‘AN ANALYTICAL STUDY OF FINANCIAL PERFORMANCE OF NGO AND NBFC MICROFINANCE INSTITUTIONS WITH SPECIAL REFERENCE TO MICROFINANCE INFORMATION EXCHANGE (MIX)’
Dr. M J Siddiqui,
Ph.D., MBA, LLM, NET (Management), Diploma in Mech Engg AMIE (Mech), B.A. (Psychology), Pursuing Bachelor of Journalism
Assistant Professor,
Dr. Ambedkar Institute of Management Studies & Research
Rucha R Lohi,
(Ph.D., (pursuing) MBA, B.com. DIRPM) Assistant Professor,
Datta Meghe Institute of Management Studies,
ABSTRACT
Micro finance is catering banking services to low income group of society who lack access to conventional financial services. Microfinance Institutions are viewed primarily as instruments of social renovation, their performance is often calculated by non-financial factors. The idea of social performance has seemed to overtake the status of financial health of these MFI’s. A MFI is measured for financial sustainability based on its superior financial performance. In the Early stage the MFI were non-profit organizations subsequently several non-governmental organizations (NGOs), societies and non-banking financial companies (NBFCs) have entered the microfinance sector The main objective of this paper is to study the overall financial performance of Selected Microfinance Institutions in the form of Non Banking financial institutions & compare it with overall financial performance of Selected Microfinance Institutions in the form of NGO’s. The information gathered for the study incorporates secondary data. The different sources used to gather secondary data incorporate Research articles, papers, journals and different sites. The secondary data gathered is analyzed utilizing different statistical tools and techniques.
INTRODUCTION
1.1 MICRO FINANCE:
Micro finance refers to the provision of financial services to low-income segment of society, including consumers and the self-employed. (Ledgerwood, 2000) The term also refers to the practice of sustainably delivering financial services to the poor.
Micro finance has served to offer financial administrations and credit to poor people and unbanked section in India along these lines achieving financial inclusion. The credits gave by microfinance institutions serve the low-wage population in different courses as takes after:
They give working capital advances to business purposes.
They give advances to getting to necessities, for example, food, clothes, shelter and education.
They serve as different options for the credits gave by money lenders.
In addition to various micro finance institutions, various other players contributing to provision of microcredit include banks, insurance companies, agricultural & dairy co-operatives, etc.
Following are the major components of microfinance: Deposits
Loans
Payment services Money transfers
Insurance to the poor (Prof Zohra Bi, 2011)
MIX employs a functional definition of micro finance as: “Microfinance services – as opposed to financial services in general – are retail financial services that are relatively small in relation to the income of a typical individual. Specifically, the average outstanding balance of microfinance products is no greater than 250% of the average income per person (GNI per capita).”
Microfinance is useful to poor households as it provides them credit facility and thus helps them to raise income, put together assets and cushion themselves against future contingencies. Microfinance provides financial administration to low-income households it also involves supply of credit, savings, insurance, remittance and pension services in token sizes that are much smaller than those prevailing in the conventional commercial markets.
The Microfinance industry in India has taken largely from Grameen Bank in Bangladesh, in terms of methodology, processes and systems. Majority of the leading Indian MFIs commenced as NGOs during 1985-1999, with the Grameen Bank model of group-based lending to women in rural areas. Over the years, the MFIs have developed considerably and have transformed into for-profit non banking finance companies (NBFCs), thus moving towards a more regulated legal setup.
1.2 MICROFINANCE INSTITUTION:
MFIs have played a significant role in bridging the gap between conventional financial institutions and low-income segment of the society. Lending to rural poor is expensive activity which affects the financial performance of MFIs. In several countries, completions among MFIs have increased rapidly that led to lower interest rates, more efficiency, and introduction of new financial services. Micro finance Institutions in India are heterogeneous in nature & only a few of them have managed to reach among poor with significant volume of credit. The top 10 MFIs have been able to reach 2 million poor customers.
