Effect of Governance on the Performance of Selected Indian Microfinance Institutions: An Empirical Study

Abstract

Corporate Governance has assumed heightened proportions in India, probably due to great push by the Andhra Pradesh crisis during the year 2010 to embrace corporate governance in order to attract the confidence of investors & other Stakeholders again and improve shareholders values in microfinance sector. Hence, this study attempts to study the impact of various internal governance mechanisms on the performance of Microfinance Institutions along with the effectiveness of board. The study is based on secondary data on governance and financial information covering the period from 2009-2013 and data has been collected from annual report and Mix market database. The corporate governance variable under investigation includes board size, female board, Independent director Proportion, number of board meetings, CEO duality and Board committee. Descriptive statistics, correlation and multiple regressions were used to analysis of data empirically for drawing the inference. After analysing empirically the association of internal governance mechanism and ROA as used proxy measure for performance, it is found that Board meeting, female board and proportion of Independent director indicates positive impact on the performance of NBFC-MFIs and there may be no effect of Board size, CEO duality and Board committee on ROA. Board diversity of a moderate board size with a considerable number of women should be encouraged in order to maintain relatively independent boards which enhance MFI performance. Also the separation of board chairman and CEO positions is vital in MFIs because this minimizes the tension between CEO and board members and it also reduces conflict of interest from the CEO. It was evident that MFI performance is enhanced with the presence of female Board; a Board is likely to attract more women to invest in MFI thus allow the MFI to increase profitability. The participation of independent director also encourages as they are experts in various financial related issues and due to having no any pecuniary interest in the MFIs, they take desirable decision independently for the institution.

Keywords: Corporate governance, Internal Governance mechanism, Financial Performance, Microfinance Institutions