Regulation and the Performance of Microfinance Institutions in India
DOI:
https://doi.org/10.55763/ippr.2025.06.05.003Abstract
This study examines the regulatory status and the performance of 183 Microfinance Institutions (MFIs) in India from 2004-05 to 2019-20, using the latest available unbalanced panel data set, compiled from the Mix market database published by World bank. MFIs are vital in providing financial services to underserved populations. In response to concerns over aggressive lending practices and borrower exploitation, the Reserve Bank of India (RBI) has implemented stringent guidelines on interest rates, loan sizes, and borrower eligibility. While these regulations are intended to promote financial inclusion and maintain the ethical and financial stability of the sector, their effects on MFIs' operational efficiency, financial sustainability, and outreach capabilities remain ambiguous. Using the Generalized Method of Moments (GMM) technique, this empirical study examines the relationship between regulatory interventions and MFI performance across three key models: operational self-sufficiency (OSS), the number of active borrowers (NAB), and average loan size per borrower. The findings indicate that RBI-regulated MFIs have higher OSS and breadth of outreach, as regulated MFIs demonstrating improved operational sustainability and a greater capacity to attract and retain borrowers. However, the study also highlights challenges, such as high loan default rates and reduced loan sizes, particularly in response to macroeconomic factors like inflation and economic growth.
Keywords:
Microfinance institutions (MFIs), Operational Self-Sufficiency (OSS), Breadth and Depth of Outreach, RBI Regulation, Generalized Methods of Moments (GMM)Downloads
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