3 Material accounting policies
3.1 Loans - Recognition and Measurement
3.1.1 Date of recognition
Loans are recognised when fund transfers are initiated to
the customers' account or cheques for disbursement have
been prepared by the Company (as per the terms of the
agreement with the borrowers) or when the Company
assumes unconditional obligations to release the
disbursement amount to third party on the direction of the
borrower, whichever is earlier.
3.1.2 Initial measurement of Loans
The classification of Loans at initial recognition depends
on their contractual terms and the business model for
managing them. They are initially measured at their fair
value. Transaction costs/fees which are directly attributable
to acquisition of loans are added to, or subtracted from this
amount.
3.1.3 Measurement categories of Loans
The Company classifies all its Loans at Amortised cost as
the business model is to hold them to collect contractual
cash flows and the contractual terms of the loans give rise
on specified dates to cash flows that are solely repayments
of principal and interest.
3.1.4 Modification of Loans
Modification of a loan occurs when the contractual terms
governing its cash flows are renegotiated or otherwise
modified between the initial recognition and maturity of
the financial asset. A modification affects the amount and/
or timing of the contractual cash flows either immediately
or at a future date. The company renegotiates loans to
customers in financial difficulty to maximise collection and
minimise the risk of default. Modification of loan terms is
granted in cases where although the borrower made all
reasonable efforts to pay under the original contractual
terms, there is a risk of default or default has already
happened and the borrower is expected to be able to meet
the revised terms. The revised terms in most of the cases
include an extension of the maturity of the loan, changes
to the timing of the cash flows of the loan (principal and
interest repayment). When a loan is modified the company
assesses whether this modification results in derecognition.
In accordance with the company's policy, a modification
results in derecognition when it gives rise to substantially
different terms. Where a modification does not lead to
derecognition, the company calculates the modification
gain/loss comparing the gross carrying amount before and
after the modification (excluding the ECL allowance).
3.1.5 Derecognition of Loans
Loan (or, where applicable, a part of a loan or part of a
group of similar loans) is derecognised when the rights to
receive cash flows from the loan has expired. The Company
also derecognises the loan if it has both transferred the
loan and the transfer qualifies for derecognition.
Loan is transferred only if, either:
• the Company has transferred its contractual rights to
receive cash flows from the loan, Or;
• has retained the rights to the cash flows but has
assumed an obligation to pay the received cash flows
in full without material delay to a third party under a
'pass-through' arrangement.
A transfer qualifies for derecognition if either:
• the Company has transferred substantially all the risks
and rewards of the loan, Or;
• has neither transferred nor retained substantially all the
risks and rewards of the loan but has transferred control
of the loan.
The Company considers control to be transferred if and
only if, the transferee has the practical ability to sell the
loan in its entirety to an unrelated third party and is able
to exercise that ability unilaterally and without imposing
additional restrictions on the transfer.
In case of loan transfers which qualify for derecognition,
any difference between the proceeds received on such
sale and the carrying value of the transferred asset is
recognised as gain or loss on de-recognition of such loan
previously carried under amortised cost category. The
resulting interest only strip initially is recognised at Fair
Value Through Profit or Loss and re-assessed at the end of
every reporting period.
In case of loan transfers which do not qualify for
derecognition, the loan continues to be recognised only
to the extent of the Company's continuing involvement,
in which case, the Company also recognises an associated
liability. The transferred loan and the associated liability are
measured on a basis that reflects the rights and obligations
that the Company has retained.
Continuing involvement that takes the form of a guarantee
over the transferred loan is measured at the lower of the
original carrying amount of the asset and the maximum
amount of consideration the Company could be required
to pay.
3.1.6 Undrawn loan commitments
Undrawn loan commitments are commitments under
which, over the duration of the commitment, the Company
is required to provide a loan with pre-specified terms to
the customer. The nominal contractual value of undrawn
loan commitments, where the loan agreed to be provided
is on market terms, are not recorded in the balance sheet.
The nominal values of these commitments are disclosed in
notes.
3.1.7 Loan write-offs
Loans are written off either partially or in their entirety
only when the Company has no reasonable expectation of
recovery. If 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.
