3. A Summary of Material accounting policies
This note provides a list of the material accounting policies adopted in the preparation of these financial
statements. These policies have been consistently applied to all the years presented, unless otherwise stated.
3.1 Revenue Recognition
(i) Interest income
The Company recognizes interest income using Effective Interest Rate (EIR) on all financial assets
subsequently measured at amortized cost or fair value through other profit & loss account (FVTPL). EIR is
calculated by considering all costs and incomes attributable to acquisition of a financial asset or assumption
of a financial liability and it represents a rate that exactly discounts estimated future cash payments/receipts
through the expected life of the financial asset/financial liability to the gross carrying amount of a financial
asset or to the amortized cost of a financial liability.
The Company recognizes interest income by applying the EIR to the gross carrying amount of financial
assets other than credit-impaired assets. In case of credit-impaired financial assets regarded as 'stage 3', the
Company recognizes interest income on the amortized cost net of impairment loss of the financial asset at
EIR. If the financial asset is no longer credit-impaired, the Company reverts to calculating interest income on
a gross basis. Delayed payment interest (penal interest) levied on customers for delay in
repayments/nonpayment of contractual cash flows is recognized on realization.
Interest on financial assets subsequently measured at fair value through profit or loss (FVTPL) is recognized
at the contractual rate of interest.
(ii) Dividend income
Dividend income on equity shares is recognized when the Company's right to receive the payment is
established, which is generally when shareholders approve the dividend.
(iii) Other revenue from operations (other than Interest and Dividend Income)
The Company recognizes revenue from contracts with customers (other than financial assets to which Ind
AS 109 'Financial Instruments' is applicable) based on a comprehensive assessment model as set out in Ind
AS 115 'Revenue from contracts with customers. The Company identifies contract(s) with a customer and its
performance obligations under the contract, determines the transaction price and its allocation to the
performance obligations in the contract and recognizes revenue only on satisfactory completion of
performance obligations. Revenue is measured at fair value of the consideration received or receivable.
(a) Fees and commission
The Company recognizes service and administration charges towards rendering of additional services to its
loan customers on satisfactory completion of service delivery. Fees on value added services and products are
recognized on rendering of services and products to the customer. Distribution income is earned by selling
of services and products of other entities under distribution arrangements. The income so earned is
recognized on successful sales on behalf of other entities subject to there being no significant uncertainty of
its recovery. Foreclosure charges are collected from loan customers for early payment/closure of loan and
are recognized on realization.
(b) Net gain on fair value changes
Financial assets are subsequently measured at fair value through profit or loss (FVTPL) or fair value through
other comprehensive income (FVOCI), as applicable. The Company recognizes gains/losses on fair value
change of financial assets measured as FVTPL and realized gains/losses on recognition of financial asset
measured at FVTPL and FVOCI.
(c) Sale of services
The Company, on de-recognition of financial assets where a right to service the derecognized financial assets
for a fee is retained, recognizes the fair value of future service fee income over service obligations cost on net
basis as service fee income in the statement of profit or loss and correspondingly creates a service asset in
Balance Sheet. Any subsequent increase in the fair value of service assets is recognized as service income
and any decrease is recognized as an expense in the period in which it occurs. The embedded interest
component in the service asset is recognized as interest income in line with Ind AS 109 'Financial
instruments.
Other revenues on sale of services are recognized as per Ind AS 115 'Revenue from Contracts with Customers'
as articulated above in 'other revenue from operations.
(d) Recoveries of financial assets written off.
The Company recognizes income on recoveries of financial assets written off on realization or when the right
to receive the same without any uncertainties of recovery is established.
(iv) Taxes
Incomes are recognized net of the Goods and Services Tax (GST) wherever applicable.
3.2 Expenditures
(i) Finance costs
Borrowing costs on financial liabilities are recognized using the EIR method as set out in Ind AS 109
'Financial Instruments'
(ii) Fees and commission expenses
Fees and commission expenses which are not directly linked to the sourcing of financial assets, such as
commission/incentive incurred on value added services and products distribution, recovery charges and
fees payable for management of portfolio etc., are recognized in the Statement of Profit and Loss on an
accrual basis.
