SCHEDULE 17 - SIGNIFICANT ACCOUNTING POLICIES
1. BACKGROUND
DCB Bank Limited ('DCB' or 'the Bank'), incorporated in Mumbai, India is a publicly held banking company engaged in providing banking and financial services and governed by the Banking Regulation Act, 1949 and the Companies Act, 2013.
2. BASIS OF PREPARATION
The financial statements have been prepared and presented under the historical cost convention and on the accrual basis of accounting unless otherwise stated, and comply with the Generally Accepted Accounting Principles in India ('GAAP'), statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (the 'RBI') from time to time and the Accounting Standards ('AS') notified under Section 133 of the Companies Act 2013 read with the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standard) Rules, 2021 as amended, in so far as they apply to banks and the current practices prevailing within the banking industry in India.
3. USE OF ESTIMATES
The preparation of the financial statements in conformity with GAAP requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the results of operations during the reporting period. Although these estimates are based upon the management's best knowledge of current events and actions, actual results could differ from these estimates. Any revisions to the accounting estimates are recognised prospectively in the current and future periods.
4. INVESTMENTS
4.1 Classification:
The investment portfolio comprising approved securities (predominantly Government Securities) and other securities (Pass through Certificates, Shares, Debentures and Bonds, etc.) is classified at the time of acquisition in accordance with the RBI guidelines under three categories viz. 'Held to Maturity' ('HTM'), 'Available for Sale' ('AFS') and Fair Value though Profit and Loss ('FVTPL'). 'Held for Trading' ('HFT') is a separate category under FVTPL. For the purposes of disclosure in the Balance Sheet, they are classified under six groups viz. Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Subsidiaries and/or joint ventures and Other Investments.
The Bank follows 'Settlement Date' accounting for recording purchase and sale transactions.
4.2 Basis of Classification:
Investments are classified as HTM, if the securities are acquired with the intention and objective of holding it to maturity, i.e., the financial assets are held with an objective to collect the contractual cash flows; and the contractual terms of the security give rise to cash flows that are solely payments of principal and interest on principal outstanding ('SPPI criterion') on specified dates.
Investments are classified as AFS, if the securities are acquired with an objective of both collecting contractual cashflows and selling securities and the contractual term of the securities meet the SPPI criterion as defined in RBI guidelines.
The securities that do not qualify for inclusion in HTM or AFS shall be classified under FVTPL.
4.3 Transfer of Securities between Categories:
The transfer/ shifting of securities between categories of investments is accounted as per the RBI guidelines on Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023.
4.4 Initial recognition and Acquisition Cost:
All investments are fair valued on initial recognition. Unless facts and circumstances suggest that the fair value is materially different from the acquisition cost, it shall be presumed that the acquisition cost is the fair value. Cost including brokerage, commission pertaining to investments, paid at the time of acquisition, is charged to the Profit and Loss Account.
Broken period interest is charged to the Profit and Loss Account.
Cost of investments is computed based on the weighted average cost method.
4.5 Valuation:
FVTPL - HFT and Available for Sale (AFS) categories:
Investments classified as FVTPL - HFT and AFS are marked to market daily. These securities are valued scrip-wise and any resultant depreciation or appreciation is aggregated for each category. The net appreciation/ depreciation for each category is recognised in the profit and loss account.
As per RBI guidelines, the net appreciation/depreciation on FVTPL portfolio is passed through profit and loss account while, for AFS, it is recognized in AFS reserves.
Quoted investments are valued based on the closing quotes on the recognised stock exchanges or prices declared by Fixed Income Money Market and Derivatives Association ('FIMMDA')/ Financial Benchmark India Private Limited ('FBIL'), periodically.
The valuation of other unquoted fixed income securities (viz. State government securities, Other approved securities, Bonds and debentures, Pass through Certificates) wherever linked to the YTM rates, is computed with a mark-up (reflecting associated credit and liquidity risk) over the YTM rates for government securities with similar maturity, published by FIMMDA/ FBIL. Unquoted equity shares are valued at the break-up value, if the latest audited Balance Sheet which is not older than 18 months from the reporting date is available or otherwise at ' 1 as per the RBI guidelines. Units of mutual funds are valued at the latest repurchase price/ net asset value declared by the mutual fund. Treasury bills, commercial papers and certificate of deposits, being discounted instruments, are valued at carrying cost.