3.2 Impairment of Loans
3.2.1 Expected Credit Loss (ECL)
The Company records allowance ECL for all loans measured
at amortised cost, together with loan commitments. ECL is
the expected cash shortfall discounted at an approximation
to the EIR. A cash shortfall is the difference between the
cash flows that are due to an entity in accordance with
the contract and the cash flows that the entity expects to
receive. (ECL = PD*EAD*LGD)
PD: The Probability of Default is an estimate of the
likelihood of default over a given time horizon. A default
may only happen at a certain time over the assessed period
if the facility has not been previously derecognised and is
still in the portfolio.
EAD: The Exposure at Default is an estimate of the exposure
at a future default date (in case of Stage 1 and Stage 2),
taking into account expected changes in the exposure
after the reporting date, including repayments of principal
and interest, whether scheduled by contract or otherwise,
expected drawdowns on committed facilities, and accrued
interest from missed payments. In case of Stage 3 loans
EAD represents exposure when the default first occurred.
LGD: The Loss Given Default is an estimate of the loss
arising in the case where a default occurs at a given time.
It is based on the difference between the contractual
cash flows due and those that the lender would expect to
receive, including from the realisation of any collateral. It is
usually expressed as a percentage of the EAD.
The ECL allowance is based on the credit losses expected to
arise over the life of the asset (the lifetime expected credit
loss or LTECL), unless there has been no significant increase
in credit risk since origination, in which case, the allowance
is based on the 12 months' expected credit loss (12mECL).
The 12mECL is the portion of LTECLs that represent the ECLs
that result from default events on a loan that are possible
within the 12 months after the reporting date.
Both LTECLs and 12mECLs are calculated on a collective
basis, for each category of loan.
The Company has established a policy to perform an
assessment, at the end of each reporting period, of
whether a loan's credit risk has increased significantly since
initial recognition, by considering the change in the risk of
default occurring over the remaining life of the financial
instrument.
Based on the above process, the Company categorises its
loans into Stage 1, Stage 2 and Stage 3, as described below:
Stage 1: When loans are first recognised, the Company
recognises an allowance based on 12mECLs. Stage 1 loans
also include facilities where the credit risk has improved
and the loan has been reclassified from Stage 2 or Stage 3.
Stage 2: When a loan has shown a significant increase
in credit risk since origination, the Company records
an allowance for the LTECLs. Stage 2 loans also include
facilities, where the credit risk has improved and the loan
has been reclassified from Stage 3.
Stage 3: Loans considered credit impaired. The Company
records an allowance for the LTECLs.
Impairment losses and releases are accounted for and
disclosed separately from modification losses or gains that
are accounted for as an adjustment of the financial asset's
gross carrying value.
3.2.2 Loan commitment:
When estimating LTECLs for undrawn loan commitments,
the Company estimates the expected portion of the loan
commitment that will be drawn down over its expected
life. The ECL is then based on the present value of the
expected shortfalls in cash flows if the loan is drawn
down. The expected cash shortfalls are discounted at
an approximation to the expected EIR on the loan. For
an undrawn loan commitment, ECLs are calculated and
presented under provisions.
3.2.3 Forward looking information
The Company considers a broad range of forward-looking
information with reference to external forecasts of
economic parameters such as GDP growth, unemployment
rates etc., as considered relevant so as to determine the
impact of macro-economic factors on the Company's ECL
estimates.
The inputs and models used for calculating ECLs are
recalibrated periodically through the use of available
incremental and recent information. Further, internal
estimates of PD, LGD rates used in the ECL model may not
always capture all the characteristics of the market / external
environment as at the date of the financial statements. To
reflect this, qualitative adjustments or overlays are made
as temporary adjustments to reflect the emerging risks
reasonably.
3.2.4 Collateral repossessed
The Company generally does not use the assets repossessed
for the internal operations. The underlying loans in respect
of which collaterals have been repossessed with an
intention to realize by way of sale are considered as Stage
3 assets and the ECL allowance is determined based on the
estimated net realisable value of the repossessed asset. Any
surplus funds are returned to the borrower and accordingly
collateral repossessed are not recorded on the balance
sheet and not treated as non-current assets held for sale.
3.2.5 Restructured, rescheduled, and modified loans
The Company sometimes makes concessions or
modifications to the original terms of loans such as
changing the instalment value or changing the tenor of the
loan, as a response to the borrower's request.