LITERATURE REVIEW 2.1 Literature Review:
Keeping in mind the end goal to fulfill this research proposition, following literatures were reviewed:
Vijay Mahajan and G Nagasri, attempted to inspect what comes in the method for making Indian MFIs sustainable and what can encourage this. An endeavor has been made in this paper to take a gander at manageability from various measurements, for example, demand, mission, lawful and administrative structure, proprietorship, governance and HR and financial sustainability. (Vijay Mahajan, 1999)
Piyush Tiwari and S.M. Fahad talk about calculated structure of a microfinance institution in India. The triumphs and disappointments of different microfinance institution around the globe have been assessed and lessons learnt have been consolidated in a model microfinance institutional component for India. Creator finds that the poor reimburse their advances and are willing to pay for higher financing costs than business banks gave that entrance to credit is given. Furthermore, the poor recovery and henceforth microfinance ought to give both funds and advance offices. These two discoveries infer that banking money on poor people can be a productive business. On the other hand, achieving financial viability and sustainability is the major institutional test. (Piyush Tiwari, 2004)
"Microfinance in India: Discussion" by R.Srinivasan and M.S.Sriram demonstrates shifted perspectives of individuals from diverse microfinance institutions. Microfinance has been seen as a powerful device in realizing financial inclusion and as a measure to eradicate poverty. This exchange additionally is an investigation of the diverse models of microfinance existing in India and expects to talk about if these models add to the growth and sustainability. It likewise plans to examine about the scope of government policies and regulatory framework prevailing in microfinance sector. (Srinivasan R. and Sriram, 2006)
OBJECTIVES & SCOPE OF STUDY 3.1 Objectives:
To analyze Profitability and Efficiency of NGO-MFIs and NBFC-MFIs in India.
3.2 Scope of the Study:
The scope of the research is limited to the financial performance of NBFC-MFIs and NGO-MFIs in India. The time span of the study is restricted to the period five years from 2010 to 2014.
The scope of the research is limited to the NGO-MFIs and NBFC-MFIs in India.
NGO-MFIs and NBFC-MFIs have been taken as a sample from the Microfinance Information Exchange (MIX). Data for the NGO-MFIs and NBFC-MFIs have been collected from Microfinance information exchange (MIX) where MFIs report their financial data.
A sample of NGO-MFIs and NBFC-MFIs in India has been selected based on their ratings given by microfinance information exchange (MIX) for the study. This rating has been given by MIX to the microfinance institutions based on the level of disclosure, quality of disclosure, financial parameters etc.
Out of the 190 MFIs in India reported on MIX, 87 are NGO-MFIs, 75 are NBFC-MFIs and 28 are others. Out of 87 NGO-MFIs in India reported on MIX, 39 are four star rated and Out of 75 NBFC-MFIs in India reported on MIX,49 are four star rated. (MIX Market)
Only the four star rated NGO-MFIs and NBFC-MFIs alone are selected.
This study shall be based on studying specified financial aspects of the MFIs namely:
A. Return on equity B. Net profit margin
C. Operating expenses ratio
HYPOTHESIS 4.1 Hypotheses:
Following hypotheses will be tested in the course of the proposed research study:
H01: There is no significant difference between the means of Return on equity of NGOS and NBFC MFIs
H12: There is significant difference between the means of Return on equity of NGOS and NBFC MFIs.
H02: There is no significant difference between the means of Net profit margin of NGOS and NBFC MFIs H12: There is significant difference between the means of Net profit margin of NGOS and NBFC MFIs.
H03: There is no significant difference between the means of Operating Expense ratio of NGOS and NBFC MFIs
H13: There is significant difference between the means of Operating Expense ratio of NGOS and NBFC MFIs.
RESEARCH METHODOLOGY 5.1 Research Design:
Research design is a conceptual structure within which research would be conducted. It is a blue print of research work.
So far as this research concerns, the data on the financial statements and the annual reports of the selected NBFC-MFIs and NGO-MFIs should be taken. The research work will be done for Institutions in India only.
The selected NBFC-MFIs and NGO-MFIs will only be studied and necessary data of the said NBFC-MFIs and NGO-MFIs will be taken to study.
The tools and techniques of the research is the comparison of the data.
5.2 Sources of data
Data used for the present study was mainly secondary in nature. Data regarding NGO-MFIs and NBFC-MFIs were collected from the MIX Market Inc. website. Along with the MIX Market Inc. data, information pertaining to the recent trends in the microfinance industry and their news updates were collected from the sources such as journals, magazines and research publications.
