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January 2011

SKS Microfinance Ltd. (31-3-2010)

By Himanshu V. Kishnadwala | Chartered Accountant
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Section A : Disclosures on Clause 21 of CARO, 2003 regarding fraud noticed or reported on or by the company during the year

5. SKS Microfinance Ltd. (31-3-2010)

From Auditor’s Report :

Based upon the audit procedure performed for the purpose of reporting the true and fair view of the financial statements and as per the year, though there were some instances of fraud on the Company by its employees and borrowers as given below :

(a) Eighty-two cases of cash embezzlements by the employees of the Company aggregating Rs.15,024,158 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. We have been informed that thirty-seven of these employees were absconding. The outstanding balance (net of recovery) aggregating Rs. 8,663,302 has been written off.

(b) Sixty-one cases of loans given to non-existent borrowers on the basis of fictitious documentation created by the employees of the Company aggregating Rs.13,645,345 were reported during the year. The services of all such employees involved have been terminated and the Company is in the process of taking legal action. The outstanding loan balance (net of recovery) aggregating Rs. 11,029,667 has been written off; and

(c) Thirty-one cases of loans taken by certain borrowers, in collusion with and under the identity of other borrowers, aggregating Rs. 6,025,000, were reported during the year. The Company is pursuing the borrowers to repay the money. The outstanding loan balance (net of recovery) aggregating Rs.2,359,930 has been written off.

From Directors’ Report :

In terms of the provisions of S. 217(3) of the Companies Act, 1956, the Board would like to place on record an explanation to the Auditors’ comments in their Audit Report dated 4th May 2010 :

(a) There is an inherent risk involved in our operations as all the transactions at the field are in cash. The Company has taken legal or remedial action in almost all the cases of embezzlement of cash and issue of fake loans by employees. The Company has recovered an amount of Rs. 2,226,304 out of cash embezzled from the employees and an amount of Rs.4,134,552 from the Insurance Company, as the company has the adequate insurance coverage in place;

(b) To mitigate this risk the Company has formed the policy which is as follows :

  •   Not to deploy the Sangam Manager in their hometown

  •   Rotate the Centres handled by Sangam Manager’s in every six months

  •   Transfer Sangam Manager/Branch Manager in a span of 9 to 12 months.

In addition to the above, stringent monitoring systems at all levels have been implemented and checked/verified by risk/audit team on a monthly basis. Going forward at Head Office level we are implementing automated dropouts of dormant members month on month to mitigate the risk of fake loans.

(c) While the system of Joint Liability Groups in the Centre and changing Centre Leader every one year persists, intentional and fraudulent Centre Leaders have been identified and we have initiated legal proceedings with the help of Group Leaders and respective members. The net impact of frauds comes to around 0.029% of the total amount disbursed during the year. The company is working towards bringing down this percentage to the least possible by making process improvements, covering the loss by having adequate insurance policy and by increasing the number of opportunities for direct contact with our members.

 

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