(iii) Taxes
Expenses are recognized net of the Goods and Services Tax/Service Tax, except where credit for the input
tax is not statutorily permitted.
3.3 Financial instruments
A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity. Trade receivables and payables, loan receivables,
investments in securities and subsidiaries, debt securities and other borrowings, preferential and equity
capital etc. are some examples of financial instruments.
All the financial instruments are recognized on the date when the Company becomes party to the contractual
provisions of the financial instruments. For tradable securities, the Company recognizes the financial
instruments on trade date.
(I) Financial assets
Financial assets include cash, or an equity instrument of another entity, or a contractual right to receive cash
or another financial asset from another entity. Few examples of financial assets are loan receivables,
investment in equity and debt instruments, trade receivables and cash and cash equivalents.
Initial recognition and measurement
All financial assets are recognized initially at fair value including transaction costs that are attributable to the
acquisition of financial assets except in the case of financial assets recorded at FVTPL where the transaction
costs are charged to profit or loss.
Subsequent measurement
For the purpose of subsequent measurement, financial assets are classified into four categories:
(a) Debt instruments at amortized cost
(b) Debt instruments at FVOCI
(c) Debt instruments at FVTPL
(d) Equity instruments designated at FVOCI
(a) Debt instruments at amortized cost:
The Company measures its financial assets at amortized cost if both the following conditions are met:
The asset is held within a business model of collecting contractual cash flows; and Contractual terms of the
asset give rise on specified dates to cash flows that are Sole Payments of Principal and Interest (SPPI) on the
principal amount outstanding. To make the SPPI assessment, the Company applies judgment and considers
relevant factors such as the nature of portfolio and the period for which the interest rate is set.
The Company determines its business model at the level that best reflects how it manages groups of financial
assets to achieve its business objective. The Company's business model is not assessed on an instrument-by¬
instrument basis, but at a higher level of aggregated portfolios. If cash flows after initial recognition are
realized in a way that is different from the Company's original expectations, the Company does not change the
classification of the remaining financial assets held in that business model but incorporates such information
when assessing newly originated financial assets going forward.
The business model of the Company for assets subsequently measured at amortized cost category is to hold
and collect contractual cash flows. However, considering the economic viability of carrying the delinquent
portfolios in the books of the Company, it may sell these portfolios to banks and/or asset reconstruction
companies.
After initial measurement, such financial assets are subsequently measured at amortized cost on effective
interest rate (EIR). The expected credit loss (ECL) calculation for debt instruments at amortized cost is
explained in subsequent notes in this section.
(b) Debt instruments at FVOCI
The Company subsequently classifies its financial assets as FVOCI, only if both of the following criteria are
met:
• The objective of the business model is achieved both by collecting contractual cash flows and selling the
financial assets; and
• Contractual terms of the asset give rise on specified dates to cash flows that are Solely Payments of
Principal and Interest (SPPI) on the principal amount outstanding.
Debt instruments included within the FVOCI category are measured at each reporting date at fair value with
such changes being recognized in other comprehensive income (OCI). The interest income on these assets is
recognized in profit or loss. The ECL calculation for debt instruments at FVOCI is explained in subsequent
notes in this section.
Debt instruments such as long-term investments in Government securities to meet regulatory liquid asset.
Requirement of the Company's deposit program and mortgage loans portfolio where the Company
periodically resorts to partially selling the loans by way of assignment to willing buyers are classified as
FVOCI.
On De-recognition of the asset, cumulative gain or loss previously recognized in OCI is reclassified to profit or
loss.
(c) Debt instruments at FVTPL
The Company classifies financial assets which are held for trading under FVTPL category. Held for trading
assets are recorded and measured in the Balance Sheet at fair value. Interest and dividend incomes are
recorded in interest income and dividend income, respectively according to the terms of the contract, or when
the right to receive the same has been established. Gain and losses on changes in fair value of debt
instruments are recognized on net basis through profit or loss.
The Company's investments into mutual funds, Government securities (trading portfolio) and certificate of
deposits for trading and short-term cash flow management have been classified under this category.