When the loan has been renegotiated or modified but not
derecognised, the Company also reassesses whether there
has been a significant increase in credit risk. The Company
also considers whether the assets should be classified as
Stage 3. Once an asset has been classified as restructured,
it will remain restructured for a period of year from the date
on which it has been restructured.
Loans which have been renegotiated or modified in
accordance with RBI Notifications (including extensions
granted) - RBI/2020-21/16 DOR.No.BP.BC/3/21.04.048/2020-
21- Resolution Framework for COVID-19 related Stress
and RBI/2020-21/17 DOR.No.BP.BC/4/21.04.048/2020-
21- Micro, Small and Medium Enterprises (MSME) sector -
Restructuring of Advances, have been classified as Stage 2
due to significant increase in credit risk.
3.3 Loans - Revenue recognition
Interest income on loans measured at amortised cost is
recorded using the effective interest rate ('EIR') method. The
EIR is the rate that discounts estimated future cash receipts
through the expected life of the loan to the gross carrying
amount of the loan. For credit-impaired loans, interest
income is calculated by applying the EIR to the amortised
cost. (i.e. the gross carrying amount less the allowance for
expected credit losses).
The EIR is calculated by taking into account the fees and
costs that are an integral part of the EIR of the loan such
as origination fees received for acquisition of the loan and
sourcing cost incurred for closing the transaction.
Fees, charges and reimbursements due from borrowers
as per the contractual terms of the loan are recognised on
realisation.
Any recovery from written off loan is recognised in the
statement of profit and loss.
3.4 Borrowings
3.4.1 Debt securities and other borrowings
The Company recognises debt securities and other
borrowings when funds reach the Company.
Debt issued and other borrowed funds are subsequently
measured at amortised cost. Amortised cost is calculated
by taking into account any discount or premium on issue
funds, and costs that are an integral part of the EIR.
3.4.2 Foreign Currency Borrowings
Borrowings in foreign currencies are initially recorded at
the respective functional currency spot rates at the date
the transaction first qualifies for recognition. They are
translated at the functional currency spot rates of exchange
at the reporting date and exchange gains and losses arising
on restatement are recognized under OCI in the statement
of profit and loss as an adjustment to borrowing cost.
3.4.3 Derivative and Hedge accounting
The company enters into derivative transactions only
for economic hedging purposes and not as speculative
investments. Derivative instruments are used to manage
exposures to interest rate and foreign currency. In order
to manage particular risks, the Company applies hedge
accounting for transactions that meet specified criteria.
Derivatives are initially recognised at fair value at the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at each balance sheet date.
The resulting gain/loss is recognised in statement of profit
and loss immediately unless the derivative is designated
and is effective as a hedging instrument , in which event
the timing of the recognition in profit or loss depends on
the nature of the hedge relationship.
Hedges that meet the strict criteria for hedge accounting
are accounted for as cash flow hedge.
A cash flow hedge is a hedge of the exposure to variability
in cash #ows that is attributable to a particular risk
associated with a recognised asset or liability (such as all or
some future interest payments on variable rate debt) or a
highly probable forecast transaction and could affect profit
or loss.
For designated and qualifying cash flow hedges, the
effective portion of the cumulative gain or loss on the
hedging instrument is initially recognised directly in Other
Comprehensive Income (OCI) within equity (cash flow
hedge reserve). The ineffective portion of the gain or loss
on the hedging instrument is recognised immediately as
net gain/loss on fair value changes in the statement of
profit and loss.
When a hedging instrument expires, is sold, terminated,
exercised, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss that
has been recognised in OCI at that time remains in OCI
and is recognised when the hedged forecast transaction is
ultimately recognised in the statement of profit and loss.
When a forecast transaction is no longer expected to occur,
the cumulative gain or loss that was reported in OCI is
immediately transferred to the statement of profit and loss.
3.4.4 Finance cost on Borrowing
Finance cost on borrowings measured at amortised cost is
recorded using the effective interest rate ('EIR') method. The
EIR is the rate that discounts estimated future payments
through the expected life of the borrowing to its gross
carrying amount. The EIR is calculated taking in to account
any discount or premium on issue funds, and costs that are
an integral part of the EIR.
4 Other accounting policies
4.1 Cash and Cash equivalents
Cash and cash equivalent in the balance sheet comprise
cash at banks and on hand and short-term deposits with an
original maturity of three months or less, which are subject
to an insignificant risk of changes in value.
