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MICROFINANCE INSTITUTIONS:

RISK MANAGEMENT AND INTERNAL CONTROL

(CHALLENGES/ISSUES/RISKS AFTER COVID19)

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMNETS

OF THE POST GRADUATE DIPLOMA IN MANAEMENT

CHANDRAGUPT INSTITUTE OF MANAGEMENT PATNA

BY
SHILPI KUMARI
[DD/MM/2020]

CHANDRAGUPT INSTITUTE OF MANAGEMENT PATNA

SYNOPSIS
Breif note

Chief motivation

Problem statement

Theoretical framewwork

Methodology

Findings

Recomendations
DECLARATION

I hereby declare that the Summer Internship Project entitled “Microfinance Institutions: Risk

Management And Internal Control (Challenges/Issues/Risks After Covid19)” submitted to

Chandragupt Institute of Management Patna in partial fulfilment of the requirements for the

award of Post Graduate Diploma in Management is my original work and has not been submitted

earlier, either to any other Institute or University for the award of any diploma, degree or

certificate. I have followed the CIMP guidelines to prepare the report. I have also given due

credit to the sources of data, theoretical analysis, text and other materials by citing them in the

text of the report and producing the details in the reference section.

Sign Of Student

Name:-

Roll No:-

Place:-

Date:- DD/MM/2020
CERTIFICATE BY FACULTY GUIDE

This is to certify that the work incorporated in this Summer Internship Project entitled

“Microfinance Institutions: Risk Management And Internal Control (Challenges/Issues/Risks

After Covid19)” by Ms Shilpi Kumari bearing Roll no 120102, comprises the results of his/her

independent and original investigations carried out under my supervision and guidance in partial

fulfillment of the requirements for the award of Post Graduate Diploma in Management. To the

best of my knowledge, the work has not been submitted earlier, either to any other Institute or

University for the award of any diploma, degree or certificate.

Place: Faculty Sign

Date: Faculty Name:


ACKNOWLEDGEMENT
CONTENT
ABBREVIATION
1. INTRODUCTION

Microfinance – It refers to small sized loans, savings, insurance or other financial services

that are offered to low income households and individuals. The idea of microfinance came

from the understanding that people of low income group are unable to develop economically

without small financial help. Microfinance services can be used for a wide range of

activities like growing business, building assets, and managing risk just like people of good

income are able to do. Further, microfinance allows low income classes to develop

themselves financially without coming in trap of informal moneylenders and debt collectors

who pose higher risk to borrowers.

Microfinance is not a new concept. It has been existing since 18 th century. The first

occurrence of micro lending was done by Jonathan Swift to improve conditions for Irish

citizens. In modern era, microfinance became popular on large scale in 1970s by

Bangladeshi economist Mohammad Yunus. When he came to his country from USA after

receiving his Ph.D., he saw massive poverty throughout the region which developed an idea

to introduce new economic approach to improve local economy. With this intension he setup

Gramin Bank with the objective to help poor people escape from poverty by giving them

small loans to start or grow business. As of November, 2019, it has 9.60 million members, 97

percent of whom are women. With 2,568 branches, GB provides services in 81,678 villages,

covering more than 93 percent of the total villages in Bangladesh. The GRAMIN BANK

microfinance program became model for the rest of the world. the World Bank estimates that

more than 16 million people are served by some 7000 microfinance institutions all over the

world.
Microfinance in India

Microfinance in India started in 1970s through the emergence of informal self-help group formed

SELF EMPLOYED WOMEN’s ASSOCIATION (SEWA Bank) with the objective to provide

banking services to poor women employed in unorganized sector in Ahmadabad. To provide

credit for promotion of Agriculture, small-scale Industry, cottage and village industries etc in

rural area which comprised nearly 80% India’s population NABARD came into existence. Post-

1991, there was strong growth numbers due to liberalization of the economy and increased

lending by private sector organizations. Between 2005-2010 Microfinance sector grew

consistently due to high demand for loans from borrowers. However, in 2010, the Andhra

Pradesh crisis and State government ordinance to restrict the activities of microfinance

companies slowed the growth of the industry. This crisis triggered a series of regulatory changes
by RBI in the following years. Between 2014-2017 Microfinance sector has also seen many

changes like seting up of BANDHAN BANK, DEMONETISATION, MUDRA YOJNA BFIL

MERGER.

Every profit as well as nonprofit making organization has its objectives and goals to achieve. For

any organization to carry its business smoothly there as some factors to keep in mind and work

on it. Every organization has internal as well as external risk which they have to overcome. And

also to achieve their goals and objective, they have to control their operations.

Risk and Risk Management

Managing risk is a complex task for MFIs and is important to minimize losses that occurs or

might occur.

Effective Risk management system has several benefits like early warning signal for any kind of

potential threats, efficient resource allocation and helps in identifying positive opportunities. It

allows senior managers and directors to make conscious decisions about risk.

Major risks to MFI:-

 Financial risks,

 Operational risks

 Strategic risks.