The data collected for the study includes secondary data. The various sources used to collect secondary data are as follows:
Research papers Journals
Articles
Annual reports of the company
Data from the Microfinance information exchange (MIX) Various other websites
5.4 Sample Size:
24 NBFC-MFIs reporting data to MIX which are four star rated by MIX are selected as sample 24 NBFC-MFIs reporting data to MIX which are four star rated by MIX are selected as sample
DATA ANALYSIS AND INTERPRETATION Sheet of Averages of five years 2010-2014 ratios
MFI NAME RETURN ON
NET WORTH
OPERATING EXPENSES
NET PROFIT MARGIN
NBFC BANDHAN 28.76 53.37 24.15
NBFC DISHA 3.68 68.45 7.11
NBFC MMFL 8.81 7.58 11.44
NBFC VFS 8.38 9.66 5.45
NBFC JFSPL 2.44 73.99 1.22
NBFC FUSION -5.00 74.65 1.04
NBFC BSS 11.31 84.53 8.68
NBFC SVC -1.72 84.34 -5.93
NBFC SCNL 5.82 79.27 5.34
NBFC MUTHOOT 3.29 24.93 37.32
NBFC JAGRAN 4.88 64.09 20.87
NBFC BFL -7.87 86.06 -14.87
NBFC IDF 2.73 3.73 17.47
NBFC NAVCHETNA 4.20 48.15 5.37
NBFC SMILE 5.69 88.24 7.74
NBFC CHAITANYA 1.68 84.51 -10.58
NBFC RGVN INDIA 8.97 52.44 12.91
NBFC SAHAYOG 8.49 83.82 7.51
NBFC
SAMASTA
MICROFINANCE LTD. 3.54 77.31 3.76
NBFC SWADHAAR -0.97 77.83 -1.84
NBFC MFS 6.17 84.19 11.65
NBFC SONATA 2.85 78.54 4.76
NBFC SSFL 11.05 50.58 20.53
NBFC
SV CREDIT LINE
PRIVATE LTD. 6.66 92.44 6.96
NGO SMGBK 36.86 93.18 14.39
NGO SARALA 40.25 60.86 24.09
NGO SUWS 47.11 9.35 22.06
NGO SRFS 21.47 3.27 19.07
NGO PRAYAS 3.55 71.28 17.66
NGO BJS 32.97 27.53 11.81
NGO CASHPOR 46.13 83.47 13.52
NGO CDOT 42.23 84.49 16.11
NGO HIH 0.30 69.38 0.28
NGO SMCS 7.18 71.54 11.45
NGO SKDRDP 48.34 85.43 13.31
NGO WSDS 25.95 91.37 3.45
NGO WSE 14.24 90.09 7.81
NGO MAHASHAKTI 3.75 92.44 3.28
NGO GMSSS 12.21 56.69 23.55
NGO BMVS 14.38 80.88 15.39
NGO GRAMEEN SAHARA 47.12 80.54 11.48
NGO GUARDIAN 4.49 89.19 1.21
NGO IMPACT 11.83 68.54 21.71
NGO IRCED 5.85 82.08 4.07
NGO LBT 10.69 88.58 11.75
NGO HPPI 5.84 80.75 14.35
NGO SEBA RAHARA 9.01 88.71 9.54
Return on Net Worth
The return on Net Woth gives the measure of profitability of a company. It indicates the profit generated by the company from the money invested by its shareholders. Return on Net Worth is expressed as a percentage. RONW is also known as “Return on Equity‟.
Descriptives
Return on Net Worth
N Mean Std.
Deviation
Std. Error
95% Confidence Interval for Mean
Minimum Maximum
Lower Bound
Upper Bound
NGO 24 21.1350 16.76970 3.42310 14.0538 28.2162 .30 48.34
NBFC 24 4.9317 7.17762 1.46513 1.9008 7.9625 -7.87 28.76
Total 48 13.0333 15.16128 2.18834 8.6310 17.4357 -7.87 48.34
ANOVA
Return on Net Worth
Sum of
Squares
df Mean Square F Sig.