4.2 Bank balances other cash and cash
equivalents
These are measured at amortised cost as they are held for
collecting contractual cash #ows that are solely payments
of principal and interest on principal outstanding.
4.3 Receivables and other financial assets
Receivables and other financial assets are measured
at amortised cost. The Company follows a 'simplified
approach' for recognition of impairment loss allowance
on these assets. The application of simplified approach
does not require the Company to track changes in credit
risk and calculated on case by case approach, taking into
consideration different recovery scenarios.
4.4 Investments
Investments are initially recognised on the trade date,
i.e., the date that the company becomes a party to the
contractual provisions of the instrument.
4.4.1 Equity instruments
Equity Investment in Subsidiaries and Joint Ventures are
carried at Cost.
The Company subsequently measures all equity
investments other than investment in subsidiaries and
associates, at fair value through profit or loss, unless the
Company's management has elected to classify irrevocably
some of its equity investments not held for trading as
equity instruments at Fair value through OCI (FVOCI).
Such classification is determined on an instrument-by¬
instrument basis.
Gains and losses on these equity instruments are never
recycled to profit or loss. Dividends are recognised in profit
or loss as dividend income when the right of the payment
has been established, except when the Company benefits
from such proceeds as a recovery of part of the cost of the
instrument, in which case, such gains are recorded in OCI
(Other Comprehensive Income). Equity instruments at
FVOCI are not subject to an impairment assessment.
4.4.2 Other Instruments
Investment in other instruments is measured at amortised
cost if they are held for collecting contractual cash #ows
that are solely payments of principal and interest on
principal outstanding. The Company follows 'simplified
approach' for recognition of impairment loss allowance
on these assets. The application of simplified approach
does not require the Company to track changes in credit
risk and calculated on case by case approach, taking into
consideration different recovery scenarios.
Investments which do not meet the SPPI test are measured
at fair value through profit or loss.
4.5 Taxes
4.5.1 Current tax
Current tax comprises amount of tax payable in respect
to the taxable income or loss for the year determined in
accordance with Income Tax Act,1961 and any adjustment
to tax payable or receivable in respect of prior years.
Current tax assets and liabilities for the current and prior
years are measured at the amount expected to be recovered
from, or paid to, the taxation authorities. The tax rates and
tax laws used to compute the amount are those that are
enacted, or substantively enacted, by the reporting date in
the countries where the Company operates and generates
taxable income.
Current tax assets and liabilities are offset only if there is a
legally enforceable right to set off the recognised amounts
and is intended to realise the asset and settle the liability on
a net basis or simultaneously.
Current income tax relating to items recognised outside
profit or loss is recognised outside profit or loss (either
in other comprehensive income or in equity). Current
tax items are recognised in correlation to the underlying
transaction either in OCI or directly in 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.
4.5.2 Deferred Tax
Deferred tax is provided on temporary differences at
the reporting date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting
purposes.
Deferred tax liabilities are recognised for all taxable
temporary differences. Deferred tax assets are recognised
to the extent that it is probable that taxable profit will
be available against which the deductible temporary
differences, and the carry forward of unused tax credits and
unused tax losses can be utilised.
The carrying amount of deferred tax assets is reviewed
at each reporting date 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. Unrecognised deferred tax assets are re-assessed
at each reporting date and are recognised to the extent
that it has become probable that future taxable profits will
allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the year when the asset
is realised or the liability is settled, based on tax rates (and
tax laws) that have been enacted or substantively enacted
at the reporting date. Deferred tax relating to items
recognised outside profit or loss is recognised outside
profit or loss (either in other comprehensive income or in
equity). Deferred tax items are recognised in correlation
to the underlying transaction either in OCI or directly in
equity.
Deferred tax assets and deferred tax liabilities are offset if a
legally enforceable right exists to set off current tax assets
against current tax liabilities and the deferred taxes relate
to the same taxable entity and the same taxation authority
and intends to settle on net basis.
4.6 Investment Property
Investment property represents property held to earn
rentals or for capital appreciation or both.
Investment properties are measured initially at cost,
including transaction costs. Subsequent to initial
recognition, investment properties are stated at cost less
accumulated depreciation and accumulated impairment
loss, if any.
