B. Interest income

The Company calculates interest income by applying EIR
to the gross carrying amount of financial assets other than
credit impaired assets. When a financial asset becomes
credit impaired and is, therefore, regarded as 'stage 3, the
Company calculates interest income on the net basis. If
the financial asset cures and is no longer credit impaired,
the Company reverts to calculating interest income on a
gross basis.

3.2 Financial instrument - initial recognition

A. Date of recognition

Debt securities issued are initially recognised when they
are originated. All other financial assets and financial
liabilities are initially recognised when the Company
becomes a party to the contractual provisions of the
instrument.

B. Initial measurement of financial instruments

The classification of financial instruments at initial
recognition depends on their contractual terms and the
business model for managing the instruments (Refer
note 3.3(A)). Financial instruments are initially measured
at their fair value (as defined in para 3.8), except in the
case of financial assets and financial liabilities recorded at
FVTPL, transaction costs are added to, or subtracted from
this amount.

C. Measurement categories of financial assets and
liabilities

The Company classifies all of its financial assets based
on the business model for managing the assets and the
asset’s contractual terms, measured at either:

i) Amortised cost

ii) FVOCI

iii) FVTPL

3.3 Financial assets and liabilities
A. Financial assetsBusiness model assessment

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 and is
based on observable factors such as:

a. How the performance of the business model and
the financial assets held within that business model
are evaluated and reported to the Company’s key
management personnel.

b. The risks that affect the performance of the business
model (and the financial assets held within that
business model) and, in particular, the way those
risks are managed.

c. Managers of the business are compensated (for
example, whether the compensation is based on
the fair value of the assets managed or on the
contractual cash flows collected).

d. The expected frequency, value and timing of
sales are also important aspects of the Company’s
assessment.

The business model assessment is based on reasonably
expected scenarios without taking 'worst case’ or 'stress
case’ scenarios into account. If cash flows after initial
recognition are realised 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 or newly
purchased financial assets going forward.

SPPI test

As a second step of its classification process, the Company
assesses the contractual terms of financial assets to
identify whether they meet SPPI test.

'Principal’ for the purpose of this test is defined as the
fair value of the financial asset at initial recognition and
may change over the life of financial asset (for example,
if there are repayments of principal or amortisation of the
premium/ discount).

The most significant elements of interest within a
lending arrangement are typically the consideration
for the time value of money and credit risk. To make
the SPPI assessment, the Company applies judgement
and considers relevant factors such as the period for
which the interest rate is set. In contrast, contractual
terms that introduce a more than minimum exposure to
risks or volatility in the contractual cash flows that are
unrelated to a basic lending arrangement do not give
rise to contractual cash flows that are solely payments
of principal and interest on the amount outstanding. In
such cases, the financial asset is required to be measured
at FVTPL.

Accordingly, financial assets are measured as follows:

i) Financial assets carried at amortised cost ("AC")

A financial asset is measured at amortised cost if it
is held with in a business model whose objective
is to hold the asset in order to collect contractual

cash flows and the contractual terms of the financial
asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the
principal amount outstanding.

ii) Financial assets measured at FVOCI

A financial asset is measured at FVOCI if it is held within
a business model whose objective is achieved by both
collecting contractual cash flows and selling financial
assets and the contractual terms of the financial asset
give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal
amount outstanding. Since, the loans and advances are
held to sale and collect contractual cash flows, they are
measured at FVOCI.

iii) Financial assets at fair value through profit or loss
("FVTPL")

A financial asset which is not classified in any of the above
categories are measured at FVTPL.

iv) Investment in subsidiaries

The Company has accounted for its investments in
subsidiaries at cost.

B. Financial liability

i) Initial recognition and measurement

All financial liabilities are initially recognized at fair
value. Transaction costs that are directly attributable
to the acquisition or issue of financial liability,
which are not at fair value through profit or loss, are
adjusted to the fair value on initial recognition.

ii) Subsequent measurement

Financial liabilities are carried at amortized cost
using the effective interest method.