Units of Alternate Investment Fund ('AIF') held under AFS category are marked to market based on the NAV provided by AIF based on the latest audited financial statements. Where an AIF fails to carry out and disclose the valuation of its investments by an independent valuer as per the frequency mandated by SEBI (Alternative Investment Fund) Regulations, 2012, the value of its units shall be treated as ' 1. In case AIF is not registered under SEBI (Alternative Investment Fund) Regulations, 2012 and the latest disclosed valuation of its investments by an independent valuer precedes the date of valuation by more than 18 months, the value of its units shall be treated as ' 1.
Held to Maturity:
These investments are carried at their acquisition cost and are not marked to market. Any premium or discount on acquisition is amortized over the remaining maturity period of the security on a straight-line basis. Where there is a decline, other than temporary, in the carrying amounts of HTM investments, the resultant reduction in the carrying amount is charged to the profit and loss statement.
Non-performing investments are identified and provision is made as per RBI guidelines.
Brokerage, fees, commission and broken period interest incurred at the time of acquisition of securities, including money market instruments, are recognized as expenses.
4.6 Security Receipts (‘SRs’):
Where sale of stressed asset results in a consideration lower than the value of the stressed assets net of provisions carried there against, the shortfall is debited to Profit & Loss account. Where such sale results in consideration higher than the value of the stressed assets net of provisions carried there against, the excess is netted off against the cost of corresponding SRs by creating a provision to arrive at their Book Value. The excess provision shall be credited to the profit & loss account in the year in which sum of cash received by way of initial consideration and/ or redemption or transfer of Security Receipts ('SRs') issued by ARCs if it exceed the NBV of the loan at the time of transfer.
SRs issued by Asset Reconstruction Companies ('ARC') are valued at Net Asset Value ('NAV') declared by the ARC except in respect of stressed assets which are sold on or after April 01, 2018 and the Bank holds more than 90% of SRs backed by its sold assets, the provision held against the Book Value of these SRs is higher of provision required in terms of NAV declared by the ARC and provisioning applicable to the underlying loans, assuming that the assets sold notionally continued in the books of the Bank.
4.7 Disposal of Investments:
Profit/ Loss on sale of investment under the AFS and FVTPL categories is recognised in the Profit and Loss Account except for equity instruments designated under AFS at the time of initial recognition. Any gain or loss on sale of such equity investments shall not be transferred from AFS-Reserve to the Profit and Loss Account. Instead, such gain or loss shall be transferred from AFS-Reserve to the Capital Reserve. The profit on sale of investment in HTM category, net of taxes and transfer to Statutory Reserve, is appropriated to Capital Reserve.
4.8 Repo and reverse repo transactions:
Repo and reverse repo transactions are accounted for as secured borrowing and lending transactions respectively. Borrowing cost on repo transactions is treated as interest expense and income on reverse repo transactions is treated as interest income.
4.9 Short Sale
In accordance with the RBI guidelines, the Bank undertakes short sale transactions in Central Government dated securities. The short positions are reflected in 'Securities Short Sold ('SSS') A/c', specifically created for this purpose. Such short positions are categorised under HFT category and netted off from investments in the Balance Sheet. These positions are marked-to-market along with the other securities under HFT portfolio and the resultant mark-to-market gains/ losses are accounted for as per the relevant RBI guidelines for valuation of investments discussed earlier.
4.10 The Bank makes floating provision at 0.10% per annum on the opening balance of Standard Non SLR investments in the nature of credit substitutes at the beginning of every calendar quarter, proportionately for the quarter. These provisions are not reversed by credit to the Profit and Loss Account without prior approvals of the Board and the RBI under specific circumstances.
5. ADVANCES
5.1 In pursuance of guidelines issued by the RBI, advances are classified as Standard, Sub-Standard, Doubtful and Loss Assets and are stated net of specific provisions made towards NPAs and floating provisions.
5.2 Advances are net of bills rediscounted, Inter-bank participation with risk, provisions for non-performing advances, floating provisions and unrealised interest held in suspense account.
