D. Significant accounting policies:
1. Cash and Cash equivalents:
Cash and cash equivalents include cash in hand and ATMs, balances with the Reserve Bank of India, balances with other banks and money at call and short notice.
2. Revenue recognition:
2.1 General
I ncome/ expenditure is generally accounted for on accrual basis except for income accounted on cash basis as per regulatory provisions.
2.2 Income from investments
a) The Profit or loss on sale of investments is recognised in the Profit and Loss Account. In accordance with the guidelines issued by the Reserve Bank of India, profit on sale of investments in the Held to Maturity (HTM) category is appropriated (Net of applicable taxes and amount required to be transferred to “Statutory Reserve Account”) to the “Capital Reserve Account”.
b) Dividend income is recognized when right to receive the dividend is established.
c) Upside on security receipts is recognised on realisation as ‘Other income'.
2.3. Sale of financial assets
Financial Assets sold are recognized as under:
a) The sale of NPA is accounted as per guidelines prescribed by RBI. When the Bank sells its financial assets to Securitisation Company (SC)/ Reconstruction Company (RC), the same is removed from the books.
b) In case the sale to SC/ARC is at a price lower than the Net Book Value (NBV) the shortfall is charged to the Profit and Loss Account in the year of sale.
c) I n case the sale is at a price higher than the NBV on cash basis, the surplus is taken to the credit of Profit and Loss Account.
2.4. Fee based income
Commission on letters of credit, bank guarantee and deferred payment guarantee are recognised on accrual basis proportionately over the period. All other commission and fee income are recognised on their realisation.
2.5 Others
a) Interest on income tax refund is accounted on receipt of refund order(s)/ intimation from Income Tax Department and acceptance by the Bank.
b) Provision for interest payable on overdue deposits is made as per Reserve Bank of India guidelines.
3. Advances:
3.1 Based on the guidelines/ directives issued by the RBI, loans and advances are classified as performing and non-performing, as follows:
a) The term loan is classified as a non-performing asset, if interest and/ or instalment of principal remains overdue for a period of more than 90 days.
b) An overdraft or cash credit is classified as a non-performing asset, if, the account remains “out of order”, i.e. if the outstanding balance exceeds the sanctioned limit/ drawing power continuously for a period of 90 days, or if there are no credits continuously for 90 days, or if the credits are not adequate to cover the interest debited during the previous 90 days period.
c) The bills purchased/ discounted are classified as non-performing asset if the bill remains overdue for a period of more than 90 days.
d) The agricultural advances are classified as a non-performing if, (i) for short duration crops, where the instalment of principal or interest remains overdue for two crop seasons; and (ii) for long duration crops, where the principal or interest remains overdue for one crop season.
3.2 Non-performing assets are classified into sub¬ standard, doubtful and loss Assets, based on the following criteria stipulated by RBI:
a) Sub-standard: A loan asset that has remained non-performing for a period less than or equal to 12 months.
b) Doubtful: A loan asset that has remained in the sub-standard category for a period of 12 months.
c) Loss: A loan asset where loss has been identified but the amount has not been fully written off.
3.3 Provisions are made for NPAs as per the extant guidelines prescribed by the regulatory authorities, subject to minimum provisions as prescribed below:
Sub-standard assets:
i. A general provision of 15% on the total outstanding.
ii. Additional provision of 10% for exposures which are unsecured ab-initio (i.e. where realisable value of security is not more than 10 percent ab-initio).
iii. Unsecured Exposure in respect of infrastructure advances where certain safeguards such as escrow accounts are available - 20%.
Advance covered by guarantees under any existing or future schemes launched by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and National Credit Guarantee Trustee Company Ltd (NCGTC).
In case the advance covered by any existing or future schemes/guarantees launched by CGTMSE, CRGFTLIH and NCGTC becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding, in excess of the guaranteed portion, should be provided for as per the extant guidelines on provisioning for non¬ performing assets.
