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Do interest rate caps on microfinance loans result in higher MFI efficiency? A study of Indian MFIs using data envelopment analysis

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  • Savita Shankar
  • Trishit Bandyopadhyay

Abstract

A regulatory cap on interest rates on micro finance loans in India in 2011, imposed subsequent to a crisis in the state of Andhra Pradesh, is studied using data envelopment analysis. The research objective is to ascertain if the regulation was followed by improvements in efficiency of micro finance institutions (MFIs) during the period 2011 to 2015. Improvements in efficiency are important because they can bolster MFIs' sustainability and ability to expand outreach. It is found that in three of the four years studied, MFI efficiencies showed increases, while in one-year efficiencies remained constant. Moreover, the proportion of MFIs which were of optimal size was significantly higher in 2015. The paper also examined if the regulation led to increases in average MFI loan sizes. It was found that while average loan sizes showed an increase during the period studied, the growth rate was in line with the trend observed prior to the regulation.

Suggested Citation

  • Savita Shankar & Trishit Bandyopadhyay, 2024. "Do interest rate caps on microfinance loans result in higher MFI efficiency? A study of Indian MFIs using data envelopment analysis," International Journal of Business and Globalisation, Inderscience Enterprises Ltd, vol. 37(3), pages 376-389.
    • Handle: RePEc:ids:ijbglo:v:37:y:2024:i:3:p:376-389
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