Chapter 7 Findings, Conclusions and Suggestions This chapter explains the findings and conclusions of the research study. This chapter also includes the suggestions made by the researcher on the basis of findings and conclusions. Objective-1: To study the long term performance (trend) of financial sustainability of MFI s in India Microfinance is viewed as an instrument of social change and hence often been measured on non-financial parameters. Recent research of the past decade shows that for long term sustainability MFIs need to focus on Performance and outreach. Though there are many tools developed which measure the social performance of MFIs but measuring the social performance is still in nascent stage. The financial performance measurement is lacking of such a number of options and methodologies despite fundamental importance of financial sustainability. In the study, the financial sustainability is measured by return on equity, return on asset, Operational Self Sufficiency, Gross Loan Portfolio, Capital Asset Ratio, Debt Equity Ratio, portfolio at risk>30 days and yield on gross loan portfolio. The findings and conclusions related to objective 1 are discussed below: 1.1 Return on Equity: In the study it is found that with respect to average ROE of selected MFIs, most of the MFIs are found to have positive average ROEs. However some of the MFIs are having negative average ROE. Among the selected MFIs Adhikar (0.870) is found to have maximum ROE followed by Cashpor (0.633). It is found in the study that most of the selected MFIs in India are not providing very good ROE to their equity holders. Swadhar is found to have lowest average ROE (-4.39) followed by GU Financial (-1.25). ROE is said to be dependent on scale of operations and operation expense ratio. Higher the scale of operation leads to higher ROE. Also, lower the operating expense ratio contributes to higher ROE. SaDhan Microfinance Report 2014, states that MFIs with very large scale of operations tend to have higher returns and hence high ROE and ROA. Moderate scale of 171
operations has the lowest and small has reasonably better ROA and ROE because of higher yield with a smaller capital base. The results indicate that the selected MFIs have a range of average ROE. Some firms are found to have a negative average ROE. However most of the funds have a positive ROE. 30 percent of the MFIs are having negative average ROE and 70 percent have a positive average ROE. Out of the 70 percent, 66.7 percent have the average ROE between 0-20 percent and 3.3 percent have more than 20 percent. In India the MFIs are growing rapidly. In the study it is found that most of the MFIs are providing positive ROE to their equity holders which are a positive sign. In India one of the reasons of growing in the number of MFIs is the presence of business potential in microfinance. Another reason for the growth in ROE of the MFIs in India is the regulatory action and promotions taken by Indian government to promote microfinance in the country. 1.2 In the study the long term trend of ROE of all the individual firms is analysed. It is found that out of the selected MFI s 8 MFIs have significant long term trend in the behaviour of ROE. Out of these 8 MFIs, 6 are having a significant positive trend and 2 are having negative. In the study it is found that very few MFIs have significant positive trend with respect to ROE. Most of the firms do not have long term trend of ROE. This indicates the return to equity shareholders is not available for most of the MFIs. The reason of absence of significant trend in ROE is that the business model is not having significant growth; Capital structure of the firm is having less proportion of equity and the presence of high competition on the microfinance segment. On the basis of estimated long term trend of ROE in selected MFIs the firms are divided into 3 categories namely; Less than 0 percent, ROE between 0 to 20 percent and ROE more than 20 percent. It is found that out of 30 selected MFIs, 17 are found to have negative ROE whereas 13 MFIs are found to have a positive long term trend in ROE. Out of the 12 MFIs, 9 are having a long term trend between 0 to 20 percent and 4 are found to have a long term trend of more than 20 percent. ROE measures an MFI s ability to compensate shareholders investment, to build its equity base through retained earnings, and to raise additional equity investment. For a non-profit MFI, ROE shows its ability to build equity through retained earnings, and increased equity enables the MFI to leverage more financing to grow its portfolio. Hence it can be concluded that that most of the MFIs are not able to have long term sustenance as unable to give a good return to the shareholders. 172
