF Financial Services FFSL, Muthoot, Sanghamithra, Trident
front, availability of more data in coming years will facili- Microfinance
tate comparison and give broader view of how shift in IMPACT FFSL, Muthoot, SCDS
objectives, if any, has happened in India. IRCED Bandhan, Sanghamithra
JFIL Disha Microfin, FFSL, Muthoot
JFSPL Disha Microfin, FFSL, Muthoot
Acknowledgement
Jagaran MF Muthoot, SCDS
The author is thankful to Dr Soma Dey, Faculty of Management KBSLAB Disha Microfin, MMFL, Muthoot
Studies, Delhi, for her invaluable suggestions and comments. LBT Muthoot, SCDS
M-power Disha Microfin, Muthoot
MFS FFSL, Muthoot, SCDS
Annexure 1. Peer Group Under Financial Efficiency MMFL MMFL
Specification Mahasemam Disha Microfin, Muthoot
Mahashakti FFSL, Muthoot, SCDS
Peer Group in Case of Financial Muthoot Muthoot
DMU Name Efficiency NEED Bandhan, Muthoot, SML
NFPL Disha Microfin, FFSL, Muthoot
AML Muthoot, SML, Trident Microfinance
Navachetana Disha Microfin, Muthoot
ASA India Muthoot, SCDS
Nightingale Disha Microfin, MMFL, Muthoot
Adhikar FFSL, Muthoot, SCDS, Trident
PRAYAS FFSL, Muthoot, SCDS
Microfinance
RGVN(NE) Disha Microfin, MMFL, Muthoot
Annapurna Mahila Disha Microfin, MMFL, Muthoot
SCDS SCDS
Credit Co-op Society
SCNL FFSL, MMFL, Muthoot, Sanghamithra
Annapurna Microfinance FFSL, Muthoot, Sanghamithra, Trident
Pvt. Ltd Microfinance SEWA Bank SEWA Bank
Arohan Muthoot, SCDS SKDRDP FFSL, Sanghamithra, Trident
Microfinance, WSE
Arth Disha Microfin, FFSL, Muthoot
SKS FFSL, SCDS, Trident Microfinance
Asirvad Disha Microfin, MMFL, Muthoot
SMCS Bandhan, MMFL, Muthoot,
Asomi Muthoot, SCDS
Sanghamithra
BASIX SCDS, Trident Microfinance
SMGBK Muthoot, SCDS
BFL FFSL, MMFL, Muthoot, Sanghamithra
SMILE Disha Microfin, FFSL, Muthoot
BJS Muthoot, SCDS.
SML Bandhan, SML, Trident Microfinance
BMVS Bandhan, MMFL, Muthoot
SMPL Disha Microfin, FFSL, Muthoot
BSS Disha Microfin, FFSL, MMFL, Muthoot
SNFL Bandhan, Muthoot, SML
Bandhan Bandhan
SVCL Disha Microfin, FFSL, Muthoot
Belstar FFSL, Muthoot, SCDS
Sahara Utsarga SCDS
CDOT Disha Microfin, FFSL, MMFL, Muthoot
Sahayog Bandhan, MMFL, Muthoot
CMML Muthoot, SCDS, Trident Microfinance
Saija FFSL, Muthoot, SCDS
Cashpor MC FFSL, Muthoot, Sanghamithra, Trident
Samasta Disha Microfin, FFSL, MMFL, Muthoot
Microfinance
Sanghamithra Sanghamithra
Chaitanya Disha Microfin, FFSL, Muthoot
Sarala Muthoot, SCDS
DBIS Muthoot, SCDS
(Annexure 1 continued)
Kaur 63

