Malmquist Luenberger productivity index for microfinance productivity measurement

The objective of the study is to measure the microfinance institutions (MFIs) productivity by integrating the undesirable output, i.e., the non-performing loans (NPLs). We have calculated the productivity growth of MFIs over its two components, such as catch up effect and frontier shift effect by measuring the variation in efficiency and technology, respectively. The study is based on data of 72 Indian MFIs over five years from 2013-2017. We have employed a directional distance function (DDF) model to compute the Malmquist Luenberger productivity index (MLPI), output-oriented with undesirable output assuming a constant return to scale. The study also attempted to find a significant difference between two methodologies, i.e., Malmquist productivity index (MPI) and MLPI, to show the effect of NPL through testing of hypothesis. Furthermore we have classified the MFIs into four groups using a categorisation rule to infer the relationship between productivity growth, technical changes (TC), and efficiency change (EC) components to give noteworthy economic information for benchmarking and policymaking. The findings indicated that rather than the technological change component, the efficiency changes are contributing more to the productivity growth of MFIs. It implies that Indian MFIs need to strengthen more technically, to enhance their productivity and efficiency.