1.3 Return on Assets is another measure which is used to measure the financial performance of the firm and it indicates the rate of return earned on total assets which includes both debt and equity. In the study the data of ROA of the selected MFIs are collected for the time period 2005-13. It is found that most of the MFIs are found to have positive average ROA. However some of the MFIs are have negative ROA. Among the selected MFIs Bandhan (0.544) is found to have maximum ROE followed by BSS (0.444). It is found from the results that most of the selected MFIs in India are not providing very good ROA to their equity holders. The results also indicates that Swadhar is found to have lowest average ROA (-0.4133) followed by BSFL (-0.1433). As stated above both ROE and ROA are dependent positively on the Scale of operations and negatively on the operation expense ratio, which is supported by the above result for MFI Bandhan and BSS. On 2nd of April, 2014 RBI in-principle approved Bandhan Financial Services Pvt. Ltd, which is the leading microfinance institutions in India, to function as a private bank with full focus on rural regions/areas of India. ROA for Swadhar has been found to be the lowest as it is a relatively young in age as compared to Bandhan and other MFIs considered which results in higher Operating expense ratio which leads to low ROA. In the study it is found that some of the firms have a negative average ROA, however most of the firm are found to have a positive ROA. 33 percent of the MFIs are having a negative average ROA, 67 percent of the firm have a positive ROA. The result indicates that out of 67 percent, only 17 percent have an average ROA more than 5 percent. As quoted in SaDhan annual report of 2014 on Microfinance, the average Return on Assets of the industry is 1.94% which is considered to be a good leap from 2013 when the average was 1% due to the impact of Andhra Crisis on the Indian MFIs. Comparing the data taken above shows that out of the 30 selected MFIs, 14 have an average ROA of greater than equal to 1 percent. 1.4 In the study the long term trend of ROA of all the individual firms is analysed with the help of regression analysis. It is found that 8 MFIs have significant long term trend in the behaviour of ROA. Out of the 8 MFIs, 6 are having a significant positive trend and 2 are having negative. In the study it is observed that very few MFIs have significant positive trend with respect to ROA.. This indicates the return on assets to debtors and shareholders is not available for most of the MFIs. The reason of absence of significant trend in ROA is that the business model is not having significant growth; the firm is having less proportion 173
of equity and the presence of high competition on the microfinance segment. Out of 30 selected MFIs 15 are found to have negative ROA and 15 are found to have a positive long term ROA. Out of the 15 having positive trend, 2 firms have a trend more than 2%. As ROA includes the return on the loan portfolio of the MFI as well as other revenue generated from investments and other operating activities.this again, like the Return on Equity explains that the MFIs are not able to earn enough return on overall assets and move towards the long term sustainability of MFIs in India. 1.5 Operational Self Sufficiency (OSS) is the measure of operation sustainability which indicates whether the MFI is able to sustain itself and cover its operational expenses, loan loss provisions and financial costs. It is the most basic measurement of sustainability, indicating whether revenues from operations are sufficient to cover all operating expenses. OSS focuses on revenues and expenses from the MFI s core business and thus, reflects the MFI s ability to continue its operations if it receives no further subsidies.in the study the data of OSS of the selected MFIs are collected for the period of 2005-13. The results indicate that the selected MFIs have an average OSS range from 0.57 to 1.56. MFIs having OSS above 1 are considered to be operationally sustainable. However some of the MFIs do have OSS less than 1. Among the selected MFIs Madura (1.56) is found to have maximum OSS followed by Bandhan (1.49). The results also indicate that Swadhar is found to have lowest average OSS (0.57). Thus it proves that there exists a relationship that between the ROA and OSS of the MFIs selected as it is observed that 3 out of 4 MFIs having the highest and lowest mean ROA have the same for mean OSS. The reason for the above result can be that both are dependent on the Operating expense ratio (OER). Lower the OER, higher the OSS and ROA. It is found that the selected MFIs have a range of average OSS. Most of the firms are found to have OSS greater than 1, but few have OSS less than 1. It is observed that only 23.33 percent of total of 30 MFIs have an operational self sufficiency of less than 1. Remaining 76.66 percent of the MFIs have an average OSS of greater than 1. Thus we can conclude that the Indian MFIs from 2005-13 have moved toward gaining operational sustainability which is a positive sign for the industry as OSS is one of the major goals for MFIs to achieve to maintain viable and future growth of the operations. 174
1.6 In the study the long term trend of OSS of the individual firms, it is seen that 12 MFIs, out of the selected 30 MFIs, have significant long term trend in the behaviour of OSS. Out of these 12 MFIs, 10 are having a significant positive trend and 2 are having negative. In remaining of the 18 MFIs there exists no significant trend of OSS. Most of the firms do have a long term trend of OSS. This indicates the operational self sufficiency is available for most of the MFIs. The result also indicate that out of 30 MFIs selected, 13 are found to have a negative OSS and the remaining 17 have a positive long term trend. Out of the 17, 6 are found to have an OSS increasing on an average of 4 percent over 2005-13. Though a low growth trend, OSS is one of the key variables which impact long term financial sustainability. As long term sustainability starts from operational sustainability, so that the MFIs can fund their day to day operations which further can be developed to long term. 1.7 Gross Loan Portfolio is the