3 Summary of material accounting policies
This note provides details 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 Income
(i) Interest income
The Company recognises interest income using effective interest rate (EIR) method as per Ind AS 109
'Financial Instruments' on all financial assets subsequently measured under amortised cost or fair value
through other comprehensive income (FVOCI). The Company recognises interest income by applying
the EIR to the gross carrying amount of financial assets other than credit-impaired assets.
Interest on financial assets subsequently measured at fair value through profit or loss (FVTPL) is
presented under interest income on investment.
Interest rebate for the timely payment of interest by borrowers is recognised once the full interest
amount is received on time, adhering to the terms of the respective contract, and is netted against
the corresponding interest income.
(ii) Revenue from operations other than interest income
The Company recognises 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'.
(a) Fees and commission income
The Company recognises:
• Service and administration charges at point in time on completion of contracted service;
• Bounce charges at point in time on realisation, from customer at the time of default;
• Fees on value added services and products at point in time on delivery of services and
products to the customer;
• Distribution income at point in time on completion of distribution of third-party products and
services; and
• Income of loan foreclosure and prepayment at point in time when the event is concluded.
(b) Income on derecognised (assigned) loans
In direct assignment transactions, the Company recognises the excess interest spread (EIS)
as the difference between the interest on the assigned loan portfolio and the rate agreed with
the assignee. The Company records the discounted value of expected cash flow of the future
EIS, entered with the assignee, upfront in the Statement of Profit and Loss with a corresponding
receivable in Balance Sheet as 'Interest only strip receivable'. Any subsequent changes in the
fair value of future EIS are recognised in the period in which it occurs. The embedded interest
component in the future EIS is recognised as interest income in line with Ind AS 109 'Financial
instruments'.
(c) Other operating income
Other operating income is recognised on completion of service.
3.2 Expenditures
(i) Finance costs
Borrowing costs on financial liabilities are recognised using the EIR method as per Ind AS 109
'Financial Instruments'.
(ii) Fees and commission expense
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, guarantee fees under guarantee scheme and fees for management of portfolio etc., are
recognised in the Statement of Profit and Loss on an accrual basis.
(iii) Employee benefit expenses - Share based payments
The Company operates an equity settled share-based payment arrangement for its own employees
as well as employees of its subsidiaries. The Company determines the fair value of the employee
stock options on the grant date using the Black Scholes model. The cost of the share option is
accounted for on a straight line basis over the respective vesting periods of the grant. The cost
attributable to the services rendered by the employees of the Company is recognised as employee
benefits expenses in profit or loss.
(iv) Other expenses
Expenses are recognised on accrual basis inclusive of goods and services tax for which input credit is
not statutorily permitted.
3.3 Financial instruments
Recognition of Financial Instruments
All financial instruments are recognised on the date when the Company becomes party to the contractual
provisions of the financial instruments. For tradeable securities, the Company recognises the financial
instruments on settlement date.
(i) Financial assets
Initial measurement
All financial assets are recognised initially at fair value adjusted for transaction costs and income that
are directly attributable to the acquisition of the financial asset except for following:
• Investment in subsidiaries and associates which are recorded at cost as permissible under Ind AS
27 'Separate Financial Statements';
• Financial assets measured at FVTPL wherein transaction cost is charged to Statement of Profit
and Loss; and
• Trade receivables that do not contain a significant financing component (as defined in Ind AS 115)
which are recorded at transaction price.
Subsequent measurement
For subsequent measurement, financial assets are classified into four categories as per the
Company's Board approved policy:
(a) Debt instruments at amortised cost
(b) Debt instruments at FVOCI
(c) Equity/Debt instruments at FVTPL
(d) Equity instruments designated under FVOCI
The classification depends on the SPPI assessment based on contractual terms of the cash flows of
the financial assets, and the business model assessment for managing financial assets. In case of
equity instruments, it depends on the intention of the Company whether strategic or non-strategic.