(Annexure 1 continued) Peer Group in Case of Social

Peer Group in Case of Financial DMU Name Efficiency
DMU Name Efficiency GVMFL Trident Microfinance
Seba Rahara Muthoot, SCDS Grameen Sahara Trident Microfinance
Sonata Disha Microfin, FFSL, MMFL, Muthoot HiH Trident Microfinance
Spandana Bandhan, SML, Trident Microfinance IDF Financial Services Trident Microfinance
Suryoday Disha Microfin, MMFL. IMPACT Trident Microfinance
Swadhaar Disha Microfin, Muthoot IRCED Trident Microfinance
Trident Microfinance Trident Microfinance JFIL Trident Microfinance
UFSPL Muthoot, SCDS, Trident JFSPL Trident Microfinance, WSE
Microfinance Jagaran MF Trident Microfinance
Ujjivan Disha Microfin, MMFL, Muthoot
KBSLAB Trident Microfinance
Utkarsh Disha Microfin, MMFL, Muthoot
LBT Trident Microfinance
VFS FFSL, Muthoot, SCDS
WSDS Bandhan, Muthoot, SML M-power Trident Microfinance
WSE WSE MFS Trident Microfinance
YFS FFSL, Muthoot, SCDS MMFL Trident Microfinance, WSE
YMF Muthoot, SCDS Mahasemam Trident Microfinance
Mahashakti Trident Microfinance
Muthoot Trident Microfinance
Annexure 2. Peer Group Under Social Efficiency Specification NEED Trident Microfinance
NFPL Trident Microfinance, WSE
Peer Group in Case of Social Navachetana Trident Microfinance
DMU Name Efficiency Nightingale Trident Microfinance, WSE
AML Trident Microfinance PRAYAS Trident Microfinance
ASA India Trident Microfinance RGVN(NE) Trident Microfinance, WSE
Adhikar Trident Microfinance SCDS Trident Microfinance
Annapurna Mahila Credit Trident Microfinance, WSE SCNL Trident Microfinance, WSE
Co-op Society SEWA Bank WSE
Annapurna Microfinance Trident Microfinance SKDRDP Trident Microfinance, WSE
Pvt. Ltd SKS Trident Microfinance
Arohan Trident Microfinance SMCS Trident Microfinance, WSE
Arth Trident Microfinance, WSE SMGBK Trident Microfinance
Asirvad Trident Microfinance, WSE SMILE Trident Microfinance
Asomi Trident Microfinance SML Trident Microfinance
BASIX Trident Microfinance SMPL Trident Microfinance, WSE
BFL Trident Microfinance, WSE SNFL Trident Microfinance
BJS Trident Microfinance SVCL Trident Microfinance, WSE
BMVS Trident Microfinance, WSE Sahara Utsarga Trident Microfinance
BSS Trident Microfinance, WSE Sahayog Trident Microfinance, WSE
Bandhan Trident Microfinance Saija Trident Microfinance
Belstar Trident Microfinance Samasta Trident Microfinance, WSE
CDOT Trident Microfinance, WSE Sanghamithra Trident Microfinance, WSE
CMML Trident Microfinance Sarala Trident Microfinance
Cashpor MC Trident Microfinance Seba Rahara Trident Microfinance
Chaitanya Trident Microfinance Sonata Trident Microfinance
DBIS Trident Microfinance Spandana Trident Microfinance
DCBS Trident Microfinance Suryoday Trident Microfinance, WSE
Disha Microfin Trident Microfinance, WSE Swadhaar Trident Microfinance, WSE
ESAF Trident Microfinance, WSE Trident Microfinance Trident Microfinance
Equitas Trident Microfinance, WSE UFSPL Trident Microfinance
FFSL Trident Microfinance, WSE Ujjivan Trident Microfinance, WSE
Fusion Microfinance Trident Microfinance, WSE Utkarsh Trident Microfinance, WSE
GFSPL Trident Microfinance, WSE VFS Trident Microfinance
GMF Trident Microfinance WSDS Trident Microfinance
GMSSS Trident Microfinance WSE WSE
GU Trident Microfinance YFS Trident Microfinance
GUARDIAN Trident Microfinance YMF Trident Microfinance
64 Vision 20(1)

Annexure 3. Description of Inputs and Outputs

Variables Explanation
Inputs
Total assets ($) Total assets, adjusted for inflation and standardized provisioning for loan impairment and write-offs
Operating cost ($) Expenses related to operations, including all personnel expense, depreciation and amortization, and
administrative expense
Loan officers Persons directly related to loan-related activities and responsible for arranging and monitoring client loans
Outputs
Revenue ($) Financial revenues from the loan portfolio, income from interest, fee etc.
Gross loan All outstanding principals due for all outstanding client loans. This includes current, delinquent, and
portfolio ($) renegotiated loans, but not loans that have been written off. It does not include interest receivable
Number of active Number of women borrowers with loans outstanding adjusted for standardized write-offs
women borrowers
Number of poorest Calculated using the index for ith MFI as
reached ALB i - Min (ALB)
Pi = [1 - ] # (Number of active borrowers i)
Range (ALB)
Note: Definition of inputs and outputs is adopted from MIX market database.

Notes
1. Each unit under analysis under DEA is known as DMU, hence,
for the purpose of efficiency analysis, each MFI will be treated
as DMU. Efficiency of DMUs is represented on the scale 0 to
1 or can also be in percentage terms. Efficiency score 1 or (100
per cent) means DMU is on efficient frontier and score less
than 1 implies DMU is relatively inefficient in comparison to
other DMUs.
2. Excerpts are taken from the speech on, ‘Financial inclusion in
India—An assessment’, delivered by RBI Executive Director
P. Vijaya Bhaskar on 10 December 2013. Copy of speech is
accessed from Reserve Bank of India’s official website.
3. Disclosure of financial statements of Trident Microfinance for
the year 2012–3 is accessed from website http://www.trident-
microfin.com/financials.asp
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