total of loan outstanding for an MFI. It includes outstanding principal for all outstanding client loans, including current, delinquent and restructured loans, but not loans that have been written off. It does not include interest receivable. The increase in the Gross Loan Portfolio indicates the increase in the outreach of the MFIs. In the study of the data of Gross Loan Portfolio of selected MFIs are collected for the period of 2005-13. The average Gross Loan Portfolio of each MFI is estimated along with respect to standard deviation, minimum and maximum. The result indicate that the selected that the selected MFIs have a range of average Gross Loan Portfolio ranging from Rs. 6.5 Crores (Mahashakti) to Rs 2160.84 Crores (SKS). For MFIs, loan portfolio is the primary revenue generating asset. It also gives details about the health of MFIs, performance of the institutions and their contribution to the goal of financial inclusion. Gross Loan Portfolio is also a measure of outreach and indicates the scale of operations of the MFI in terms of all outstanding loans principal due for all microfinance clients. 56.7 percent of the MFIs are having an average Gross Loan Portfolio less than Rs 250 Crores and the remaining 46.3 percent have an average Gross Loan Portfolio greater than Rs. 250 Crores. Out of these 46.3 percent, 23.3 have an average Gross Loan Portfolio greater than Rs. 500 Crores. 1.8 In the study the long term trend of Gross Loan Portfolio of the individual firms is analysed and the result indicates that 23 MFIs out of the selected 30 MFIs, have a 175
significant long term trend in the behaviour of GLP and the remaining 7 MFIs do not show a significant trend of GLP. Thus it can be concluded that most of the MFIs have significant positive long term trend with respect to GLP. Further, results indicate that out of 30 MFIs selected, 17 are found to have a growth less than 50 Crores per annum and 13 have a growth of more than 50 Crores per annum. Out of these 13, 9 are showing a growth rate of more than 100 Crores during the period 2005-13. Increase in the Gross Loan Portfolio indicates that though 57 percent are showing a trend of less than 50 crores but it is a positive trend which implies a that Indian MFIs are on a growth trend as higher GLP increases the outreach and help MFIs achieve economies of scales and hence the profitability. 1.9 Capital-to-asset ratio measures whether a company has sufficient capital to support its assets. It is measured as the proportion of equity to total assets. In the study of the data of Capital Asset Ratio (CAR) of selected MFIs are collected for the period of 2005-13. The average Capital Asset Ratio of each MFI is estimated along with respect to standard deviation, minimum and maximum. The results indicate that there are only two MFIs having a negative Capital Asset Ratio which means that they do not have any percentage of equity in the total capital. The remaining 28 have a ratio varying from 3% to 35%. Having equity in the capital structure does bring in accountability and responsibility of MFIs to perform. 1.10 In the study the long term trend of capital asset ratio of the individual firms is analysed and the result indicates that out of 30 MFIs selected, 10 have a significant long term trend in the behaviour of CAR and the remaining 20 do not show a positive long term trend. Further, out of the selected 30 MFIs, eight MFIs are found to have a negative growth and 22 have a positive growth varying from 0-20%, Out of the 22, 10 have a positive growth of over 20% for a period of 2005-13, which means that most of the MFIs in India are showing a positive trend and a positive CAR indicates the growth of equity in the total capital. 1.11 Debt Equity Ratio is the simplest and best known measure of capital adequacy as it measures the overall leverage of the institution. The debt-to-equity ratio indicates the relationship of debt to equity financing. This Ratio expresses the relationship between capital contributed by creditors and that contributed by owners. It expresses the degree of 176
protection provided by the owners for the creditors. Traditionally, MFIs have had low debt to equity ratios, because as NGOs their ability to borrow from commercial lenders was limited but as they reconstitute themselves as regulated intermediaries, however, DER perhaps rise rapidly. In the study the data of DER of the selected MFIs are collected for a period of 2005-13. The results of average DER of selected MFIs varies from a minimum of 24.54 percent (Janalakshmi) to a maximum of 76.89 percent (GU Financial). Apart from 2 MFIs Janalakshmi and Spandana (having a negative DER), all have a DER ranging from 2.77 to 76.89 percent. Negative DER implies that the firm has a negative net worth and hence the debt available to these firms will be at a high rate and which will lead to lower negative interest coverage ratio too. 7 percent of the MFIs are having negative average DER and 93 percent have a positive average ROE. Out of the 93 percent, 80 percent have the average DER between 0-20 percent and 13 percent have more than 20 percent. As per the life cycle theory sources of financing are linked to the stages of MFI development (Fehr and Hishigsuren, 2004). Research also shows that other factors influencing leverage is the promoters profile, size and growth rate of the MFI, Business model adopted and legal form of an MFI (M-CRIL Technical Note 2 Equity & Leverage in Indian MFIs, 2005). 