The said classification methodology is detailed below-
Solely payment of principal and interest (SPPI) assessment
In making this assessment, the Company considers whether the contractual cash flows represents
sole payments of principal and interest. Principal for the purpose of this test refers to the fair value of
the financial asset at initial recognition and interest represents the time value of money at an agreed
contractual rate.
Business model assessment:
The Company has a Board approved policy for determination of the business model. The policy
consider whether the objective of the business model, at initial recognition, is to hold the financial
asset only to collect its contractual cash flows or, to also sell the financial asset. The Company
determines business model 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.
[a) Debt instruments at amortised cost
The Company measures its debt instruments at amortised 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 Solely
Payments of Principal and Interest (SPPI) on the principal amount outstanding.
The Company may enter into following transactions without affecting the business model of
the Company:
• Considering the economic viability of carrying the delinquent portfolios on the books of the
Company, it may enter into immaterial/infrequent transactions to sell these portfolios to
third parties.
• Assignment of non credit impaired assets and sale of credit impaired asssets which are
infrequent and insignificant and below the threshold provided by the Management.
(b) Debt instruments at FVOCI
The Company subsequently measures its debt instruments 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.
The Company measures debt instruments included within the FVOCI category at each reporting
date at fair value with such changes being recognised in Other Comprehensive Income (OCI).
The Company recognises interest income on these assets in Statement of Profit and Loss. The
ECL calculation for debt instruments at FVOCI is explained in subsequent notes in this section.
On derecognition of the asset, the Company reclassifies cumulative gain or loss previously
recognised in OCI to profit or loss.
[c) Equity/Debt instruments at FVTPL
The Company operates a trading portfolio as a part of its treasury strategy and classifies its
equity and debt instruments which are held for trading under FVTPL category. As a part of its
hedging strategy, the Company enters into derivative contracts and classifies such contracts
under FVTPL.
Gains and losses on changes in fair value of equity and debt instruments are recognised on net
basis through profit or loss.
(d) Equity instruments designated under FVOCI
Investments in equity instruments other than in subsidiaries and associates are measured at
fair value.
The Company has strategic investments in equity for which it has elected to present
subsequent changes in fair value in other comprehensive income. The classification is made on
initial recognition and is irrevocable.
All fair value changes of the aforesaid equity instruments are recognised in OCI. On sale of these
investments, the Company transfers the realised gains/losses from OCI to retained earnings.
Derecognition of financial assets
The Company derecognises a financial asset (or, where applicable, a part of a financial asset) when:
• The right to receive cash flows from the asset has expired; or
• The financial assets are written-off; 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 derecognised, the Company does not have any continuing involvement in
the same.
The financial assets transferred through the assignment route are derecognised to the extent of
transferred portion as the Company neither has any continuing involvement in the same nor does it retain
any control. On derecognition of a financial asset, 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 profit or loss.
The Company, based on economic viability of certain portfolios measured at amortised cost, may enter
into infrequent and insignificant transactions of assignment and sale of non NPA portfolios within the
threshold defined in business model policy which doesn't affect the business model of the Company.
In case of securitisation transactions by way of pass through certificate (PTC), the Company continues
to retain the financial assets on the Balance sheet and recognises a collateralised borrowing for the
proceeds received.
Write-off
Financial assets are written off when the Company has no reasonable expectation of recovery or expected
recovery is not significant basis experience. Where the amount to be written off is greater than the
accumulated loss allowance, the difference is recorded as an expense in the period of write off. However,
financial assets that are written off could still be subject to enforcement activities under the Company's
recovery procedures. Any recoveries made from written off assets are netted off from impairment on
financial instrument in Statement of Profit and Loss account.
Impairment of financial assets - General approach
Expected credit losses ('ECL') are recognised for all financial assets except those classified as FVTPL and
equity instruments as per the Board approved policy.
