For any lending institution, the risk of income loss due to processing errors, inadequate Information, noncompliance with loan policy, excessive concentration of credit Risk, counterfeit collateral, and employee fraud are major risk exposures.
A typical Microfinance lending institution provides small loans to a large number of clients and consequently handles a large number of transactions. The sheer volume of Transactions requires that risk be reduced both before disbursement through Client appraisal as well as post disbursement, through a regular and comprehensive Portfolio tracking system.
Adopting effective control mechanisms relative to loan administration and Management is beneficial to MFIs and MFBs in terms of cost reduction, control of lapses and weaknesses in loan administration, as well as increasing financial income and preventing future losses. Portfolio control performs a preventive feedback function in the larger internal control system, making it a critical aspect of the operations.