5.3 Credit facility/ investment are classified as performing and non-performing asset as per applicable RBI guidelines.
5.4 In case of NPAs other than retail EMI loans, recoveries effected are first adjusted towards the principal amount. In case of retail EMI loans, recoveries effected are adjusted towards the EMI and within the EMI first towards the principal amount.
5.5 In case of Standard accounts, repayments are appropriated first towards the interest and then towards the principal amount.
5.6 Provision for non-performing advances ('NPAs') comprising sub-standard, doubtful and loss assets is made in accordance with the RBI guidelines which prescribe minimum provision levels and encourage banks to make a higher provision based on sound commercial judgement. NPAs are identified basis RBI guidelines. In respect of identified NPAs in Retail portfolio, provision is recognised on the retail loans at account level on the basis of ageing of loans in the non-performing category and in respect of identified NPAs in other cases, provision is recognised account at borrower level. The provisioning done is at or higher than the minimum rate prescribed under the RBI guidelines. Non-performing assets are written-off in accordance with the Bank's policy. Recoveries from bad debts written off are recognised in Profit & Loss account under Provisions and Contingencies.
5.7 In case of restructured/ rescheduled assets, provision is made in accordance with the guidelines issued by the RBI as applicable.
5.8 In addition to the above, the Bank, on a prudent basis, recognises provisions on advances or exposures which are performing assets as per the IRAC norms, but has reasons to believe on the basis of the extant environment impacting a specific exposure or any specific information, the possible deterioration of a specific advance or a group of advances or exposures or potential exposures. These provisions are recognised as per Board approved policy and are classified as Provision for Specific Standard Assets, included under Provision for Standard Assets and reported under Other Liabilities. These provisions are not reversed to the Profit and Loss Account but are transferred as provision on the same specific advance/ exposure in case the asset slips into non-performing asset, except in case of full repayment of the exposure when such provision will be reversed and recognised in the Profit and Loss Account.
5.9 The Bank maintains general provision for Standard Assets, including on credit exposures computed as per the current marked to market values of foreign exchange forward contracts, at levels stipulated by the RBI from time to time. These provisions on Standard Assets are included under Other Liabilities.
5.10 The Bank estimates the inherent risk of the unhedged foreign currency exposures of its borrowers as per the regulatory guidelines stipulated by the RBI from time to time and recognises incremental provisions on exposures to such entities as per methodology prescribed. These provisions are included in Provision for Standard Assets and reported under Other Liabilities.
5.11 The RBI guidelines further permit banks to create floating provisions on Advances up to levels as per a Board approved policy over and above the regulatory provisions required on standard assets. These floating provisions are netted from Advances. The Bank makes floating provision at 0.05% per annum on the opening balance of Standard Advances at the beginning of every calendar quarter, proportionately for the quarter. These provisions are not reversed by credit to the Profit and Loss Account without prior approvals of the Board and the RBI under specific circumstances.
5.12 The Bank enters into transactions for the sale or purchase of Priority Sector Lending Certificates ('PSLCs'). In the case of a sale transaction, the Bank sells the fulfilment of priority sector obligation and in the case of a purchase transaction the Bank buys the fulfilment of priority sector obligation through RBI trading platform. There is no transfer of risks or loan assets. The fee received for the sale of PSLCs is recorded as miscellaneous income and the fee paid for purchase of the PSLCs is recorded as other expenditure in Profit and Loss Account.
6. FIXED ASSETS [PROPERTY, PLANT AND EQUIPMENT]
Premises and other fixed assets are stated at historical cost (or revalued amounts, as the case may be), less accumulated depreciation and impairment losses, if any. Cost comprises the purchase price and any attributable cost of bringing the asset to its working condition for its intended use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit/ functioning capability from/ of such assets. Profit on sale of immovable properties is transferred to the Capital Reserves after appropriation to Statutory Reserve.
7. REVALUATION OF FIXED ASSETS
Portfolio of immovable properties is revalued periodically by an independent valuer to reflect current market valuation. All land and building owned by the Bank and used as branches or offices are grouped under "Office Premises” in the fixed assets category. Appreciation, if any, on revaluation is credited to Revaluation Reserve under Capital Reserves. Additional Depreciation on the revalued asset is charged to the Profit and Loss Account and appropriated from the Revaluation Reserves to Profit and Loss Account i.e. revenue reserves.