The Company follows a staging methodology for ECL computation. Financial assets where no significant
increase in credit risk has been observed since inception are classified in 'stage 1' for which a 12 month ECL
is recognised. Financial assets which have significant increase in credit risk since inception 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'. Life time ECL is recognised for stage 2 and stage 3 financial assets.
Stage 1 (12-month ECL) is provided basis the default events that are likely to occur in the next 12 months
from the reporting date. Stage 2 and stage 3 (lifetime ECL) is provided for basis all possible default events
likely to occur during the life of the financial instrument.
Financial assets are written off in full, when there is no realistic prospect of recovery. The Company may
apply enforcement activities to certain qualifying financial assets written off.
Treatment of the different stages of financial assets and the methodology of determination of ECL
[a) Credit impaired (stage 3)
The Company classifies a financial asset as credit impaired (stage 3) when one or more events
indicate impairment in the recoverability of future cash flows. The assessment is based on relevant
objective evidence, including the following:
• Contractual payments of principal and/or interest are overdue for more than 90 days.
• Where any loan account of a customer is stage 3, all other loan accounts of the same customer are
classified as Stage 3 and remain so until overdues across all accounts are fully cleared.
• Where any loan account of a customer has been written off or settled under a one time
compromise settlement, all other active loan accounts of such customer are classified as Stage
3 for 12 months from the date of such event. Thereafter, such accounts are upgraded to stage 1
only upon clearance of all arrears of principal and interest.
• Restructured loans, involving modification of contractual terms due to financial distress of the
borrower, are classified as Stage 3. Restructuring does not result in derecognition of the financial
asset. Such loans are upgraded to Stage 1 only if:
- The restructured loan is not in default until repayment of at least 10% of the principal outstanding or
completion of 12 months, whichever is later; and
- No other loan account of the same customer is in default during this period.
• Loan accounts where a one time compromise settlement is offered or where recovery is pursued
through repossession of security involving waiver of interest and/or principal are classified as
Stage 3.
• Loan is otherwise considered to be in default based on the Company's internal credit risk
assessment or other objective evidence indicating unlikelihood of timely repayment.
(b) Significant increase in credit risk [stage 2)
The Company considers loan accounts which are overdue for more than 1 day but up to 90 days as
on the reporting date as an indication of significant increase in credit risk. Additionally, for mortgage
loans, the Company recognises stage 2 based on other indicators such as frequent delays in
payments beyond due dates.
The measurement of risk of defaults under stage 2 is computed on homogenous portfolios, generally by
nature of loans, tenors, location (urban/rural) and borrower profiles. The default risk is assessed using PD
(probability of default) derived from past behavioural trends of default across the identified homogenous
portfolios. These past trends factor in the customer behavioural trends. 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 recognised for
financial assets in stage 1. The Company has ascertained default possibilities on past behavioural
trends witnessed for each homogenous portfolio using behavioural analysis and other performance
indicators, determined statistically.
(d) Measurement of ECL
The Company calculates ECL based on discounted present value of probability weighted scenarios to
measure the expected cash shortfall. Cash shortfall is the difference between the cash flows that are
due to the Company in accordance with the contract and the cash flows that the Company expects
to receive.
It incorporates all information that is relevant including past events, current conditions and current
profile of customers. Additionally, forecasts of future macro situations and economic conditions are
considered as part of forward economic guidance (FEG) model. Forward looking economic scenarios
determined with reference to external forecasts of economic parameters that have demonstrated
a high correlation to the performance of our portfolios over a period of time have been applied to
determine impact of macro-economic factors. In addition, the estimation of ECL takes into account
the time value of money.
The Company has calculated ECL using three main components: a probability of default (PD), a loss
given default (LGD) and the exposure at default (EAD). ECL is calculated by multiplying the PD, LGD
and EAD and adjusted for time value of money using a rate which is a reasonable approximation
of EIR.
• Determination of PD is covered above for each stages of ECL.