3.4 Advances are shown net of provisions (in case of NPA), Unrealised Interest, amount recovered from borrowers held in Sundries and claims received from CGTSI/ ECGC, etc.
3.5 For restructured/ rescheduled assets, provisions are made in accordance with the guidelines issued by the RBI, which inter alia require that the difference between the fair value of the loans/ advances before and after restructuring is provided for, in addition to provision for the respective loans/ advances. The provision for diminution in fair value and interest sacrifice, if any, arising out of the above, is reduced from advances.
3.6 In addition to the specific provision on NPAs, general provisions are also made for standard assets as per extant RBI guidelines. These provisions are reflected in Schedule 5 of the Balance Sheet under the head “Other Liabilities & Provisions - Others” and are not considered for arriving at the Net NPAs.
3.7 In the case of loan accounts classified as NPAs, an account may be reclassified as a performing asset if it conforms to the guidelines prescribed by the regulators.
3.8 Amounts recovered against debts written off in earlier years are recognised as revenue in the year of recovery.
3.9 Additional provisions higher than regulatory norms are made in specific assets in view of the identified weakness and/ or prevailing economic situation.
3.10Partial recoveries in non-performing account (including partially written off accounts) are appropriated in the following order:
i. Principal Overdue / Irregularities
ii. Unrealised interest
iii. Partial Written Off principal
iv. Uncharged Interest
v. Unrealised charges
In case of suit filed/SARFAESI/ recalled accounts, recovery is appropriated in the following order:
i. Ledger outstanding balance
ii. Unrealised interest
iii. Partial Written Off principal
iv. Uncharged Interest
v. Unrealised charges
However, where any borrower account is required to be classified as non-performing from an earlier date, any recovery till the account was classified as Standard is first credited to Interest on Loans and Advances
4. Provision for country exposure:
In addition to the specific provisions held according to the asset classification status, provisions are also made for individual country exposures (other than the home country). Countries are categorised into seven risk categories, namely, insignificant, low, moderate, high, very high, restricted and off-credit and provisioning made as per extant RBI guidelines. If the country exposure (net) of the Bank in respect of each country does not exceed 1% of the total funded assets, no provision is maintained on such country exposures.
5. Investments:
Investments are accounted for in accordance with the extant guidelines Reserve Bank of India Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 vide RBI RBI/DOR/2023-24/104 DOR. MRG.36/21.04.141/2023-24 dated 12.09.2023
5.1 Classification:
In accordance with the guidelines issued by the Reserve Bank of India, Investment portfolio is
to be classified (except investments in their own subsidiaries, joint ventures and associates) under three categories, viz., Held to Maturity (HTM), Available for Sale (AFS) and Fair Value through Profit and Loss (FVTPL). Held for Trading (HFT) shall be a separate investment sub- category within FVTPL. Investments in subsidiaries, associates and joint ventures shall be held in a distinct category i.e.. SAJV separate from the other investment categories.
For disclosure in the Balance Sheet in Schedule 8, investments are classified as Investments in India and outside India.
Under each category, the investments in India are further classified as
a) Government Securities
b) Other Approved Securities
c) Shares
d) Debentures and Bonds
e) Subsidiaries, joint ventures/associates and sponsored institutions; and
f) Others (Commercial Papers and units of Mutual Funds etc.)
The investments outside India are further classified under 3 categories
a) Government Securities
b) Subsidiaries and Joint Ventures/Associates
c) Other Investments
5.2 Basis of Classification:
Classification of an investment is done at the time of purchase into the following categories:
a) Held to Maturity: Investments that the Bank intends to hold till maturity are classified as “Held to Maturity (HTM)” which meets Solely Payment of Principal and Interest (SPPI) criteria.
b) Available for Sale: Investments that the Bank intends to hold till maturity & sale which meets SPPI Criteria.
c) FVTPL: Securities that do not qualify for inclusion in HTM or AFS shall be classified under FVTPL. HFT shall be separate sub¬ category within FVTPL.
d) Investments in subsidiaries, associates and joint ventures shall be held sui generis i.e., in a distinct category for such investments
(viz. HTM, AFS and FVTPL).
e) Only those financial instruments are included in HFT where there is no legal impediment against selling or fully hedging it.