8. DEPRECIATION & AMORTISATION
Depreciation on fixed assets, including amortisation of software, is charged over the estimated useful life of the fixed assets on a straight-line basis at the rates and in the manner prescribed in Schedule II of the Companies Act, 2013, except as mentioned below. The useful life of an asset is the period over which an asset is expected to be put to use to the Bank.
Assets purchased/ sold during the year are depreciated on a pro-rata basis, based on the actual number of days the assets have been put to use. Whenever there is a revision in the estimated useful life of an asset, the unamortized depreciable amount is charged over the revised remaining useful life of the said asset. Assets costing less than ' 5,000 individually are fully depreciated in the year of purchase.
9. IMPAIRMENT OF ASSETS
The carrying amount of assets is reviewed at each Balance Sheet date if there is any indication of impairment based on internal/ external factors. An impairment loss is recognised wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the asset's net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. After impairment, depreciation is provided on the revised carrying amount of the asset over remaining useful life.
10. RECOGNITION OF INCOME AND EXPENDITURE
10.1 Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Bank and the revenue can be reliably measured.
10.2 Penal charges on loans are recognised as income on realisation basis.
10.3 Other items of income and expenditure are accounted on accrual basis.
10.4 Interest income is recognised in the Profit and Loss Account on accrual basis as per Accounting Standard, except in the case of non-performing assets where it is recognised on receipt basis as per the RBI norms.
10.5 Interest income on investments in Pass Through Certificates ('PTC') is recognised at the coupon rate on an accrual basis.
10.6 Interest income on loans bought out through the direct assignment route is recognised at the effective interest rate i.e. after amortising premium, if any, on the bought out portfolio as per Guidelines on Securitised Transactions issued by the RBI.
10.7 Processing fees on loans are recognised as income on due basis. Processing overheads on loans are expensed at the inception of the loan.
10.8 Overdue rent on safe deposit lockers is accounted for when there is certainty of receipts.
10.9 Guarantee commission, annual safe deposit locker rent fees are recognised on a straight-line basis over the period of contract. Letters of credit ('LC') are generally issued for a shorter tenor, typically of 90 days. The commission on such LC is recognised when due.
10.10 Dividend income is recognised as income when the right to receive dividend is established.
10.11 Fees received for priority sector lending certificates ('PSLC') is recognised on straight-line basis under miscellaneous income.
11. FOREIGN CURRENCY TRANSACTIONS
11.1 Initial recognition:
Foreign currency transactions are recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and foreign currency on the date of the transaction.
11.2 Conversion:
Foreign currency monetary items are reported using the closing rate notified by Foreign Exchange Dealers' Association of India ('FEDAI') at the Balance Sheet date and the resulting profit or loss is recognised in the Profit and Loss Account, as per the guidelines issued by the RBI.
11.3 Exchange differences:
Exchange difference arising on settlement of monetary items is recognised as income or as expense in the year in which it arises. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction and non-monetary items which are carried at fair value or other similar valuations denominated in a foreign currency are reported using the exchange rates that existed when the values were determined.
11.4 Foreign Exchange Forward Contracts:
Foreign exchange forward contracts not intended for trading that are entered into to establish the amount of reporting currency required or available at the settlement date of transactions, which are outstanding at the Balance Sheet date are effectively valued at the closing spot rate. The premium or discount arising at the inception of such a forward exchange contract is amortised as expense or income over the life of the contract.
11.5 Outstanding forward exchange contracts intended for trading are revalued at the Balance Sheet date at the rates notified by FEDAI and at interpolated rates for contracts of interim maturities. The resultant gain/ loss on revaluation is recognised in the Profit and Loss Account in accordance with the RBI/ FEDAI guidelines
11.6 Contingent liabilities denominated in foreign currencies are disclosed in the Balance Sheet at the rates notified by FEDAI as at the Balance Sheet date.
