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The hazards of microfinance business
The operational risk arising from fraud, petty theft, embezzlement and violent crime have been highlighted in SKS MicroFinance Ltd’s draft red herring prospectus for initial public offering.
The Hyderabad-based microfinance institution has referred to the fact that it is exposed to the risk of fraud and misconduct by employees or outsiders, given that it handles a large amount of cash through a high volume of small transactions taking place on its network of 1,627 branches serving 53 lakh customers across 19 States.
The operational risks are compounded due to the high level of delegation of power and responsibilities that the microfinance business model requires.
For instance, during fiscal 2009, SKS discovered 33 cases of embezzlement by employees aggregating to Rs 70.80 lakh; 18 cases of misrepresentation by employees aggregating to Rs 56.50 lakh; and one case of fraudulent misrepresentation involving Rs 96.10 lakh by an employee in collusion with a vendor.
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