1.12 In the study the long term trend of DER of all the individual firms is analysed. The result indicates that the probability value of 12 MFIs, out of the selected 30 MFIs, have significant negative long term trend in the behaviour of DER and the remaining do not have significant trend of DER. On the basis of estimated long term trend of DER in selected MFIs, the results indicate that out of 30 MFIs selected, 24 are found to have a negative growth which implies that the growth of Debt Equity ratio is on a decline for majority of the firms. The remaining 6 have positive growth; 1 out of the 6 has a more than 30 percent growth in the ratio and the remaining are below 30 percent. The above indicates absence of MFIs taking deposits and hence diversification of MFIs in India is desirable for them to sustainable which will lead to reducing their dependence on subsidy and donations. 1.13 Portfolio at Risk (PAR) is the key income-generating asset for a MFI. Interest income constitutes over 90% of the total income of MFIs. Lending, obviously, is burdened with the intrinsic risk of repayment default. Therefore, maintaining a healthy loan portfolio with minimum loan default ensures the profitability and financial health of an MFI. 177
Portfolio at Risk > 30 days measures the potential for future losses based on the current performance of the loan portfolio. The ratio also includes renegotiated loans which prevents hiding troubled loans through rescheduling or refinancing and indicates a higher level of risk associated with clients that have had repayment problems. The result of average PAR of selected MFIs indicates a varied range from 0.16 percent (Bandhan) to 27.26 percent (Share). 11 MFIs out of the selected have a PAR less than 1 which is indicates a healthy financial health of the MFIs. As per the SaDhan Microfinance Report 2014, the PAR which had risen after the 2010 Andhra Crisis is on a decline post 2012 which indicates a positive sign of growth of the industry. 60 percent of the MFIs are having an average PAR less than 2 percent and the remaining 40 percent has a PAR more than 2 percent. Out of the 40 percent, 33.33 percent have an average PAR greater than 4 percent. 1.14 The result indicates that 10 MFIs out of the selected 30 have significant long term trend in the behaviour of PAR. Out of these 10 MFIs, 5 are having a significant positive trend and 5 are having negative. In the study it is observed that very few MFIs have significant positive trend with respect to PAR. The results of average PAR of selected MFIs indicate that most of the MFIs are found to have negative trend of PAR. However some of the MFIs, 17% have a of the tune of 2% and above. But the declining trend indicates that the Indian MFIs are on a positive path of moving towards a low PAR. 1.15 Yield on Gross Loan Portfolio is a percentage (%) which shows the average gross returns as a proportion of the portfolio outstanding. Generally speaking, Portfolio Yield is the initial indicator of an institution's ability to generate revenue with which to cover its financial and operating expenses. It measures how much the Microfinance Institution (MFI) actually received in interest payments from its clients during the period. It also provides an insight into portfolio quality. For Portfolio Yield to be meaningful, it must be understood in the framework of the prevailing interest rate environment the MFI operates in. The results of average YGLP of selected MFIs indicate that they vary from a minimum of 13% (SKDRDP) to a maximum of 50% (Mahasemam). The average yield of the 30 MFIs is calculated to be close to 23%. This indicates a healthy position of Indian MFIs through 2005-13. The result indicates that most of the MFIs (57%) of the selected 30 lie in the range of 20-30%.and the remaining are either below 20% and only three having a YGLP more than 30%. An average of YGLP between 20-30% implies a good performance of MFIs for the period under consideration. 178
1.16 The study of long term trend on YGLP show that 13 MFIs have significant long term trend. Out of these 13 MFIs, five are having a significant negative trend and the remaining eight are having positive. In remaining of the 17 MFIs the probability value of t statistic is found to be more than 5 percent level of significance hence it can be concluded that there exists no significant trend of YGLP in those MFIs. The results further indicates that 16 out of the selected 30 MFIs show a negative trend for the period 2005-13 and the 12 have a trend of earning between 0-20% on the gross loan portfolio. The remaining two have a trend of more than 20% return on the gross loan portfolio. The declining trend in most of the MFIs is due to RBI intervention to stream line the interest rates charged by MFIs after the crisis of Andhra Pradesh. 1.17 Exponential Growth Rate (EGR) - Assets indicates that except 5 firms all the other selected have significant growth of their assets in the last 8 years. The study indicates that out of 30 MFIs selected, eight of the MFIs have a growth trend less than 15%, 10 have a growth trend of assets between 15-30 percent and the remaining 12 show a growth trend of more than 30%. Thus it can be concluded that the MFIs have a positive trend for assets which implies a positive growth in the MFI industry. The average of the 30 MFIs is found to be 30% which is a good indicator of the growth of the industry. 1.18 Exponential Growth Rate (EGR) Borrowings The result of long term trend indicate that except 9 firms all the selected MFIs are having significant growth of their borrowings in the last 8 years. The study further indicates that out of 30 MFIs selected, 7 percent of the MFIs have a negative growth trend whereas the remaining 93 percent show a positive growth trend. Out of the 28 MFIs showing a positive trend, 16 have a growth trend between 0 to 30 percent and the remaining 12 have a growth trend of more than 30%. 1.19 Exponential Growth Rate (EGR) Gross Loan Portfolio The result of long term trend indicate that all MFIs have a positive growth rate varying from 0-96 percent. Out of 30 MFIs selected, 13 percent of the MFIs have a growth trend between 0-20 percent; 57 percent has a growth trend between 20-80 percent and 30 percent of the MFIs show a growth trend of more than 80 percent. 179