11.7 Forward exchange contracts and other derivative contracts which have overdue receivables remaining unpaid over 90 days or more are classified as non-performing assets and provided for as per the extant master circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning issued by the RBI.
12. DERIVATIVE TRANSACTIONS
Valuation of Exchange Traded Interest Rate Futures is carried out on the basis of the daily settlement price of each contract provided by the exchange. Changes in the fair value of the Exchange Traded Interest Rate Futures are recognised in the Profit and Loss Account.
13. EMPLOYEE BENEFITS
13.1 Defined Benefit Plan
Provision in respect of future liability for payment of gratuity is made on the basis of actuarial valuation on projected unit credit method made at the end of the year. The actuarial calculations entail assumptions about demographics, early retirement, salary increases, interest rates etc. Gratuity is funded with the Gratuity Trust duly registered under the provisions of Income tax Act, 1961. Actuarial gains/ losses are recognised immediately in the Profit and Loss Account and are not deferred.
13.2 Defined Contribution Scheme
Retirement benefits in the form of provident fund and national pension scheme is a defined contribution scheme and the contributions are charged to the Profit and Loss Account of the year when the contributions to the fund are due. There is no other obligation other than the contribution payable to the fund.
13.3 Short Term Employee Benefits
Short term employee benefits comprise salaries and other compensation payable for services which the employee has rendered during the period. These are recognized at the undiscounted amount in the Profit & Loss Account.
14. TAXES ON INCOME
14.1 Tax expense comprises current and deferred taxes. Current income tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961. Deferred Income Tax reflects the impact of current year timing differences between the taxable income and the accounting income for the year and reversal of timing differences of earlier years.
14.2 Deferred tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the Balance Sheet date. 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 tax assets and deferred tax liabilities relate to taxes levied by same governing taxation laws. 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 can be realised. In situations where the Bank has unabsorbed depreciation or carry forward tax losses, all deferred tax assets are recognised only if there is virtual certainty supported by convincing evidence that they can be realised against future taxable profits.
14.3 At each Balance Sheet date, the Bank re-assesses unrecognised deferred tax assets and recognises deferred tax asset to the extent that it has become reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which such deferred tax assets can be realised.
15. ACCOUNTING FOR PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Provisions are recognised when there is a present legal or statutory obligation as a result of past events leading to probable outflow of resources, where a reliable estimate can be made of the amount required to settle the obligation.
Contingent Liabilities are recognised only when there is a possible obligation arising from past events due to occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Bank, or where there is a present obligation arising from a past event which is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made. When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets are neither recognised nor disclosed in the financial statements.
16. EMPLOYEE SHARE BASED PAYMENTS
Measurement and disclosure of employee share-based employment plans is done in accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014/ Guidance Note on Accounting for the Employee Share-based Payments issued by The Institute of Chartered Accountants CICAI') of India. The Bank measures compensation cost relating to employee stock options/ cash settled stock appreciation rights using the fair value method. Deferred compensation expense is amortised over the vesting period.
17. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the year.
For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the year are adjusted for the effect of dilutive potential equity shares.
18. SHARE ISSUE EXPENSES
Share issue expenses are adjusted from Securities Premium Account in terms of Section 52 of the Companies Act, 2013.
19. 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 (including effect of changes in exchange rates on cash and cash equivalents in foreign currency).
20. LEASES
Leases where the Lessor effectively retains substantially all risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognised as an expense in the Profit and Loss Account on a straight-line basis over the lease term.
21. SEGMENT REPORTING
As per the RBI guidelines on Segment Reporting, the Bank has classified its activity into Treasury Operations, Corporate/ Wholesale Banking, Retail Banking and Other Banking Operations.
21.1 Treasury Operations includes all financial markets activities undertaken on behalf of the Bank's customers, proprietary trading, maintenance of reserve requirements and resource mobilisation from other banks and financial institutions.
21.2 Wholesale Banking includes lending, deposit taking and other services offered to corporate customers.
21.3 Retail Banking includes lending, deposit taking and other services offered to retail customers.
21.4 Other Banking Operations includes para banking activities like third party product distribution, merchant banking, etc.
22. CORPORATE SOCIAL RESPONSIBILITY
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, is recognized in the Profit and Loss Account.
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