Regulatory Frameworks for Microfinance Institutions: Balancing Inclusion and Sustainability in India

Abstract

This paper examines the regulatory environment of Microfinance Institutions (MFIs) in India in the sense of the trade-offs between financial inclusion and sustainability of the financial institutions in the long term. The findings of the study that was carried out on secondary data obtained through RBI, industry reports carry out the ratio analysis, trend analysis and comparative analysis to evaluate the measures of performance such as Operational Self-Sufficiency (OSS), Financial Self-Sufficiency (FSS), Portfolio at Risk (PAR), Return on Assets (ROA) and Return on Equity (ROE). The findings show that regulatory reforms have had a huge influence on enhancing transparency, safeguarding borrowers, and attaining financial stability, besides driving outreach. Sustainability however on a temporary basis is affected by external shocks that adds importance to the need to acquire adaptive regulatory mechanisms. In the paper, the authors conclude that a flexible and regulated system is necessary in the microfinance sector in India as it would ensure sustainability and inclusive growth of this sector.