FINANCIAL MANAGEMENT AND EFFICIENCY: A COMPARATIVE ANALYSIS OF MICROFINANCE INSTITUTIONS AND COMMERCIAL BANKS IN INDIA

Abstract

 Microfinance in India is often seen as a vital tool for promoting economic development, reducing poverty, and fostering financial inclusion. However, despite the vast number of villages in India, only a relatively small fraction, approximately 50,000, have access to financial services. India also holds the unfortunate distinction of having the highest number of unbanked households. This paper aims to investigate the performance and efficiency of microfinance institutions, especially in light of challenges like the Andhra crisis and concerns about mission drift. To conduct this study, we have selected a sample of microfinance institutions in India, chosen based on their ratings from the Microfinance Information Exchange (MIX). We assess the performance of these selected microfinance institutions and compare their performance to that of commercial banks in India using statistical tools. Financial sustainability of a microfinance institution is evaluated based on its financial records and adherence to recognized accounting practices as suggested by Meyer (2002). Data on the microfinance institutions have been gathered from the Microfinance Information Exchange (MIX), where some of the MFIs have begun reporting their financial data. MIX classifies MFIs based on various parameters such as the level of disclosure and financial indicators, subsequently assigning ratings. Out of the 88 MFIs in India reported on MIX, we have chosen 24 as our sample, specifically focusing on those with a five-star rating from MIX. We analyze the financial performance of these MFIs, comparing their financial parameters to those of commercial banks. The key financial performance indicators considered include financial structure, profitability, and efficiency. This study falls within the purview of financial management, providing insights into how microfinance institutions in India perform in relation to commercial banks in various financial aspects.