Objective-2: To examine determinants which affect the financial sustainability scores of Indian MFIs. In this section impact of each independent variable, namely, Operational Self sufficiency, Return on Assets, Portfolio at Risk>30days, Gross Loan Portfolio, Operating expenses to Loan portfolio, Age, Debt Equity Ratio and Operating expenses to Assets, Total Expenses to Assets is measured on dependent variable of financial sustainability namely, Return on Equity, Return on Assets and Operational Self Sufficiency. The above mentioned determinants have been put to statistical analysis done using pooled regression model as well as panel regression models. 2.1 Variables which impact return on Equity a. Portfolio at Risk The results indicate that PAR>30 days impact the return on equity of the MFIs under consideration as the F statistics of pooled regression model is found to be 7.845 with p value (0.005). This indicates that the model is statistical fit. The R square value of 2.85 percent indicates that 2.85 percent of variance in ROE of MFIs can be explained with the help of variations of portfolio at risk in the pooled regression model. b. Capital Asset Ratio The results indicate that Capital Asset Ratio impacts the return on equity of the MFIs under consideration as the F statistics of pooled regression model is found to be 25.717 with p value (0.000). This indicates that the model is statistical fit. The R square value of 8.786 percent indicates that 8.786 percent of variance in ROE of MFIs can be explained with the help of variations Capital Asset Ratio in the pooled regression model. c. Operating Expenses to Asset Ratio The results indicate that Operating Expenses to Asset Ratio impacts the return on equity of the MFIs under consideration as the F statistics of pooled regression model is found to be 20.422 with p value (0.000).. This indicates that the model is statistical fit. The R square value of 7.11 percent indicates that 7.11 percent of variance in ROE of MFIs can be explained with the help of variations Operating Expenses to Asset Ratio in the pooled regression model. 180
To understand the heterogeneity of the variables among the selected MFIs, both F-test and Hausman test was applied at it was found that for all the variables, random effect test needs to be applied. The results found are, for Capital Asset Ratio, F-value was found to be 25.717 with a p value (0.000) and a R square value of 8.79 percent; Operating Expenses to Asset ratio had a, F-value was found to be 20.422 with a p value (0.000) and a R square value of 7.11 percent; Portfolio at risk >30 days, the, F-value was found to be 7.213 with a p value (0.007) and a R square value of 2.85 percent.further the combined effect of the above four variables were studied on Return on Equity and the results found were an F- Value of 17.54 with a p-value (0.000) and a Rsquare of 16.57 percent. 2.2 Variables which do not impact return on Equity In the study it has been found that Operational Self Sufficiency, Age, Debt to Equity Ratio and Gross Loan Portfolio does not impact the Return on Equity as the p value for all is found to be more than 5 percent level of significance. Hence with 95 percent confidence it can be concluded that the above mentioned variable do not impact return on equity. 2.3 Variables which impact return on Assets a. Operational Self Sufficiency The results indicate that OSS impact the return on assets of the MFIs under consideration as the F statistics of pooled regression model is found to be 273.972 with p value (0.000). This indicates that the model is statistical fit. The R square value of 50.64 percent indicates that 50.64 percent of variance in ROA of MFIs can be explained with the help of variations of portfolio at risk in the pooled regression model. b. Portfolio at Risk The results indicate that PAR>30 days impact the return on assets of the MFIs under consideration as the F statistics of pooled regression model is found to be 32.708 with p value (0.000). This indicates that the model is statistical fit. The R square value of 10.91 percent indicates that 10.91 percent of variance in ROA of MFIs can be explained with the help of variations of portfolio at risk in the pooled regression model. 181