5.3 Valuation:
The transactions in all securities are recorded on
a Settlement Date and cost is determined on the
weighted average cost method.
A. Incentive, front-end fees etc., received on purchase of securities are reduced from the cost of investments.
B. Expenses such as brokerage, fees, commission or taxes incurred at the time of acquisition of securities are charged to the Profit and Loss Account as revenue expenses.
C. Broken Period interest paid/ received on debt instruments is treated as interest expense/ income and is excluded from cost/ sale consideration.
All the securities have been valued as per extant RBI guidelines and also as per the prices / quotes declared by FIMMDA / FIBIL and stock exchanges.
a) Valuation of investments classified as Held to Maturity:
The investments classified under this category are carried at acquisition cost. The difference of acquisition cost / book value over the face value is amortised over the remaining period of maturity. Such amortisation of premium/discount is accounted as expense/ income. However, they shall be subject to income recognition, asset classification and provisioning norms.
b) Investments in Subsidiaries, Joint ventures and Associates (SAJV)
All investments (i.e., including debt and equity) in subsidiaries, associates and joint ventures shall be held at acquisition cost. A provision is made for diminution, other than temporary in nature, for each investment individually.
c) Valuation of investments classified as Available for sale:
Investments classified as Available for Sale are individually revalued at market price or
fair value determined as per the regulatory guidelines. The difference of acquisition cost / book value over the face value is amortised over the remaining period of maturity. Such amortisation of premium/discount is accounted as expense/income. The valuation gains and losses across all performing investments, irrespective of classification (i.e., Government securities, Other approved securities, Bonds and Debentures, etc.), held under AFS is aggregated. The net appreciation or depreciation is credited or debited to AFS- Reserve without routing through the Profit & Loss Account. However, they shall be subject to income recognition, asset classification and provisioning norms.
d) Valuation of investments classified as FVTPL (HFT & NON HFT):
Investments classified as FVTPL (HFT & NON HFT) are individually revalued at market price or fair value determined as per the regulatory guidelines. The net Gain or loss arising on valuation is directly credited/debited to the Profit and Loss Account. For securities which meet SPPI criterion, the difference of acquisition cost / book value over the face value is amortised over the remaining period of maturity. Such amortisation of premium/discount is accounted as expense/income. However, they shall be subject to income recognition, asset classification and provisioning norms. Fair Valuation of all HFT instruments is done on daily basis any valuation change is recognised in profit and loss account.
e) Valuation in case of sale of NPA (financial asset) to Asset Reconstruction Company (ARC) against issue of Govt Guaranteed Security Receipts (SRs):
i) If a loan is transferred to an ARC for a value higher than the book value (NBV), the excess provision can be reversed to the Profit and Loss Account in the year of transfer if the sale consideration comprises only of cash and SRs guaranteed by Govt of India.
ii) SRs shall be valued periodically by reckoning the Net Asset value (NAV) declared by the ARC based on the recovery
ratings received. SRs Outstanding after the final settlement of the government guarantee or the expiry of the guarantee period whichever is earlier, shall be valued at one Rupee ('1).
f) Valuation in case of sale of NPA (financial
asset) to Asset Reconstruction Company
(ARC) against issue of Non Govt
Guaranteed Security Receipts (SR):
i) When the stressed loan is transferred to ARC at a price below the NBV at the time of transfer, lenders shall debit the shortfall to the profit and loss account for the year in which the transfer has taken place. Banks are permitted to use countercyclical or floating provisions for meeting any shortfall on transfer of stressed loan when the transfer is at a price below the NBV.