3.4 Reclassification of financial assets and liabilities

The Company does not reclassify its financial assets
subsequent to their initial recognition, apart from the
exceptional circumstances in which the Company
acquires, disposes of, or terminates a business line.
Financial liabilities are never reclassified.

3.5 Derecognition of financial assets and liabilitiesA. Derecognition of financial assets due to substantial
modification of terms and conditions

The Company derecognises a financial asset, such as
a loan to a customer, when the terms and conditions
have been renegotiated to the extent that, substantially,
it becomes a new loan, with the difference recognised
as a derecognition gain or loss, to the extent that an
impairment loss has not already been recorded. Where the

substantial modification is because of financial difficulties
of the borrower and the old loan was classified as credit-
impaired, the new loan will initially be identified as
originated credit-impaired financial asset. On satisfactory
performance of the new loan, the new loan is transferred
to stage I or stage II of ECL.

B. Derecognition of financial assets other than due to
substantial modification

i) Financial assets

A financial asset (or, where applicable, a part of a
financial asset or part of a group of similar financial
assets) is derecognised when the contractual rights
to the cash flows from the financial asset expires or
it transfers the rights to receive the contractual cash
flows in a transaction in which substantially all of the
risks and rewards of ownership of the financial asset
are transferred or in which the Company neither
transfers nor retains substantially all of the risks
and rewards of ownership and it does not retain
control of the financial asset. On derecognition
of a financial asset in its entirety, the difference
between the carrying amount (measured at the date
of derecognition) and the consideration received
(including any new asset obtained less any new
liability assumed) is recognised in the statement
of profit and loss. Accordingly, gain on sale or
derecognition of assigned portfolio are recorded
upfront in the statement of profit and loss as per
Ind AS 109. Also, the Company recognises servicing
income as a percentage of interest spread over
tenure of loan in cases where it retains the obligation
to service the transferred financial asset. As per the
guidelines of RBI, the company is required to retain
certain portion of the loan assigned to parties in its
books as Minimum Retention Requirement ("MRR").
Therefore, it continues to recognise the portion
retained by it as MRR.

ii) Financial liability

A financial liability is derecognised when the
obligation under the liability is discharged,
cancelled or expires. Where an existing financial
liability is replaced by another from the same
lender on substantially different terms, or the terms
of an existing liability are substantially modified,
such an exchange or modification is treated as
a derecognition of the original liability and the
recognition of a new liability. The difference
between the carrying value of the original financial
liability and the consideration paid is recognised in
the statement of profit and loss.

3.6 Impairment of financial assets

A. Overview of ECL principles

In accordance with Ind AS 109, the Company uses ECL
model, for evaluating impairment of financial assets other
than those measured at FVTPL. Expected credit losses are
measured through a loss allowance at an amount equal to:

i) The 12-months expected credit losses (expected
credit losses that result from those default events
on the financial instrument that are possible within
12 months after the reporting date); or Full lifetime
expected credit losses (expected credit losses that
result from all possible default events over the life of
the financial instrument) Both LTECLs and 12 months
ECLs are calculated on collective basis.

Based on the above, the Company categorises
its loans into Stage 1, Stage 2 and Stage 3, as
described below:

Stage 1: When loans are first recognised, the
Company recognises an allowance based on 12
months ECL. Stage 1 loans includes those loans
where there is no significant credit risk observed and
also includes facilities where the credit risk has been
improved and the loan has been reclassified from
stage 2 or stage 3.

Stage 2: When a loan has shown a significant
increase in credit risk since origination, the Company
records an allowance for the life time ECL. Stage 2
loans also includes facilities where the credit

risk has improved and the loan has been reclassified
from stage 3.

Stage 3: Loans considered credit impaired are the
loans which are past due for more than 90 days. The
Company records an allowance for life time ECL.

Loan commitments: When estimating LTECLs for
undrawn loan commitments, the Company estimates
the expected portion of the loan commitment that
will be drawn down over its expected life. The ECL
is then based on the present value of the expected
shortfalls in cash flows if the loan is drawn down.