Most risks fall under one of three categories: Financial risks, operational risks and strategic risks.

Most MFIs focuses on financial risks like credit risk, liquidity risk, interest rate risk, investment

risk etc.

Operational risk arises from human or computer error within daily product delivery
and services. This risk is a function of internal controls, information systems, employee integrity,

and operating processes. Operational risks focuses on two types of risk: Fraud risk and

Transaction risk.

Transaction risk is high for MFIs that handle a high volume of small transactions daily. Fraud

risk arises due to loss of earnings or capital as a result of intentional deception by an employee or

client. The most common type of fraud is the direct theft of funds by loan officers or other

branch staff. Other forms include the creation of misleading financial statements, bribes, etc.

Strategic risk focuses on governance risk, reputation risk and External Business Risks. Strategic

risks include internal risks like those from adverse business decisions or improper

implementation of those decisions, poor leadership, or ineffective governance and oversight, as

well as external risks, such as changes in the business or competitive environment.

Apart from the above mentioned risks, MFIs face additional risks resulting from rapid

growth, management succession, and new product development.

INTERNAL CONTROL SYSTEM

The COSO framework1 defines internal control as “a process, effected by an entity’s board of

directors, managements, and other personnel, designed to provide reasonable assurance for the

achievement of organisational objectives under: Effectiveness and efficiency of operations;

Reliability in financial reporting and Compliance with applicable rules and procedures”.

According to statement of accounting standards, (SAS, No 55) internal control is the combined

plan, method and procedures which can safeguard the firm’s assets, promote operational

efficiency and encourage adherence to prescribed policies.”


It plays an important role in achieving goals and objective and also in preventing and detecting

fraud and protecting the organization's resources, both physical (e.g., machinery and property)

and intangible (e.g., reputation or intellectual property such as trademarks).

The Committee of Sponsoring Organizations of the Tread way Commission (COSO, 1994),

AICPA (American institute of certified public accountants) and General accounting office

(GAO) claim effective internal control should have five elements namely:

1. Control environment

2. Risk assessment

3. Control activity

4. Information and communication

5. Monitoring

Control environment establishes an atmosphere in which people can conduct their activities and

carry out their control effectively. It reflects the contribution by the board of director and

management towards the necessary discipline and the appropriate structure for ensuring proper

internal controls over the organization operation.

Following are some of the components of an effective control environment

 Commitment to integrity and ethical values

 Establishment of standard of conduct and adherence to it

 Accounting and financial management system.

 Closely monitoring of internal control system by management.


Once an effective control environment has been established, management should assess the risks

to achieve its objectives. Internal control provides for an assessment of risks the agency faces

from internal as well as external sources. Risk assessment can be done through supervision and

guidance by defining appropriate objectives for the organization, identifying risks, ascertainment

of fraud-related risks to the organization.

Control Activities includes all the policies, procedures, techniques, and mechanisms (the day-to-

day processes) management delegates and enforces to address known or perceived control risks

based on the Risk Assessment. It includes segregation of duties, designing information

technology infrastructure, corrective actions to address the weakness, training of staff etc.

Information and communication involves the procedure of identifying, capturing and exchanging

information on timely basis to enable the organization to achieve its objective. It includes

identification of information requirement, internal and external communication etc.

Monitoring is the process to assess the quality of internal control performance over time. It

involves assessing the design and operation of controls on regular basis and taking corrective

measures if required.
2. LITERATURE REVIEW

Ramakrushna Mahapatra and Sunita Patra in their paper titled “Micro-finance and Its role

in India” looked at the growth and transformation of microfinance institution in India with

different features in providing services. They discussed about the structure of microfinance

institutions in India and how it penetrate into the poverty and downtrodden segment. They

discussed differentiating factors of MFIs like lending model, repayment structure, product

offering etc. They found that there is absence of regulatory control in India and interference of

political sensitivity in the MFOs. They concluded in their paper that there should be regulatory

changes that allow smaller MFOs to get into more complex forms as they grow organically.

NGO-MFIs should get chance to invest in the equity and debt as these are larger enough to

maintain adequate leverage ratio and able to raise capital as NBFCs. The key factors that can

drive success for MFIs are robust systems, efficiency and productivity levels, maintaining asset

quality, prevention of credit losses and capital erosion and remaining adequately capitalized to

fund growth plans.