ii) On the other hand, when the stressed loan is transferred to an ARC for a value higher than the NBV at the time of transfer, lenders shall reverse the excess provision on transfer to the profit and loss account in the year the amounts are received and only when the sum of cash received by way of initial consideration and / or redemption or transfer of Security Receipts (SR) / Pass Through Certificates (PTCs)/ other securities issued by ARCs is higher than the NBV of the loan at the time of transfer. Further, such reversal shall be limited to the extent to which cash received exceeds the NBV of the loan at the time of transfer.
iii) Investments by lenders in SRs / PTCs / other securities issued by ARCs shall be valued periodically by reckoning the Net Asset Value (NAV) declared by the ARC based on the recovery ratings received for such instruments. Provided that when transferors invest in the SRs/PTCs issued by ARCs in respect of the stressed loans transferred by them to the ARC, the transferors shall carry the investment in their books on an ongoing basis, until its transfer or realization, at lower of the redemption value of SRs arrived based on the NAV as above, and the NBV of the transferred stressed loan at the time of transfer.
iv) If the investment by the transferor in SRs issued against loans transferred by it is more than 10 percent of all SRs issued against the transferred asset, then the valuation of the SRs on the books of the transferor shall be the lower of the following: i) value arrived as mentioned above ii) face value of the SRs reduced by the notional provisioning rate applicable if the loans had continued on the books of the transferor.
g) Treasury Bills and Commercial Papers are valued at carrying cost.
5.4 Investments (NPI):
Investments are classified as performing and non¬ performing, based on “Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023” dated 12.09.2023 and “Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances”, as under:
a) I n respect of debt instruments such as bonds or debentures, Interest/ instalment (including maturity proceeds) is due and remains unpaid for more than 90 days. The same is applied to preference shares where the fixed dividend is not paid.
b) In the case of equity shares, in the event the investment in shares of any company is valued at '1 per company on account of non¬ availability of the latest balance sheet, those equity shares would be reckoned as NPI.
c) The Bank also classifies an investment as a non-performing investment, in case any credit facility availed by the same borrower/ entity has been classified as a non-performing asset and vice versa.
d) The investments in debentures/ bonds, which are deemed to be advance, are also subjected to NPI norms as applicable to investments.
e) Once an investment is classified as NPI it is segregated from rest of the portfolio and not considered for netting valuation gains and losses.
5.5 Accounting for Repo/ Reverse Repo transactions
The Bank enters into repurchase and reverse repurchase transactions with RBI under Liquidity Adjustment Facility (LAF) and also with market
participants. Repurchase transaction represents borrowing by selling the securities with an agreement to repurchase the securities. Reverse repurchase transactions on the other hand represent lending funds by purchasing the securities.
a) The securities sold and purchased under Repo/ Reverse Repo (other than LAF) are accounted as overnight Tri-party Repo (TREPS) dealing and settlement.
b) However, securities are transferred as in the case of normal outright sale/ purchase transactions and such movement of securities is reflected using the Repo/ Reverse Repo Accounts and contra entries.
c) The above entries are reversed on the date of maturity. Balance in Repo Account is classified under Schedule 4 (Borrowings) and balance in Reverse Repo Account is classified under Schedule 7 (Balance with Banks and Money at call & short notice).
d) Interest expended/ earned on Securities purchased/ sold under LAF with RBI is accounted for as expenditure/ revenue.
6. Derivatives:
The Bank enters into derivative contracts, such as interest rate swaps, currency swaps and cross currency swaps in order to hedge on balance sheet/ off-balance sheet assets and liabilities or for trading purposes.
6.1 Derivatives used for hedging are accounted as under:
a) In cases where the underlying assets/ liabilities are marked to market, resultant gain/loss is recognised in the Profit and Loss Account.
b) Derivative contracts classified as hedge are recorded on accrual basis. Hedge contracts are not marked to market unless the underlying assets/ liabilities are also marked to market.
c) Gain or losses on the termination of Swaps are recognised over the shorter of the remaining contractual life of the swaps or the remaining life of the assets/ liabilities.