B. Calculation of ECLs

The mechanics of ECL calculations are outlined below and
the key elements are, as follows:

PD Probability of Default ("PD") is an estimate of the
likelihood of default over a given time horizon. A default
may only happen at a certain time over the assessed
period, if the facility has not been previously derecognised
and is still in the portfolio.

EAD Exposure at Default ("EAD") is an estimate of the
exposure at a future default date, taking into account
expected changes in the exposure after the reporting
date, including repayments of principal and interest
LGD Loss Given Default ("LGD") is an estimate of the loss
arising in the case where a default occurs at a given time.
It is based on the difference between the contractual
cash flows due and those that the lender would expect to
receive, including from the realisation of any collateral. It
is usually expressed as a percentage of the EAD.

The Company has calculated PD, EAD and LGD to determine
impairment loss on the portfolio of loans and discounted
at an approximation to the EIR. At every reporting date,
the above calculated PDs, EAD and LGDs are reviewed and
changes in the forward looking estimates are analysed.

The mechanics of the ECL method are summarised below:

Stage 1: The 12 months ECL is calculated as the portion
of LTECLs that represent the ECLs that result from default
events on a financial instrument that are possible within
the 12 months after the reporting date. The Company
calculates the 12 months ECL allowance based on the
expectation of a default occurring in the 12 months
following the reporting date. These expected 12-months
default probabilities are applied to a forecast EAD and
multiplied by the expected LGD and discounted by an
approximation to the original EIR.

Stage 2: When a loan has shown a significant increase
in credit risk since origination, the Company records an
allowance for the LTECLs. The mechanics are similar to
those explained above, but PDs and LGDs are estimated
over the lifetime of the instrument. The expected cash
shortfalls are discounted by an approximation to the
original EIR.

Stage 3: For loans considered credit-impaired, the
Company recognises the lifetime expected credit losses
for these loans. The method is similar to that for stage 2
assets, with the PD set at 100%.

Loans and advances measured at FVOCI

The ECLs for loans and advances measured at FVOCI do
not reduce the carrying amount of these financial assets
in the balance sheet, which remains at fair value. Instead,
an amount equal to the allowance that would arise if the
assets were measured at amortised cost is recognised
in OCI as an accumulated impairment amount, with a
corresponding charge to profit or loss. The accumulated
loss recognised in OCI is recycled to the profit and loss
upon derecognition of the assets.

D. Forward looking information

In its ECL models, the Company relies on a broad range
of forward looking macro parameters and estimated the
impact on the default at a given point of time.

i) Gross fixed investment (% of GDP)

ii) Lending interest rates

iii) Deposit interest rates

3.7 Write-offs

Financial assets are written off when the Company has
stopped pursuing the recovery. If the amount to be written
off is greater than the accumulated loss allowance, the
difference is first treated as an addition to the allowance
that is then applied against the gross carrying amount.
Any subsequent recoveries are credited to impairment on
financial instruments in the statement of profit and loss.

3.8 Determination of fair value

Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date,
regardless of whether that price is directly observable
or estimated using another valuation technique. In
estimating the fair value of an asset or a liability, the
Company has taken into account the characteristics of
the asset or liability if market participants would take
those characteristics into account when pricing the asset
or liability at the measurement date. In addition, for
financial reporting purposes, fair value measurements
are categorised into Level 1, 2, or 3 based on the degree
to which the inputs to the fair value measurements are
observable and the significance of the inputs to the fair
value measurement in its entirety, which are described as
follows:

• Level 1financial instruments: Those where the inputs
used in the valuation are unadjusted quoted prices
from active markets for identical assets or liabilities
that the Company has access to at the measurement
date. The Company considers markets as active only
if there are sufficient trading activities with regards
to the volume and liquidity of the identical assets or
liabilities and when there are binding and exercisable
price quotes available on the balance sheet date;

• Level 2 financial instruments: Those where the
inputs that are used for valuation and are significant,
are derived from directly or indirectly observable
market data available over the entire period of the
instrument's life. Such inputs include quoted prices
for similar assets or liabilities in active markets, quoted

prices for identical instruments in inactive markets
and observable inputs other than quoted prices such
as interest rates and yield curves, implied volatilities,
and credit spreads; and

• Level 3 financial instruments: Those that include
one or more unobservable input that is significant to
the measurement as whole.

