2. Summary of significant accounting policies
This note provides a list of the significant accounting policies adopted in the preparation of these financial statements.
These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Income
(i) Interest income
The Company recognises interest income using Effective Interest Rate (EIR) on all financial assets subsequently
measured at amortised cost or fair value through other comprehensive income (FVOCI). 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 amortised cost of a
financial liability.
The Company recognises 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 [as set out in note no. 2.4(i)] regarded as
'stage 3', the Company recognises interest income on the amortised cost net of impairment loss of the financial asset
at EIR. If the financial asset is no longer credit-impaired [as outlined in note no. 2.4(i)], the Company reverts to
calculating interest income on a gross basis.
Delayed payment interest (penal interest) levied on customers for delay in repayments/ non-payment of contractual
cashflows is recognised on realisation.
Interest on financial assets subsequently measured at fair value through profit or loss (FVTPL) is recognised at the
contractual rate of interest.
(ii) Dividend income
Dividend income on equity shares is recognised when the Company's right to receive the payment is established,
which is generally when shareholders approve the dividend.
(iii) Other revenue from operations
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'. 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 recognises 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 recognises 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 recognised 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 recognised 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 recognised on realisation.
(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 recognises gains/losses on fair value change of
financial assets measured as FVTPL and realised gains/losses on derecognition 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 derecognised financial assets for a
fee is retained, recognises 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 recognised as service income and in the service asset
is recognised as interest income in line with Ind AS 109 'Financial Instruments'.
Other revenues on sale of services are recognised 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 recognises income on recoveries of financial assets written off on realisation or when the right to
receive the same without any uncertainties of recovery is established.
(iv) Taxes
Incomes are recognised net of the Goods and Services Tax, wherever applicable
2.2 Expenditures
(i) Finance costs
Borrowing costs on financial liabilities are recognised using the EIR [refer note no. 2.1(i)].
(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 recognised in the Statement of Profit and Loss on an accrual basis.
(iii) Taxes
Expenses are recognised net of the Goods and Services Tax/Service Tax, except where credit for the input tax is not
statutorily permitted.
2.3 Cash and cash equivalents
Cash and cash equivalents include cash on hand, other short term, highly liquid investments with original maturities
of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.
2.4 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 recognised on the date when the Company becomes party to the contractual
provisions of the financial instruments. For tradable securities, the Company recognises the financial instruments on
settlement 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 measurement
All financial assets are recognised 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 amortised cost
(b) Debt instruments at FVOCI
(c) Debt instruments at FVTPL
(d) Equity instruments designated at FVOCI
(a) Debt instruments at amortised cost
The Company measures its financial assets 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 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 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
financial assets going forward.
The business model of the Company for assets subsequently measured at amortised 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 amortised cost on effective interest
rate (EIR). For further details, refer note no. 2.1(i). The expected credit loss (ECL) calculation for debt instruments at
amortised 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 recognised in other comprehensive income (OCI). The interest income on these assets is recognised
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 derecognition of the asset, cumulative gain or loss previously recognised 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 recognised 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 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 recognised 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.
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 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 derecognised, the
Company does not have any continuing involvement in the same.
The Company transfers its financial assets through the partial assignment route and accordingly derecognises the
transferred portion as it neither has any continuing involvement in the same nor does it retain any control. If the
Company retains the right to service the financial asset for a fee, it recognises either a servicing asset or a servicing
liability for that servicing contract. A service liability in respect of a service is recognised at fair value if the fee to be
received is not expected to compensate the Company adequately for performing the service. If the fees to be received
is expected to be more than adequate compensation for the servicing, a service asset is recognised for the servicing
right at an amount determined on the basis of an allocation of the carrying amount of the larger 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 profit or loss.
Impairment of financial assets
ECL are recognised for financial assets held under amortised cost, debt instruments measured at FVOCI, and certain
loan commitments.
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 recognised. 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 recognised 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 recognises 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 be done for such loans.
Interest income is recognised by applying the EIR to the net amortised 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, 3o 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 behavioural trends of default across the identified homogenous portfolios.
These past trends factor in the past customer behavioural 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 recognised for financial instruments in
stage 1. The Company has ascertained default possibilities on past behavioural trends witnessed for each
homogenous portfolio using application/behavioural 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.
Company has incurred any loss of assets or Interest Income thereon in last 3 Financial years, therefore expected
credit loss is assumed as per RBI Prudential Norms on Prudent Basis.
"Provisions involving substantial degree of estimation in measurement are recognized when there is a
present obligation as a result of past events and it is probable that there will be an outflow of resources. Contingent
liabilities are not recognized but are disclosed in the notes. Contingent assets are neither recognized nor disclosed
in the financial statements.
Provision for non-performing assets is recorded at rates which are equal to or higher than the rates specified by
Reserve Bank of India in their guidelines on prudential norms. The rates used by the Company are as follows:"
• Provision for Non-Performing Assets
• Provision for standard and non-performing assets
• In accordance with Prudential Norms, contingent provision at 0.25% has been created on
outstanding standard assets.
(ii) Financial liabilities
Financial liabilities include liabilities that represent a contractual obligation to deliver cash or another financial assets
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 recognised 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 amortised cost using the EIR [Refer note
no. 2.1(i)]. Any gains or losses arising on derecognition of liabilities are recognised in the Statement of Profit and
Loss.
Derecognition
The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or
expired.
(iii) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the Balance Sheet only if there
is an enforceable legal right to offset the recognised amounts with an intention to settle on a net basis or to realise
the assets and settle the liabilities simultaneously.
2.5 Investment in subsidiaries
Investment in subsidiaries is recognised at cost and are not adjusted to fair value at the end of each reporting period.
Cost of investment represents amount paid for acquisition of the said investment.
The Company assesses at the end of each reporting period, if there are any indications that the said investment may
be impaired. If so, the Company estimates the recoverable value/amount of the investment and provides for
impairment, if any i.e. the deficit in the recoverable value over cost.
2.6 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 recognised outside profit or loss is recognised 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.
2.7 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'.
(a) Depreciation is provided on a pro-rata basis for all tangible assets on straight line method over the useful life
of assets, except buildings which is determined on written down value method.
(b) 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.
(c) 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.
(d) 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.
2.8 Intangible assets and amortisation thereof
Intangible assets, representing softwares are initially recognised at cost and subsequently carried at cost less
accumulated amortisation and accumulated impairment. The intangible assets are amortised using the straight line
method over a period of five years, which is the Management's estimate of its useful life. The useful lives of intangible
assets are reviewed at each financial year end and adjusted prospectively, if appropriate.
2.9 Impairment of non-financial assets
An assessment is done at each Balance Sheet date to ascertain whether there is any indication that an asset may
be impaired. If any such indication exists, an estimate of the recoverable amount of asset is determined. If the carrying
value of relevant asset is higher than the recoverable amount, the carrying value is written down accordingly.
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