Jonathan Morduch and Stuart Rutherford in their paper titled, “ Microfinance: analytical

issues for India” analysed about poor households facing constraints in trying to save, invest,

and protect their livelihoods. users. Research shows that poor people value financial services,

want more of them and worry when they don’t have them, but are often frustrated by them when

they do get them. They know that managing money is important, and managing money will give

them a better chance to manage their lives and livelihoods well. The researcher analyzed the

analytical issues, and steps taken to overcome those issues of MFIs in India with MFIs in

Bangladesh. They discussed how Bangladesh and Indonesia arrived at the beginning of the new
century with booming, expanding, good-quality yet still-improving microfinance reaching large

proportions of its poor populations. They concluded that in past few years India has

demonstrated a willingness to innovate and to think afresh about financial services for poor

people. Lessons from Bangladesh and Indonesia guides for better solutions which include

Necessary steps: raising interest rates well above “cheap credit” levels (no matter what one’s

view on subsidy); clearly targeting customer groups (whether by product design, location, or

explicit eligibility criteria; managing and rewarding staff according to their performance

ASHENAFI JEMAL HUSSEN (2017) in his paper “Assessment of internal control system

in selected micro finance institution in Addis Ababa.” Focused on assessment of the internal

control system in the micro finance institution to know the possible areas of deficiencies in the

system. The population for the study was made of the nineteen micro finance institutions in

Addis Ababa of which three of them were selected as a sample. The data gathered from the

respondents were analyzed and interpreted with the help of bar frequency table, minimum &

maximum value, mean and standard deviation. He came to the observation that though risk

assessment elements with the average mean value of 3.81 is better in the institution, there is

effective control environment, information and communication, control activity, and monitoring

activity components in the institution. He concluded that the control environment concerned

majority of respondents. Majority of respondents nearly agreed that in the practice of control

environment, elements include integrity and ethical behaviour in the work place, formulation of

organizational structure, formulation of standard code of conduct, establishment of competence

in every position and creating accountability in execution of internal control activities. The

researcher further recommended, it is possible to improve internal control effectiveness through


continuous monitoring, assessing changing risks, designing sound control methods, and with

good communication in the organization.

Yvonne Mawuko-Yevugah in his paper “BANKING THE UN-BANKABLE: AN

EMPRICAL STUDY OF RISK AND RISK MANAGEMENT BY MICRO-FINANCIAL

INSTITUTIONS IN GHANA” explores the risks that microfinance institutions (MFIs) face in

their operations and the risk management strategies they adopt to mitigate their risks. The data

for this study was from both secondary and primary sources; 48 MFIs in Ghana were chosen for

the survey. The Analysis found that the MFIs surveyed were aware of the types of risk inherent

in their line of business and employ some form of risk management strategies to mitigate losses

and enhance profitability. The conclusion drawn from the study was, for effective risk

management, there is the need to deploy a combination of risk management strategies. The

current system where various managers adopt different risk management strategies may not

advance the long-term objectives of all stakeholders, including clients and the government.

While there have been attempts to transform MFIs through the implementation of specific policy

reforms and the passage of specific legislations, more needs to be done to integrate the MFIs

with banking and financial system if the gains made so far are to be sustained.

SANGEETHA S (2017) in her paper titled “Assessment of credit risk and financial

sustainability of Indian microfinance institutions an empirical study” focused on understanding

the credit risk levels of top five Indian Microfinance Institutions based on a gross loan portfolio

for financial year 2-12-2013. Morgan Stanley‘s credit risk assessment and Altman‘s Multi

Discriminant Analysis methodology is adopted for the purpose of analysis. The study analyses
the Credit Risk, Solvency, Sustainability and Profitability of MFIs for 10 years. Stratified

random sampling has been opted to choose the samples. The conclusion drawn from the study

was that all the companies taken for study do not satisfy the credit score requirements. But 60%

of the respondents shows better solvency position during the study period.

3. METHODOLOGY

Problem Statement:

Objective: -

The main objective of the study is

 To understand the types of risk faced by MFIs in India and the mechanisms or steps or

strategies adopted by these institutions to minimize or manage those risk.

 To know the opinion of institutions on role of internal control system on reducing the

risk faced by the organization.

 To understand the internal control components used within the organization and steps or

mechanisms adopted for internal control process.

 To get opinion of institutions on the impact of risk management & internal control

system on performance of organization.

 Challenges/issues/risks that will be faced by MFIs in India after covid19

Limitations

 This study would be more productive if it were conducted on all MFIs in India. Due to

time limit and other constraints it was difficult to get in touch with more MFIs.

 Limited research work and articles on the topic in India, to further work on this topic

other countries articles were also taken for the study.


 Unwillingness of some respondents to participate in the survey due to no direct contact,

fear of leak of data.

Source of data

Help of both primary as well as secondary data is taken in for the study. Secondary data are

taken from newspaper articles, blogs, literature reviews and research paper. Primary data were

collected from survey method. A structured questionnaire was therefore designed to collect the

data.

Population under study

The study was based on small, medium and large micro-finance institutions in India.

The questionnaire was send to people working in 30 MFIs out of which people from 20 MFIs

agreed to take part in the survey. Total 60 respondents filled the questionnaire out of 100. All the

respondents work in the organization as branch manager, regional manager, head of risk

department, head of audit department and other staffs.

Data analysis and interpretation

Mostly descriptive statistics is used to analyze data from respondents through questionnaire. The

result is presented by using statistical tools such frequencies, mean, percentage and standard

deviation and they are used to describe the basic features of the data in the study.

They also provide the simple summaries and measures.

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