c. Capital Asset Ratio The results indicate that Capital Asset Ratio impacts the return on assets of the MFIs under consideration as the F statistics of pooled regression model is found to be 13.829 with p value (0.000). This indicates that the model is statistical fit. The R square value of 4.92 percent indicates that 4.92 percent of variance in ROA of MFIs can be explained with the help of variations Capital Asset Ratio in the pooled regression model. d. Operating Expenses to Asset Ratio The results indicate that Operating Expenses to Asset Ratio impacts the return on assets of the MFIs under consideration as the F statistics of pooled regression model is found to be 341.072 with p value (0.000). This indicates that the model is statistical fit. The R square value of 56.09 percent indicates that 56.09 percent of variance in ROA of MFIs can be explained with the help of variations Operating Expenses to Asset Ratio in the pooled regression model. To understand the heterogeneity of the variables among the selected MFIs, both F-test and Hausman test was applied at it was found that for all the variables, random effect test needs to be applied. The results found are, for Operational Self Sufficiency, F-value was found to be 261.287 with a p value (0.000) and a R square value of 49.46 percent; Capital Asset Ratio had a, F-value was found to be 30.967 with a p value (0.000) and a R square value of 10.39 percent; Operating Expense to Loan portfolio Ratio, the, F-value was found to be 299.495 with a p value (0.000) and a R square value of 52.87 percent; and lastly for portfolio at Risk, the F-value was found to be 44.61 with a p value (0.000) and a R square value of 14.32 percent. Further the combined effect of the above four variables were studied on Return on Assets and the results found were an F-Value of 39.431 with a p value (0.000) and a Rsquare of 84.70%. 2.4 Variables which do not impact return on assets In the study it has been found that Age, Debt to Equity Ratio and Gross Loan Portfolio does not impact the Return on Assets as the p value for all is found to be more than 5 percent level of significance. Hence with 95 percent confidence it can be concluded that the above mentioned variable do not impact return on assets. 182
2.5 Variables which impact Operational Self Sufficiency a. Return on Assets The results indicate that OSS impact the return on assets of the MFIs under consideration as the F statistics of pooled regression model is found to be 273.972 with p value (0.000). This indicates that the model is statistical fit. The R square value of 50.64 percent indicates that 50.64 percent of variance in ROA of MFIs can be explained with the help of variations of return on assets in the pooled regression model. b. Portfolio at Risk The results indicate that PAR>30 days impact the operational self sufficiency of the MFIs under consideration as the F statistics of pooled regression model is found to be 50.68 with p value (0.000). This indicates that the model is statistical fit. The R square value of 15.95 percent indicates that 15.95 percent of variance in OSS of MFIs can be explained with the help of variations of portfolio at risk in the pooled regression model. c. Operational expenses to loan portfolio The results indicate that Operational expenses to loan portfolio impacts the operational self sufficiency of the MFIs under consideration as the F statistics of pooled regression model is found to be 48.61 with p value (0.000).This indicates that the model is statistical fit. The R square value of 15.40 percent indicates that 15.40 percent of variance in ROA of MFIs can be explained with the help of variations Operational expenses to loan portfolio in the pooled regression model. d. Gross Loan Portfolio The results indicate that Gross Loan Portfolio impacts the operational self sufficency of the MFIs under consideration as the F statistics of pooled regression model is found to be 4.780 with p value (0.0297). This indicates that the model is statistical fit. The R square value of 1.76 percent indicates that 1.76 percent of variance in ROA of MFIs can be explained with the help of variations Gross Loan Portfolio in the pooled regression model. e. Operational expenses to assets ratio The results indicate that Operational expenses to assets ratio impacts the operational self sufficiency of the MFIs under consideration as the F statistics of pooled regression model is found to be 76.65 with p value (0.000)..This indicates that the model is statistical fit. The R square 183
value of 22.30 percent indicates that 22.30 percent of variance in ROA of MFIs can be explained with the help of variations Operational expenses to assets ratio in the pooled regression model To understand the heterogeneity of the variables among the selected MFIs, both F-test and Hausman test was applied and it was found that for all the variables, except for portfolio at risk random effect test needs to be applied. The results found are, for return on assets, F- value was found to be 262.17 with a p value (0.000) and a R square value of 49.54 percent; Operating expenses to loan portfolio had a, F-value was found to be 37.72 with a p value (0.000) and a R square value of 12.38 percent; gross Loan portfolio Ratio, the, F-value was found to be 2.795 with a p value (0.096) and a R square value of 1.037 percent; operating expenses to assets ratio, the F-value was found to be 76.645with a pvalue of (0.000) and a R square value of 22.30 percent and lastly for portfolio at Risk, which qualifies for a fixed effect model, the F-value was found to be 8.013 with a p value (0.000) and a R square value of 50.25 percent. Further the combined effect of the above four variables were studied on Return on Assets and the results found were an F-Value of 70.866 with a pvalue (0.000) and a R square of 57.39 percent. 