(d) Equity investments designated under FVOCI
All equity investments in the scope of Ind AS 109 'Financial Instruments' are measured at fair value. The
Company has strategic investments in equity for which it has elected to present subsequent changes in the fair
value in other comprehensive income. The classification is made on initial recognition and is irrevocable.
All fair value changes of the equity instruments, excluding dividends, are recognized in OCI and not available
for reclassification to profit or loss, even on sale of investments. Equity instruments at FVOCI are not subject
to an impairment assessment.
De-recognition of Financial Assets
The Company derecognizes a financial asset (or, where applicable, a part of a financial asset) when:
• The right to receive cash flows from the asset have expired; or
• The Company has transferred its right to receive cash flows from the asset or has assumed an obligation
to pay the received cash flows in full without material delay to a third party under an assignment
arrangement and the Company has transferred substantially all the risks and rewards of the asset. Once
the asset is derecognized, the Company does not have any continuing involvement in the same.
Impairment of financial assets
Expected Credit Loss (ECL) are recognized for financial assets held under amortized cost, debt instruments
measured at FVOCI, and certain loan commitments.
The company follows a staging methodology for ECL Computation. Financial assets where no significant
increase in credit risk has been observed are considered to be in 'stage 1' and for which a 12-month ECL is
recognized. Financial assets that are considered to have significant increase in credit risk are considered to be
in 'stage 2' and those which are in default or for which there is an objective evidence of impairment are
considered to be in 'stage 3'. Lifetime ECL is recognized for stage 2 and stage 3 financial assets.
At initial recognition, allowance (or provision in the case of loan commitments) is required for ECL towards
default events that are possible in the next 12 months, or less, where the remaining life is less than 12 months.
In the event of a significant increase in credit risk, allowance (or provision) is required for ECL towards all
possible default events over the expected life of the financial instrument ('lifetime ECL').
Financial assets (and the related impairment loss allowances) are written off in full, when there is no realistic
Prospect of recovery.
T reatment of the different stages of financial assets and the methodology of determination of ECL
(a) Credit impaired (stage 3)
The Company recognizes a financial asset to be credit impaired and in stage 3 by considering relevant
objective evidence, primarily whether:
• Contractual payments of either principal or interest are past due for more than 90 days.
• The loan is otherwise considered to be in default.
Restructured loans, where repayment terms are renegotiated as compared to the original contracted terms
due to significant credit distress of the borrower, are classified as credit impaired. Such loans continue to be in
stage 3 until they exhibit regular payment of renegotiated principal and interest over a minimum observation
period, typically 12 months- post renegotiation, and there are no other indicators of impairment. Having
satisfied the conditions of timely payment over the observation period these loans could be transferred to
stage 1 or 2 and a fresh assessment of the risk of default is done for such loans.
Interest income is recognized by applying the EIR to the net amortized cost amount i.e., gross carrying amount
less ECL allowance.
b) Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each
reporting period by considering the change in the risk of default of the loan exposure. However, unless
identified at an earlier stage, 30 days past due is considered as an indication of financial assets to have
suffered a significant increase in credit risk. Based on other indications such as borrower's frequently delaying
payments beyond due dates though not 30 days past due are included in stage 2 for mortgage loans.
The measurement of risk of defaults under stage 2 is computed on homogenous portfolios, generally by nature
of loans, tenors, underlying collateral, geographies and borrower profiles. The default risk is assessed using
PD (probability of default) derived from past behavioral trends of default across the identified homogenous
portfolios. These past trends factor in the past customer behavioral trends, credit transition probabilities and
macroeconomic conditions. The assessed PDs are then aligned considering future economic conditions that
are determined to have a bearing on ECL.
(c) Without significant increase in credit risk since initial recognition (stage 1)
ECL resulting from default events that are possible in the next 12 months are recognized for financial
instruments in stage 1. The Company has ascertained default possibilities on past behavioral trends witnessed
for each homogenous portfolio using application/behavioral score cards and other performance indicators,
determined statistically.