3.9 (I) Recognition of other income

Revenue (other than for those items to which Ind AS 109
- Financial Instruments are applicable) is measured at fair
value of the consideration received or receivable. Ind AS
115 - Revenue from contracts with customers outlines a
single comprehensive model of accounting for revenue
arising from contracts with customers and supersedes
current revenue recognition guidance found within Ind
ASs. The Company recognises revenue from contracts
with customers based on a five-step model as set out in
Ind AS 115:

Step 1: Identify contract(s) with a customer: A contract
is defined as an agreement between two or more parties
that creates enforceable rights and obligations and sets
out the criteria for every contract that must be met.

Step 2: Identify performance obligations in the contract:
A performance obligation is a promise in a contract with a
customer to transfer a good or service to the customer.

Step 3: Determine the transaction price: The transaction
price is the amount of consideration to which the
Company expects to be entitled in exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.

Step 4: Allocate the transaction price to the performance
obligations in the contract: For a contract that has more
than one performance obligation, the Company allocates
the transaction price to each performance obligation in
an amount that depicts the amount of consideration to
which the Company expects to be entitled in exchange for
satisfying each performance obligation.

Step 5: Recognise revenue when (or as) the Company
satisfies a performance obligation

A. Dividend income

Dividend income (including from FVOCI investments)
is recognised when the Company's right to receive the
payment is established, it is probable that the economic
benefits associated with the dividend will flow to the
Company and the amount of the dividend can be
measured reliably. This is generally when the shareholders
approve the dividend.

B. Income from assignment transactions

Income from assignment transactions i.e. present value
of excess interest spread is recognised when the related
loan assets are de-recognised. Interest income is also
recognised on carrying value of assets over the remaining
period of such assets.

C. Other interest income

Other interest income is recognised on a time
proportionate basis.

D. Other Charges in Respect of Loans

Income in case of late payment charges are recognized
when there is no significant uncertainty of regarding its
recovery.

3.9 (II) Recognition of other expense
A. Borrowing costs

Borrowing costs are the interest and other costs that the
Company incurs in connection with the borrowing of
funds. Borrowing costs that are directly attributable to
the acquisition or construction of qualifying assets are
capitalised as part of the cost of such assets.

A qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended
use or sale. All other borrowing costs are charged to the
statement of profit and loss for the period for which they
are incurred.

3.10 Cash and cash equivalents

Cash comprises cash on hand and demand deposits with
banks. Cash equivalents are short-term balances (with an
original maturity of three months or less from the date
of acquisition), highly liquid investments that are readily
convertible into known amounts of cash and which are
subject to insignificant risk of changes in value.

3.11 Property, plant and equipment

Property, plant and equipment ("PPE") are carried at cost,
less accumulated depreciation and impairment losses, if
any. The cost of PPE comprises its purchase price net of any
trade discounts and rebates, any import duties and other
taxes (other than those subsequently recoverable from
the tax authorities), any directly attributable expenditure
on making the asset ready for its intended use and other
incidental expenses. Subsequent expenditure on PPE
after it purchase is capitalized only if it is probable that the
future economic benefits will flow to the enterprise and
the cost of the item can be measured reliably. Depreciation
is calculated using the straight line method to write down
the cost of property and equipment to their residual
values over their estimated useful lives which are in line

with as specified under schedule II of the Act. Land is not
depreciated. The estimated useful lives are, as follows:

i) Buildings - 60 years

ii) Vehicles - 8 years

iii) Office equipment - 5 years

iv) Furniture and fixtures - 10 years

Depreciation is provided on a pro-rata basis from the
date on which such asset is ready for its intended use. 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. PPE is derecognised on disposal or when
no future economic benefits are expected from its use.
Any gain or loss arising on derecognition of the asset
(calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is
recognised in other income / expense in the statement
of profit and loss in the year the asset is derecognised.
Change the useful life of Office Equipment to 5 years to
make it in line with Schedule II