6.2 Derivatives used for trading are accounted as under:
a) Currency futures and interest rate futures are marked to market on daily basis as per exchange guidelines of MCX-SX, NSE and BSE.
b) Mark to market profit or loss is accounted by credit/ debit to the margin account on daily basis and the same is accounted in the Bank's profit and loss account on final settlement.
c) Trading swaps are marked to market at frequent intervals. Any mark to market losses are booked and gains, if any, are ignored on net basis.
d) Gains or losses on termination of swaps are recorded immediately as income/ expense under the above head.
7. Transactions involving foreign exchange:
7.1 Foreign currency transactions are recorded on initial recognition in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency.
7.2 Foreign currency monetary items are reported using the Foreign Exchange Dealers Association of India (“FEDAI”) closing (spot/ forward) rates and the resultant profit or loss is recognised in the Profit and Loss Account.
Foreign currency non-monetary items, which are carried at historical cost, are reported using the exchange rate on the date of the transaction.
Contingent liabilities denominated in foreign currency are reported using the FEDAI closing spot rates.
7.3 Outstanding foreign exchange spot and forward contracts are revalued at the exchange rates notified by FEDAI for specified maturities, and the resulting Profit or Loss is recognised in the Profit and Loss Account. Foreign exchange forward contracts which are not intended for trading and are outstanding at the balance sheet date, are valued at the closing spot rate.
7.4 Exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded are recognised as income or as expense in the period in which they arise.
7.5 Gains/ Losses on account of changes in exchange rates of open position in currency futures trades are settled with the exchange clearing house on daily basis and such gains/losses are recognised in the profit and loss account.
7.6 Accounting procedure in respect to the Forex Derivatives of the bank adheres to the RBI Master
Direction No. RBI/DOR/2023-24/104 DOR. MRG.36/21.04.141/2023-24 dated September 12, 2023 and provisions of ICAI guidelines on accounting for Derivatives contract (revised 2021).
8 Investment Fluctuation Reserve:
Investment Fluctuation Reserve is maintained on continuing basis i.e. at least two percent of the AFS and FVTPL (including HFT) portfolio.
9. Fixed assets and depreciation:
9.1 Fixed Assets are carried at cost less accumulated depreciation/ amortisation.
Cost includes cost of purchase and all expenditure such as site preparation, installation costs, taxes and professional fees incurred on the asset before it is put to use.
9.2 Subsequent expenditure(s) incurred on the assets put to use are capitalised only when it increases the future benefits from such assets or their functioning capability.
9.3 Fixed Assets are depreciated under ‘Written Down Value Method' at the following rates (other than computers which are depreciated on Straight Line Method):
a) Premises at varying rates based on estimated life
b) Furniture, Lifts, Safe Vaults 10%
c) Vehicles, Plant & Machinery 20%
d) Air conditioners, Coolers, Typewriters etc. 15%.
e) Computers including Systems Software 33.33%
(Application Software is charged to the Revenue during the year of acquisition.)
9.4 Land acquired on lease for over 99 years is treated as freehold land and those for 99 years or less is treated as leasehold land. Cost of leasehold land is amortized over the period of lease.
9.5 In case of assets, which have been revalued, the depreciation/ amortization is provided on the revalued amount and is charged to the Profit and Loss Account. Amount of incremental depreciation/ amortization attributable to the revalued amount is transferred from ‘Revaluation Reserve' and credited to ‘Revenue and Other Reserves'.
9.6 Depreciation on additions to assets, made upto 30th September is provided for the full year and on additions made thereafter, is provided for the half year.
No depreciation is provided on assets sold before 30th September and depreciation is provided for the half year on assets sold after 30th September.
