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.
II
(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.
Treatment 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, 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 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 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 amortised cost using the
EIR [Refer note no. 2.1(i)]. Any gains or losses arising on de recognition of liabilities are recognized in
the Statement of Profit and Loss.
Derecognition
The Company derecognizes 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 recognized amounts with an intention to settle on
a net basis or to realize the assets and settle the liabilities simultaneously.
2.5 Investment in subsidiaries
Investment in subsidiaries is recognized 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 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.
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 recognized 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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