• EAD represents the expected balance at default, taking into account the repayment of principal
and interest from the Balance Sheet date to the date of default together with any expected
drawdowns of committed facilities.
• LGD represents expected losses on the EAD in the event of default, taking into account, among
other attributes, the mitigating effect of collateral value at the time it is expected to be realised and
the time value of money.
The Company recalibrates above components of its ECL model on a annual basis by using the
available incremental and recent information, except where this information does not represent the
future outcome. Further, the Company assesses changes to its statistical techniques for a granular
estimation of ECL.
A more detailed description of the methodology used for ECL is covered in the 'credit risk' section of
note no. 49.
(ii) Financial liabilities
Initial measurement
The Company recognises all financial liabilities initially at fair value adjusted for transaction costs
that are directly attributable to the issue of financial liabilities except in the case of financial
liabilities recorded at FVTPL where the transaction costs are charged to profit or loss. Generally, the
transaction price is treated as fair value unless there are circumstances which prove to the contrary
in which case, the difference, if material, is charged to profit or loss.
Subsequent measurement
The Company subsequently measures all financial liabilities at amortised cost using the EIR method,
except for derivative contracts which are measured at FVTPL and accounted for by applying the
hedge accounting requirements under Ind AS 109.
Derecognition
The Company derecognises a financial liability when the obligation under the liability is discharged,
cancelled or expired through repayments or waivers.
3.4 Investment in subsidiaries and associates
The Company recognises investments in subsidiaries and associates at cost and are not adjusted to fair
value at the end of each reporting period as allowed by Ind AS 27 'Separate financial statements'.
3.5 Taxes
Income tax comprises current tax and deferred tax. It is recognised in the Statement of Profit and Loss
except to the extent that it relates to items recognised in other comprehensive income or directly in equity,
in which case the tax is recognised in the same statement as the related item appears.
Current tax is recognised based on tax rates and tax laws enacted, or substantively enacted, at the
reporting date and on any adjustment to tax payable in respect of previous years.
Deferred tax is recognised for temporary differences between the accounting base of assets and liabilities
in the Balance sheet, and their tax bases. Deferred tax is calculated using the tax rates expected to apply
in the periods in which the assets will be realised or the liabilities settled.
The carrying amount of deferred tax assets is reviewed at each reporting date by the Company 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 utilised.
Deferred tax assets and deferred tax liabilities are offset basis the criteria given under Ind AS 12
Income Taxes.
3.6 Property, plant and equipment and depreciation thereof
The Company measures property, plant and equipment initially at cost and subsequently at cost less
accumulated depreciation and impairment losses, if any.
The Company provides for depreciation on a pro-rata basis, with reference to the month in which such
asset is added or sold, for all tangible assets on straight line method over the useful life of assets assuming
no residual value at the end of useful life of the asset. Details of useful life is given in note no.13.
An item of property, plant and equipment and any significant part initially recognised is derecognised
upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or
loss arising on derecognition of an item of PPE is determined as the difference between the net disposal
proceeds and the carrying amount of the asset and is recognised in the Statement of Profit and Loss.
3.7 Intangible assets and amortisation thereof
The Company measures Intangible assets, representing softwares, licenses etc. initially at cost and
subsequently at cost less accumulated amortisation and accumulated impairment, if any.
The Company recognises internally generated intangible assets when the Company is certain that
intangible asset would support/result in furtherance of Company's existing and/or new business and cost
of such intangible asset identifiable and reliably measurable. The cost of an internally generated intangible
asset comprises of all directly attributable costs necessary to create, produce, and prepare the asset to be
capable of operating in the manner intended by the Company.
All the intangible assets including those internally generated are amortised using the straight line method
over a period of five years, which is the Management's estimate of its useful life.
An intangible asset is derecognised on disposal, or when no future economic benefits are expected
from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the
difference between the net disposal proceeds and the carrying amount of the asset are recognised in the
Statement of Profit and Loss when the asset is derecognised.
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