Beyond Profits: Redefining Performance in Indian Microfinance

Microfinance was once hailed as a silver bullet against poverty—tiny loans empowering millions to create livelihoods, especially among women. But decades after its rise, the Indian microfinance story is more complicated. Between the Andhra Pradesh crisis of 2010 and the sector’s subsequent regulatory restructuring, one lesson is clear: measuring performance solely in terms of profits is a recipe for “mission drift". The philosophical underpinning here rests on the stakeholder theory of the firm. Success, especially in institutions serving the poor, cannot be defined merely by financial returns. A microfinance institution (MFI) exists not just to generate revenue but to uphold its social contract—to extend financial access, preserve client dignity, and contribute to community development. The Yin-Yang philosophy is a fitting metaphor: financial sustainability and social mission are opposites yet interdependent. Without profits, MFIs collapse; without social performance, they lose legitimacy.

 Based on my paper on 2015, I explored the performance of MFIs. The policy implications are urgent. Regulators like the Reserve Bank of India must go beyond interest rate caps and repayment norms. They should embed social performance management into supervisory frameworks, requiring MFIs to publish data on outreach, transparency, and client welfare just as they do on financial ratios. Funding agencies and investors, too, must reward MFIs that balance the “double bottom line,” not those chasing short-term profits. Our research with 252 Indian MFIs confirms this duality. Financial performance—measured by profit margins, return on assets, and portfolio at risk—is necessary but not sufficient. Equally critical are social performance dimensions such as mission adequacy (clarity and adherence to social goals), information disclosure (transparent communication with clients), and community participation (linking finance with social and environmental initiatives). Together, these metrics form a composite framework for evaluating true institutional health.

The societal benefits of such a shift are profound. Transparent, mission-driven MFIs rebuild trust among low-income borrowers, especially women, who form the backbone of the sector. Community-linked lending ensures that credit translates into real improvements—better schooling, healthcare access, and local development. Environmental safeguards, when integrated into lending, prevent growth at the expense of sustainability. In short, performance measured holistically allows microfinance to return to its ethical roots: poverty alleviation with dignity.

Microfinance in India stands at a crossroads. If we continue treating it as just another financial industry, mission drift will deepen and public trust will erode. But if we adopt a broader lens of performance—one that values people as much as portfolios—MFIs can become not just lenders, but catalysts of social change.