9.7 The Bank considers only immovable assets for revaluation. Properties acquired during the last three years are not revalued. Valuation of the revalued assets is done every three years thereafter.
9.8 The revalued asset is depreciated over the balance useful life of the asset as assessed at the time of revaluation.
10 Leases:
Leases where risks and rewards of ownership are retained by lessor are classified as Operating Lease as per AS-19 (Leases). Lease payments on such lease are recognised in Profit and Loss account on a straight-line basis over the lease term in accordance with AS 19.
11 Impairment of Assets:
Fixed Assets are reviewed for impairment whenever events or changes in circumstances warrant that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net discounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognised is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
12. Employee Benefits:
12.1Employee benefits are accrued in the year in which services are rendered by the employees.
12.2 Short Term Employee Benefits:
The undiscounted amounts of short-term employee benefits, which are expected to be paid in exchange for the services rendered by employees, are recognised during the period when the employee renders the service.
12.3 Defined benefit plans:
The Bank operates Gratuity and Pension schemes which are defined benefit plans.
a) The Bank provides for gratuity to all eligible employees. The benefit is in the form of lump sum payments to vested employees on retirement, or on death while in employment,
or on termination of employment, for an amount equivalent to 15 days basic salary payable for each completed year of service, subject to the cap prescribed by the Statutory Authorities. Vesting occurs upon completion of five years of service. The Bank makes periodic contributions to a fund administered by Trustees based on an independent external actuarial valuation.
b) The Bank provides for pension to all eligible employees. The benefit is in the form of monthly payments as per rules to vested employees on retirement or on death while in employment, or on termination of employment. Vesting occurs at different stages as per rules. The pension liability is reckoned based on an independent actuarial valuation carried out annually and Bank makes such additional contributions periodically to the Fund as may be required to secure payment of the benefits under the pension regulations.
c) The cost of providing defined benefits is determined using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains/ losses are immediately recognised in the Profit and Loss Account and are not deferred.
d) When the benefits of the plan are changed, or when a plan is curtailed or settlement occurs, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment or settlement, is recognized immediately in the profit or loss account when the plan amendment or when a curtailment or settlement occurs.
Liability for long term employee benefit under defined benefit scheme such as contribution to gratuity, pension fund and leave encashment are determined at close of the year at present value of the amount payable using actuarial valuation technique.
e) Actuarial gain/losses are recognised in the year when they arise.
12.4 Defined Contribution Plan:
Provident fund is a defined contribution as the bank
pays fixed contribution at predetermined rates.
The obligation of the bank is limited to such fixed
contribution. The contributions are charged to
Profit and Loss account.
National Pension Scheme which is applicable to employees who have joined bank on or after 01.04.2010 is a defined contribution scheme. Bank pays fixed contribution at pre-determined rate. The obligation of the bank is limited to such fixed contribution. The contribution is charged to Profit and Loss Account
13. Accounting for Taxes on Income:
Income tax expense is the aggregate amount of current tax and deferred tax expense incurred by the Bank. The provision for tax for the year comprises of current tax liability computed in accordance with the Income Tax Act, 1961 and as per Accounting Standard 22 - “Accounting for Taxes on Income” respectively.
Deferred tax is recognized on timing differences between taxable income and accounting income that originate in one period and is capable of reversal in one or more subsequent periods. Deferred tax assets are recognised only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets will be realised.
Deferred Tax Assets are recognised on carry forward of unabsorbed depreciation and tax losses only if there is virtual certainty supported by convincing evidence that such deferred tax assets can be realised against future profits.
The carrying amount of deferred tax assets is reviewed at each balance sheet date to reassess its realization. Disputed tax liabilities are accounted for in the year of finality of assessment/ appellate proceedings and till such times they are shown as contingent liability. The impact of changes in deferred tax assets and liabilities is recognised in the Profit and Loss Account.
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