Between Groups 3150.576 1 3150.576 18.937 .000
Within Groups 7653.048 46 166.371
There is significant difference in means for Return on Net Worth for the NGOs and MFIs at 5% level of significance. Thus null hypothesis is rejected. However the equity structure for the NGOs and MFIs are different. The equity for NGOs is smaller whereas the NBFCs have a higher equity structure. The equity for a majority of NGOs is mostly in the form of donations whereas for NBFCs the equity is invested or they represent retained earnings. The small equity bases for the NBFCs report a higher ROE ratio for them. The NGOs have a higher ROE due to their other sources of income whereas NBFCs are not allowed to accept deposits. The optimum range for Return on Equity as per ACCION audit is greater than 15% (> 15%) indicating that the both type of Indian microfinance institutions have achieved those standards.
Operating Expenses Ratio
An expense ratio is calculated by dividing the operating expenses by the total sales. It is also known as management expense ratio. The lower the ratio implies that the institution is more profitable and shows its ability to cover the costs effectively.
Descriptives
Operating Expenses Ratio
N Mean Std.
Deviation
Std. Error
95% Confidence Interval for Mean
Minimum Maximum
Lower Bound
Upper Bound
NGO 24 84.9125 76.74641 15.66580 52.5053 117.3197 3.27 425.48 NBFC 24 65.4742 28.54942 5.82763 53.4188 77.5295 3.73 107.13 Total 48 75.1933 58.11783 8.38859 58.3177 92.0690 3.27 425.48
ANOVA
Operating Expenses Ratio
Sum of
Squares
df Mean Square F Sig.
Between Groups 4534.186 1 4534.186 1.352 .251
Within Groups 154216.860 46 3352.540
There is no significant difference in the operating expenses to revenue from operation ratio of NGOs and NBFCs at 5% level of significance, thereby accepting null hypothesis. The operating expenses to total sales are higher for the NGOs when compared the NBFCs. The reason for this is because the NGOs have incurred training expenses for their staff members, education of borrowers etc. The higher asset base for the NBFCs favorably impacts the ratio for them. Also, the delivery model of NGOs at the doorstep of borrowers is a reason for the NGOs to have incurred high operating costs when compared to NBFCs.
Net Profit Margin
The net profit margin is an indication of how effective is a company at its cost control. Higher net profit margin implies that the company is more effective in converting its revenue into actual profits. The net profit margin is calculated by dividing the net income by revenue or by dividing the net profits by sales. It is expressed as a percentage.
Descriptives Net Profit Margin
N Mean Std.
Deviation
Std. Error
95% Confidence Interval for Mean
Minimum Maximum
Lower Bound
Upper Bound
NGO 24 12.2754 7.11766 1.45289 9.2699 15.2809 .28 24.09
NBFC 24 6.8813 13.22106 2.69874 1.2985 12.4640 -28.84 37.32 Total 48 9.5783 10.85169 1.56631 6.4273 12.7293 -28.84 37.32
ANOVA
Net Profit Margin
Sum of
Squares
df Mean Square F Sig.
Between Groups 349.164 1 349.164 3.097 .085
Within Groups 5185.522 46 112.729
There is no significant difference between the means of NGOs and NBFCs. Thus, null hypothesis is accepted. The net profit margin of NBFCs have reported to be negative because of the higher operational expenses incurred by them. The graph above shows that the net profit margin for the NBFCs are lower and this indicates that there are a large number of NBFCs which are not sustainable and requires subsidies and grants in order to carry on their operations. Moreover, the Operating expense ratio and the yield are related to the loan size and this loan size is higher for banks and smaller in case of NBFCs. Most of the NBFCs incur high costs of servicing the poor rural population due to smaller loan sizes which in turn reduces the financial profit margins.
CONCLUSIONS AND RECOMMENDATIONS
The return on Net Worth gives the measure of profitability of a company. It indicates the profit generated by the company from the money invested by its shareholders. NGOs have shown higher Return on Equity Ratio as compared to NBFCs the reason being that the equity for NGOs is smaller whereas the NBFCs have a higher equity structure. The equity for a majority of NGOs is mostly in the form of donations whereas for NBFCs the equity is invested or they represent retained earnings. The small equity bases for the NBFCs report a higher ROE ratio for them. The NGOs have a higher ROE due to their other sources of income whereas NBFCs are not allowed to accept deposits.