2.6 Variables which do not impact Operational Self Sufficiency In the study it has been found that Age, Debt to Equity Ratio and capital asset ratio does not impact the operational self sufficiency as the p value for all is found to be more than 5 percent level of significance. Hence with 95 percent confidence it can be concluded that the above mentioned variable do not impact return on assets. Objective-3: To develop an index to measure Financial Sustainability so as to obtain scores of Indian MFIs. In this study the major objectives was to analyse the components of financial sustainability and to design an index for financial sustainability of micro finance institutions. In order to fulfill this objective the opinion of the financial experts was analyzed using the statistical method Analytical hierarchical Process (AHP) in which they were asked to rank the variables based on the literature and findings from previous objectives. Secondly to help 184
MFIs know their standing in the industry, an attempt was made to rank the selected MFIs using The Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) which lays stress on conceptualising sustainability from self-sufficiency perspective and stresses that MFIs can reach to as many poor people as possible, which should be done only in a financially sustainable manner. The findings of both are discussed below: 3.1 Findings of AHP The study indicates that OSS (35.83 percent) is the most important measurement of financial sustainability of MFI s as perceived by the selected experts. This is followed by the PAR>30 days (33.62 percent). These two measures in total explain 70 percent of the importance in order to measure financial sustainability of MFI s. These two measures are found extremely important measures of the financial sustainability as suggested by the experts. In addition to that, Return on assets (13.84 percent) is found to be another important measure of sustainability along with CAR (10.49 percent). The debt equity ratio (2.48percent) along with GLP (3.75 percent) is found to be the least important measure of sustainability out of the chosen six determinants. The results also indicates that the first three measures-oss, PAR>30 and ROA contribute to 83.29 percent of the Financial sustainability and hence if Indian MFIs concentrate on having OSS>1, a minimal loan default rate, and an increasing return on asset, they will be in the category of financially sustainable MFIs The above results support the findings and the literature mentioned in chapters 5 and chapter 2. 3.2 Findings of TOPSIS This study has attempted to measure the financial sustainability by taking into account various attributes which contribute to the financial sustainability of MFIs. For this study, equal weights were assigned to each attribute contributing to financial sustainability. The sustainability scores obtained varies from 0.14 to 0.97. It has been found that MFIs like Bandhan, BSS and Madura are among the more financially sustainable MFIs. GU financial, 185
Asmitha and BSFL are the ones which need to strengthen the variables which impact financial sustainability in a big way. 4. SUMMARY SHEET OF TOOLS USED Objective Tools Used Results/Inferences Objective-1 To study the Trend Analysis using The trend shows that the long term performance Bivariate Regression microfinance industry is on a (trend) of financial Analysis growth path part but during sustainability of MFI s in India 2010-11 there has been a dip in the performance of the major MFIs due to the Andhra Pradesh crisis. Long term growth trend has been found in all variables but OSS, PAR>30 days, GLP and CAR show a significant growth trend during the period of study under consideration. Objective 2: To examine determinants which affect the financial sustainability scores of Indian MFIs. Panel Data Analysis; F-test and Hausman Test To measure long term financial sustainability, Return on assets and return on equity is used and R 2 score of 84.7 and 16.57 percent respectively. Similarly for measuring operational sustainability OSS is used having an R 2 score of 57.39 percent. As R 2 score of ROE is very low, for objective 3, 186
Objective 3: To develop an index to measure Financial Sustainability so as to obtain scores of Indian MFIs TOPIS, AHP ROA is considered as a measure of long term financial sustainability The results attained from TOPSIS have been used to formulate an index and rank the MFIs under consideration. The index varies from 0.14-0.97 where Bandhan has the maximum score and hence ranked first and Asmitha along with BSFL are rank the least. The results using AHP indicate that experts lay the most emphasis on Operational selfsufficiency and portfolio at risk followed by return on assets which influence the financial sustainability of MFIs. Table 7.1 Summary of tools used (Author s compilation) 5. Conclusion This study examined the trend in the Microfinance industry of India for the period of 2005-13 by studying the variables which impact financial sustainability- Return on Equity, Return on Assets, Operational self-sufficiency, Portfolio at Risk, Operational expenses to Loan Portfolio, Age, Profit Margin. The trend shows that the microfinance industry is on a growth part but during 2010-11 there has been a dip in the performance of the major MFIs due to the Andhra Pradesh crisis. 187