3.12 Intangible assets

The Company's intangible assets include the value of
software. An intangible asset is recognised only when its
cost can be measured reliably and it is probable that the
expected future economic benefits that are attributable
to it will flow to the Company.

Intangible assets acquired separately are measured on
initial recognition at cost. Following initial recognition,
intangible assets are carried at cost less any accumulated
amortisation and any accumulated impairment losses.

Amortisation is calculated to write off the cost of intangible
assets less their estimated residual values over their
estimated useful lives (five years) using the straight-line
method, and is included in depreciation and amortisation
in the statement of profit and loss.

3.13 Impairment of non-financial assets - property, plant
and equipment and intangible assets

The carrying values of assets / cash generating units at
each balance sheet date are reviewed for impairment.
If any indication of impairment exists, the recoverable
amount of such assets is estimated and if the carrying
amount of these assets exceeds their recoverable amount,
impairment loss is recognised in the statement of profit
and loss as an expense, for such excess amount. The
recoverable amount is the greater of the net selling price
and value in use. Value in use is arrived at by discounting
the future cash flows to their present value based on an
appropriate discount factor. When there is indication

that an impairment loss recognised for an asset in
earlier accounting periods no longer exists or may have
decreased, such reversal of impairment loss is recognised
in the statement of profit and loss.

3.14 Corporate guarantees

Corporate guarantees are initially recognised in the
standalone financial statements (within "other non¬
financial liabilities") at fair value, being the notional
commission. Subsequently, the liability is measured at the
higher of the amount of loss allowance determined as per
impairment requirements of Ind AS 109 and the amount
recognised less cumulative amortisation.

Any increase in the liability relating to financial guarantees
is recorded in the statement of profit and loss. The notional
commission is recognised in the statement of profit and
loss under the head other income as Income on Financial
Guarantee given to banks on behalf of Subsidiary on a
straight line basis over the life of the guarantee.

3.15 Retirement and other employee benefits Defined
contribution plans

The Company's contribution to provident fund and
employee state insurance scheme are considered as
defined contribution plans and are charged as an expense
based on the amount of contribution required to be made
and when services are rendered by the employees.

Defined benefit plans

The Company pays gratuity to the employees whoever
has completed five years of service with the Company at
the time of resignation / retirement. The gratuity is paid
@15 days salary for every completed year of service as per
the Payment of Gratuity Act, 1972.

The gratuity liability amount is contributed by the
Company to the Life insurance Corporation of India who
administers the fund of the Company.

The liability in respect of gratuity and other post¬
employment benefits is calculated using the Projected Unit
Credit Method and spread over the period during which
the benefit is expected to be derived from employees'
services. As per Ind AS 19, the service cost and the net
interest cost are charged to the statement of profit and
loss. Remeasurement of the net defined benefit liability,
which comprise actuarial gains and losses, the return on
plan assets (excluding interest) and the effect of the asset
ceiling (if any, excluding interest), are recognised in OCI.

Short-term employee benefits

All employee benefits payable wholly within twelve
months of rendering the service are classified as short-

term employee benefits. Benefits such as salaries, wages
etc. and the expected cost of ex-gratia are recognised
in the period in which the employee renders the related
service. A liability is recognised for the amount expected
to be paid when there is a present legal or constructive
obligation to pay this amount as a result of past service
provided by the employee and the obligation can be
estimated reliably. The cost of short-term compensated
absences is accounted as under:

(a) in case of accumulated compensated absences, when
employees render the services that increase their
entitlement of future compensated absences; and

(b) in case of non-accumulating compensated absences,
when the absences occur.