Analyzing the Trade-Off between Outreach and Financial Performance for Indian Microfinance Institutions

Microfinance institutions (MFIs) in India are undergoing a structural change where previously donor driven, subsidy-reliant institutions are graduating into for-profit, publicly listed organizations. This necessitates a close examination of the nature of inter-relatedness between the MFIs' objectives of outreach and financial performance.A synthetic index, one for each dimension of performance – outreach and financial stability - is created for each MFI using factor analysis. The factor scores computed are then used as dependent variables in a Seemingly Unrelated Regression (SUR) framework to identify the determinants of performance.The results suggest that expansion of coverage and sustainable financial performance are strongly inter-connected objectives. While operational efficiency, leverage and institutional structure affect financial performance, outreach is driven by better aligned staff incentives, reduction in operational costs and ability to manage greater risks. A strong ‘learning by doing' component is observed to exist in the microfinance industry