Do Shocks in Financial Risk Affect the Financial Performance of Indian Microfinance Institutions?

Abstract

This study examines the financial performance sustainability of Indian microfinance institutions (MFIs). In the wake of the Andhra Pradesh Crisis, the study tries to align the key reasons for the crisis by using financial theories like Agency Theory, Free Cash Flow Hypothesis, Pecking Order Theory, Investment Theory, and Profitability Theory. The present study uses panel data of sixteen MFIs selected for the period 2010 to 2019 from the MIX market database. Panel structural vector autoregression model was used to analyze the data, as it accounts for any structural breaks present in the dataset. The findings reveal that high-interest coverage positively affects profitability, supporting agency theory. Operational self-sufficiency has a positive impact on profitability while operating cash flow has a negative impact, which highlights a need to manage the cash flows among Indian MFIs. Investment theory states that capital allocation significantly improves operational profits. The study confirms the pecking order theory in Indian MFIs and finds volatility in running income, affecting shareholder's wealth significantly. The study finds the underlying issues and provides policy recommendations to improve the management of free cash flows and increase shareholder wealth which shall lead to internal sustainability among Indian MFIs.