Depreciation on building classified as investment property
has been provided on the straight-line method over a
period of 60 years based on the Company's estimate of
their useful lives taking into consideration technical factors,
which is the same as the period prescribed in Sch II to the
Companies Act 2013.
4.7 Property, plant and equipment
Property plant and equipment is stated at cost (net of tax/
duty credits availed) excluding the costs of day-to-day
servicing, less accumulated depreciation and accumulated
impairment in value. Cost includes professional fees/
charges related to acquisition of property plant and
equipment. Changes in the expected useful life are
accounted for by changing the amortisation period or
methodology, as appropriate, and treated as changes in
accounting estimates.
Subsequent expenditure incurred, is capitalised only if it
results in economic useful life beyond the original estimate.
Depreciation is calculated using the straight-line method
to write down the cost of property and equipment to their
residual values over their estimated useful lives. Land is not
depreciated.
The above estimated useful life is based on respective asset
usage policy or pattern of the Company.
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.
Property plant and equipment is derecognised on disposal
or when no future economic benefits are expected
from its use. Any gain or loss arising on derecognition of
the asset (calculated as the difference between the net
disposal proceeds and the carrying amount of the asset)
is recognised in other income / expense in the statement
of profit and loss in the year the asset is derecognised.
The date of disposal of an item of property, plant and
equipment is the date the recipient obtains control of that
item.
1.8 Leases
The Company's lease asset consists of leases for buildings.
The Company assesses whether a contract contains a lease,
at inception of a contract.
At the date of commencement of the lease, the Company
recognises a right-to-use asset and a corresponding lease
liability for all lease arrangements in which it is a lessee,
except for leases with a term of twelve months or less
(short-term leases) and low value leases. For these short¬
term and low value leases, the Company recognises the
lease payments as an operating expense on a straight-line
basis over the term of the lease.
The right-to-use asset is initially recognised at cost which
comprises of the initial amount of lease liability adjusted for
lease payments made or prior to commencement date plus
any direct cost i.e. lease incentives. They are subsequently
measured at cost less accumulated depreciation and
impairment loss if any.
Certain lease arrangements include the options to extend
or terminate the lease before the end of the lease term. ROU
assets and lease liabilities includes these options when it is
reasonably certain that they will be exercised.
Right-to-Use assets are depreciated from the
commencement date on a straight-line basis over the
shorter of the lease term. Right to use assets are evaluated
for recoverability whenever events or changes in the
circumstances indicate that their carrying amounts may
not be recoverable.
The lease liability is initially measured at amortised cost at
the present value of the future lease payments. The lease
payments are discounted using the incremental borrowing
rates in the country of domicile of the leases. The Company
has used single discount rate to a portfolio of leases with
similar characteristics. Lease liabilities are remeasured with
a corresponding adjustment to the related right to use
asset if the Company changes its assessment as to whether
it will exercise an extension or a termination option.
The Company has opted to present the Right to use as a
part of the block of asset to which the lease pertains to and
consequently, the Right to use asset has been presented
as a part of Property, plant and equipment under the
Buildings block, whereas the lease liability is presented
under Other Financial Liabilities in the Balance Sheet. Lease
payments made by the Company are classified as financing
cash #ows.
4.9 Intangible assets
The Company's intangible assets mainly include the value
of computer software.
An intangible asset is recognised only when its cost can
be measured reliably and it is probable that the expected
future economic benefits that are attributable to it will flow
to the Company.
Intangible assets acquired separately are measured on
initial recognition at cost. Subsequently, they are carried at
cost less accumulated amortisation and impairment losses
if any, and are amortised over their estimated useful life on
the straight-line basis over a 3-year period or the license
period whichever is lower.
The carrying amount of the assets is reviewed at each
Balance sheet date to ascertain impairment based on
internal or external factors. Impairment loss, if any, is
provided to the extent, the carrying amount of assets
exceeds their recoverable amount. Recoverable amount
is the higher of an assets net selling price and the present
value of estimated future cash #ows expected to arise from
the continuing use of the asset and from its disposal at the
end of its useful life.
4.10 Input Tax Credit (Goods and Service Tax)
Input Tax Credit is accounted for in the books in the period
when the underlying service / supply received is accounted
to the extent permitted as per the applicable regulatory
laws and when there is no uncertainty in availing / utilising
the same. The ineligible input credit is charged off to the
respective expense or capitalised as part of asset cost as
applicable.
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