An expense ratio is calculated by dividing the operating expenses by the total sales. It is also known as management expense ratio. The lower ratio implies that the institution is been able cover its cost & manage its expenses effectively. Both NGOs and NBFCs have shown similarity in operating expenses ratio. However, the operating expenses to total sales are marginally higher for the NGOs when compared the NBFCs. The reason for this is because the NGOs have incurred training expenses for their staff members, education of borrowers etc. The higher asset base for the NBFCs favourably impacts the ratio for them. Also, the delivery model of NGOs at the doorstep of borrowers is a reason for the NGOs to have incurred high operating costs when compared to NBFCs.
BIBLIOGRAPHY Bibliography
1. Hema Satagopan, P. D. (2012). Transformation Of Mfis Is A Long-Term Process Requiring A Fundamental Change In Management Practices And Culture. International Journal Of Marketing, Financial Services & Management Research , 160-179.
2. Jayasheela, D. A. (2008). “Financial Inclusion And Microfinance In India: An Overview”. SSRN Electronic Journal 02/2008; doi: 10.2139/ssrn.1089680 .
3. Ledgerwood, J. (2000). Micro Finance: An Institutional And Financial Perapective. Washington Dc: World Bank.
4. MIX Market. (N.D.). Retrieved May 5, 2014, from www.mixmarket.org: http://www.mixmarket.org/mfi/country/india
5. Piyush Tiwari, F. S. (2004). Microfinance Institutions In India. Mumbai: Housing Development Finance Corporation, Ramon House,.
6. Prof Zohra Bi, D. S. (2011). Comparison Of Performance Of Microfinance Institutions With Commercial Banks In India. Comparison Of Performance Of Microfinance Institutions With Commercial Banks In India , 110-120.
7. Richa Verma, P. A. (2014). Microfinance In India. Tactful Management Research Journal , 1-10. 8. S K Sinha, P. K. (July-December 2010). 'The Financial Performance Of Micro Finance Institutions
In India'. Delhi Business Review X Vol. 11, No. 2 .
9. Sarmah G N, D. D. (2012). Micro Finance, Self Help Groups And Socioeconomic . Asian Journal Of Research In Business Economics And Management, Vol.2, Issue 4 , 145-159.
10. Singh, D. P. (N.D.). Understanding The Structure Of Micro Finance Institutions In India And Suggesting A Regulatory Framework. Retrieved 12 25, 2012, from www.iibf.org.in: http://www.iibf.org.in/documents/reseach-report/report-24.pdf
11. Singh, N. T. (2009). Micro Finance Practices In India: An Overview. International Review Of Business Research Papers , 131-146.
12. Srinivasan R. And Sriram, M. (2006). 'Microfinance In India: Discussion'. IIMB Management Review , 66-86.
13. Vijay Mahajan, N. G. (1999). Building Sustainable Microfinance Institutions In India,. BASIX. 14. Bharathi K, Indira JP (2005) A refection on the Indian women on the entrepreneurial world. IIMA
working series. W.P no 2005-08
15. Cliff J (1998) Does one size fit all? Exploring the relationship between attitudes towards growth, gender, and business size. J Bus Ventur 13(6):523–542CrossRef
16. Imai KS, Arun T, Annim SK (2010) Microfinance and household poverty reduction: New evidence from India. World Dev 38(12):1760–1774
17. Krishna S (2007) Micro-enterprises — perspectives and experiences, ICFAI, ISBN: 8131412819 18. Kantor P (2002) A sectoral approach to the study of gender constraints on economic
opportunities in the informal sector in india. Gend Soc 16(3): 285–302
19. Kumbhar VM (2013) Some critical issues of women entrepreneurship in rural india, Eur Acad Res 1(2)
20. Littlefield E, Morduch J, Hashemi S (2003) Is microfinance an effective strategy to reach the millenium development goals? CGAP. Focus Note 24
21. Ramji M, Stuti T (2009) Micro-housing loans for micro-entrepreneurs: a needs assessment. Micro Finance Rev 1(1):51–71
22. Sangeetha M (2013) Microfinance and women’s empowerment: A contemporary issues and Challenges. Int J Innovative Res Stud 2(5)
24. Sapovadia VK (2007) Capacity building, pillar of micro finance (March 19, 2007). http://ssrn. com/abstract=975088 or http://dx.doi.org/10.2139/ssrn.975088