Secondly, the study investigated the determinants of financial sustainability of Indian MFIs using balanced panel data for 30 MFIs consisting of 270 observations, covering the period 2005-2013 which were used for econometric analysis. Return on Equity, Return on Assets and Operational self-sufficiency were used as dependent variable and the impact of other variables under consideration were measured. The result show that although in literature, Return on assets has not been used too often as a measure of financial sustainability, should be taken into account as it is impacted by most of the crucial variables that impact financial sustainability as supported by the literature. It is found that portfolio at risk, capital asset ratio, operational self-sufficiency and operating expenses to assets impact the financial sustainability. Thus it can be concluded that by influencing these factors, MFIs could be able to improve financial sustainability. Lastly an attempt has been made to take into account the fussy logic and use Analytical Hierarchy Process (AHP) and The Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) to know the varied degree of impact the variables have on financial sustainability and the formulation of index using the variables suggested by experts. The results of AHP shows that the main variables which contribute to 83 percent of financial sustainability are Operational self-sufficiency, Portfolio at Risk>30 days and Return on assets. The experts and literature suggest that for an MFI to be sustainable financially, an OSS greater than 100 percent is imperative as long term sustainability is not possible if an MFI does not attain operational sustainability. Secondly, Portfolio at risk is the variable which needs a close eye of the industry experts. Low default rate brings in stability and predictable timing of returns which impact the financial sustainability. OSS and PAR management leads to MFIs exploring new sources of funds and reducing their dependence on grants and donations. Though Return on assets is the third variable which impacts the financial sustainability as it measures both profitability and efficiency of the institution. Focussing on Return on Assets brings in MFIs to explore capital market and other sources of funds which lead to higher return on its assets. The result of TOPSIS, on the basis of equal weights assigned to each variable contributing to financial sustainability shows that the sustainability scores obtained varies from 0.14 to 0.97. MFIs like Bandhan, BSS and Madura are among the more financially sustainable 188
MFIs. GU financial, Asmitha and BSFL are the ones which need to strengthen the variables which impact financial sustainability in a big way. 6. Suggestions Like other literature, this research also understands the importance of Microfinance in alleviating poverty from India and other developing nations but it suggests that before helping the poor, the MFIs need to help themselves and work towards being financially sustainable so that they are able to meet its social objective for long. Based on the research an attempt has been made to suggest the following: Although in the past Microfinance Institutions have always be measured in terms social impact it has on the society the time is changing and the focus on operational and financial sustainability needs to be brought into the industry. The MFIs should be able to reach a particular level of sustainability after 5 years of operations as other companies are expected. To avoid any crisis in future, regulatory issues and challenges related to microfinance needs to be addressed and the pending bills need to come into action. Like other companies and banks it should be made mandatory for MFIs to regularly disclose their results and continuous monitoring system needs to be in place. Till the regulatory framework is strengthened, it is suggested that MFIs should publish their efficiency levels which includes both social and financial levels of performance. The rationale is to motivate inefficient institutions and inform microfinance funders on where to invest their funds, obviously depending on their motives. The latter is underpinned by the fact that the financial and social classification of MFIs efficiency levels enables the identification of each MFI s comparative advantage After the infancy stage, MFIs need to focus and explore other sources of funds other than grants and support from the government. It is time like in many countries, MFIs reach capital market for funds which will help strengthen the financial sustainability as it will be answerable to all stakeholders. 189
The most important variables like operational self sufficiency, portfolio at risk and return on assets which measure sustainability for short term expenses, default rate and the way the MFIs utilize their assets and how efficiently they manage their resources should be focus for the MFIs to be able to attain sustainability. 7. Future Research and Thinking a. Further study can be considered by researchers by changing the geographical location, doing a comparative study of MFIs across two geographical locations. b. This study is done on the financial sustainability but other dimensions like social performance and human resources sustainability can be investigated. The study can be conducted keeping women empowerment as a focus vis a vis measuring financial sustainability, wherein a relationship can be studied between number of women borrowers impacting financial sustainability of an MFI. c. The regulatory framework and challenges of the regulations on the performance of MFIs can be investigated. d. Comparative analysis of performance of MFIs who have taken the course of capital market versus that dependant on grants and donations. 190