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Do regulations and governance quality impact performance of MFIs in India?

Author

Listed:
  • K. P. Saraswathy Amma

    (FISAT Business School)

  • Gopalakrishnan Kannan

    (Bharathiar University)

  • Lakshmi Parthasarathy

    (Indian Institute of Technology Madras)

Abstract
We explore the relationship between performance, regulations and governance quality of Microfinance Institutions (MFIs) through a survey conducted among CxOs and board of directors of top 55 MFIs in India. We study the effect of AP ordinance (2010) (taken as a proxy for regulation), boardroom conflicts (taken as a proxy for governance quality) and the recent demonetization policy of Government of India on the performance of the MFIs in India. The results show that AP ordinance and boardroom conflicts have had a negative impact on the performance of the MFIs. As per public interest theory, regulations are good for correcting market failures and upgrading the existing practices and hence have a positive impact on the performance. However, our research proves that AP ordinance has a negative impact on the performance of the firm and hence does not support the theory in the Indian context. Diversity and experience in the board could lead to conflicts and delayed decision making, having a negative impact on the performance of the firm. Our research survey confirms this theory. Managers’ powers are limited by the external environment, and the state has more powers to set the field. However, our empirical model does not support the negative impact of demonetization on the performance of MFIs. There is a dearth of study on Indian MFI industry, and this paper contributes to narrow that gap.

Suggested Citation

  • K. P. Saraswathy Amma & Gopalakrishnan Kannan & Lakshmi Parthasarathy, 2019. "Do regulations and governance quality impact performance of MFIs in India?," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 46(1), pages 3-14, March.
    • Handle: RePEc:spr:decisn:v:46:y:2019:i:1:d:10.1007_s40622-018-0199-3
    DOI: 10.1007/s40622-018-0199-3
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    References listed on IDEAS

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    1. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
    2. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, December.
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    4. Olsen, Tricia D., 2017. "Political Stakeholder Theory: The State, Legitimacy, and the Ethics of Microfinance in Emerging Economies," Business Ethics Quarterly, Cambridge University Press, vol. 27(1), pages 71-98, January.
    5. William B. Stevenson & Robert F. Radin, 2009. "Social Capital and Social Influence on the Board of Directors," Journal of Management Studies, Wiley Blackwell, vol. 46(1), pages 16-44, January.
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    Cited by:

    1. Saswat Barpanda & Susmita Mukhopadhyay, 2020. "Does firmography patterns human resource practice? evidence from microfinance industry of India," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 10(1), pages 24-39, January.
    2. Md. Ali Rasel & Sandar Win, 2020. "Microfinance governance: a systematic review and future research directions," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(7), pages 1811-1847, April.

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