(d) Measurement of ECL
The assessment of credit risk and estimation of ECL are unbiased and probability weighted. It incorporates all
information that is relevant including information about past events, current conditions and reasonable
forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL
takes into account the time value of money. Forward looking economic scenarios determined with reference
to external forecasts of economic parameters that have demonstrated a linkage to the performance of our
portfolios over a period of time have been applied to determine impact of macro-economic factors.
The Company has calculated ECL using three main components: Exposure at Default (EAD), Probability of
Default (PD), Loss Given Default (LGD)
(ii) Financial liabilities
Financial liabilities include liabilities that represent a contractual obligation to deliver cash or another
financial asset to another entity, or a contract that may or will be settled in the entities own equity
instruments. Few examples of financial liabilities are trade payables, debt securities and other borrowings and
subordinated debts.
Initial measurement
All financial liabilities are recognized initially at fair value and, in the case of borrowings and payables, net of
directly attributable transaction costs. The Company's financial liabilities include trade payables, other
payables, debt securities and other borrowings.
Subsequent measurement
After initial recognition, all financial liabilities are subsequently measured at amortized cost using the EIR.
De-recognition
The Company derecognizes a financial liability when the obligation under the liability is discharged, cancelled
or expired. Any gains or losses arising on DE recognition of liabilities are recognized in the Statement of Profit
and Loss.
Offsetting of financial instruments
Financial assets and liabilities are offset and net amount is reported if there is currently enforceable legal right
to offset the recognized amounts and there is intention to settle on a net basis, to realize assets and settle the
liabilities simultaneously.
3.4 Taxes
(i) Current tax
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the
taxation authorities, in accordance with the Income Tax Act, 1961 and the Income Computation and
Disclosure Standards (ICDS) prescribed therein. The tax rates and tax laws used to compute the amount are
those that are enacted or substantively enacted, at the reporting date. Current tax relating to items recognized
outside profit or loss is recognized in correlation to the underlying transaction either in OCI or directly in
other equity. Management periodically evaluates positions taken in the tax returns with respect to situations
in which applicable tax regulations are subject to interpretation and establishes provisions where
appropriate.
(ii) Deferred tax
Deferred tax is provided using the Balance Sheet approach on temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are
recognized for deductible temporary differences to the extent that it is probable that taxable profits will be
available against which the deductible temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it
is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset
to be utilized. Unrecognized deferred tax assets, if any, are reassessed at each reporting date and are
recognized to the extent that it has become probable that future taxable profits will allow the deferred tax
asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the
asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the reporting date.
Deferred tax relating to items recognized outside profit or loss is recognized either in OCI or in other equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current
tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same
taxation authority.
3.5 Property, plant and equipment
Property, plant and equipment are carried at historical cost of acquisition less accumulated depreciation and
impairment losses, consistent with the criteria specified in Ind AS 16 'Property, Plant and Equipment'.
Depreciation on property, plant and equipment
(a) Depreciation is provided on a pro-rata basis for all tangible assets on written down value method over
the useful life of assets.
(b) Depreciation is charged so as to allocate the cost of assets less their residual values, if any, over their
estimated useful lives, using the written down value method except intangible assets. Depreciation on
intangible assets is provided on straight line basis. The following useful lives are considered for the
depreciation of property, plant and equipment:
(c) Useful lives of assets are determined by the Management by an internal technical assessment except
where such assessment suggests a life significantly different from those prescribed by Schedule II - Part C
of the Companies Act, 2013 where the useful life is as assessed and certified by a technical expert.
(d) Depreciation on addition to assets and assets sold during the year is being provided for on a pro rata
basis with reference to the month in which such asset is added or sold as the case may be.
(e) An item of property, plant and equipment and any significant part initially recognized is derecognized
upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss
arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is recognized as income or expense when the asset is derecognized.
(f) The residual values, useful lives and methods of depreciation of property, plant and equipment are
reviewed at each financial year end and adjusted prospectively, if appropriate.
3.6 Employee benefits
Liabilities for salaries and wages, including non-monetary benefits if any, are recognized as liabilities (and
expensed) and are measured at the amounts expected.
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