All these risks experienced by the microfinance institutions are categorised into: Both strategic and operational risks are consequences of human folly, system failures, natural disasters, weaknesses of the board or its poor strategy, regulatory environment which when materializes, leads to financial loses.
We proofread, edit and make the paper upto mark without any flaws. Starting Rs for 10 pages. Challenges in risk management for small scale microfinance institutions in India By Priya Chetty on June 28, For a long time now, microfinance institutions MFI in India have followed the traditional operational model of procurement and distribution of money among rural people.
However, during the past 10 years the industry changed radically with a new business model. An increasing number of large commercial companies have entered the fray, making the industry more formal.
They have started to include more commercial and semi-commercial banks in the operational process. This has not only increased their clientele but also intensified their commitment towards customers. However, with increased business opportunity, there has emerged a graver need to upgrade their operational process.
Apart from customer satisfaction there needs to be more emphasis on risk management, manpower efficiency, funding cycles and debt recovery, among other functions.
These focus points need to be addressed especially in case of small scale microfinance institutions SC-MFI. This is because they are still vulnerable in terms of their market position and have poor management strategies for credit risk, operational risk and liquidity risk.
The meaning and consequences of the risks mentioned here have already been discussed in the previous article. Most important risk which is liquidity risk is mitigated through diversification of portfolio of funds Fernando, However, the problem with their risk assessment system is that there is poor scrutiny of clients.
This is because most of the clients take agricultural loans. Risks faced by small scale microfinance institutions This section will explain the different types of risks in the small scale microfinance and the impact of such risks on the overall growth of these financial institutions.
This causes increase in operational risk because of vulnerability to internal shocks and lack of transparency and clarity in operations Singh, Secondly, most of the customers of small scale microfinacne companies are people who are dependent on agriculture for their livelihood and this automatically makes the situation risky MicroSave, This increases the chances of default as in case of agriculture loans there are chances of moral hazard and adverse selection and natural calamities leading to loss of crop.
Other operational risks include chances of fraud by employees of the company due to poor scrutiny infrastructure. Similarly failure to digitalise their operational processes in order to reduce processing time make their customer service more inefficient.
Due to poor addressal of these risks these organizations continued to face issues of credibility, transparency and default. One of the major external risks posed in this industry is increased competition. During the past decade competition has intensified manifold with many foreign firms investing in small microfinance players.
Apart from this, other internal risk posed in this industry is lack of skilled manpower to effectively assess the performance of firms and execute remedial strategies. The manpower deployed in such institutions often lacks the educational credibility to carry out their tasks.
The industry is also vulnerable to macro-economic changes such as governmental policies and regulatory frameworks. The industry is heavily dependent on cash as a mode of transaction, especially repayments, as they are of small value. Other such credit risks are discussed here.Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses".
This definition, adopted by the European Solvency II Directive for insurers, is a variation from that adopted in the Basel II regulations for banks. It defines overall operational risk culture in organization, and sets the tone as to how a bank implements and executes its operational risk management strategy.
A successfully executed risk strategy often results in risk being firmly embedded in the vision, strategies, tools, and tactics of the organization.
The thesis takes into account theories relating to credit risk management and a case study of a commercial bank, Bank for Investment and Development of Vietnam (BIDV). As. In acknowledgement of this, central banks have in recent years launched a new wave of operational risk management initiatives to respond to three challenges: • At a time when they encourage commercial banks to enhance their risk management practices, central banks are eager to demonstrate that they practice what they.
Difference between microfinance institutions and commercial banks in India; Operational risk management in microfinance institutions are important in day to day operations to mitigate risks such as: frauds, delinquencies, workforce turnover, liquidity, Thesis writing.
that operational risk is “the risk of loss resulting from deficiencies or defect attributable to procedures, personnel, internal system or external events”. Some banks prefer to .