A. Background and nature of operations

Fino Payments Bank Limited (‘the Bank’) was originally incorporated as Fino Fintech Foundation on June 23, 2007, for promoting objects of the nature specified in Section 8, sub-section (1), clause (a) of the Companies Act, 2013 (‘the Act’) and that it intends to apply its profits if any, or other income in promoting its objects and to prohibit the payment of any dividends to its members.

The Reserve Bank of India (‘RBI’) issued a license to the Bank on March 30, 2017 under Section 22 (1) of the Banking Regulation Act, 1949 to carry on the business of Payments Bank in India. Pursuant to the resolution passed in the extra ordinary general meeting held on March 31, 2017, the name of the Bank was changed from Fino Fintech Limited to Fino Payments Bank Limited with effect from April 04, 2017. The Bank commenced operations as a Payments Bank with effect from June 30, 2017. The Bank offers services such as current and savings accounts, remittances, business correspondent, mobile banking, bill payments and third party financial products distribution. The Bank is engaged in providing various types of financial services to the rural, poor and underserved and unserved classes to help them be economically self-reliant.

The Bank has been included in the Second Schedule to the Reserve Bank of India Act, 1934 vide Notification DoR.NBD. No.2138/16.03.005/2020-21 dated January 01, 2021 and published in the Gazette of India (Part III - Section 4) dated February 13 -February 19, 2021.

Fino Payments Bank Limited is a subsidiary of Fino PayTech Limited (‘the Holding Company’) which is engaged in providing business and banking technology platform based solutions and services related to financial inclusion.

These financial statements are presented in Indian Rupees (‘Rupees’ or ‘H’) and all amounts are rounded to the nearest thousands, except as stated otherwise.

B. Basis of preparation of financial statements

The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (‘GAAP’), statutory requirements prescribed under the Third Schedule of the Banking Regulation Act, 1949, directions, circulars and guidelines issued by the Reserve Bank of India (‘RBI’) from time to time (RBI guidelines), Accounting Standards (‘AS’) specified under Section 133 of the Companies Act, 2013 read together with the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standards) Rules, 2021, in so far as they apply to banks:-

The accounting policies adopted in the preparation of the financial statement are consistent with those followed in the previous year except for the investment, pursuant to the RBI Master Direction dated September 12, 2023, which introduced revised guidelines for classification, valuation, and operation of the investment portfolio of banks, the Bank has classified its investments under the categories of Held to Maturity (HTM) and Available for Sale (AFS). Accordingly, the investment portfolio is measured and valued under the revised framework. Subsequent changes in the fair value of performing investments under AFS are recognized through the AFS Reserve by debiting or crediting the reserve, with a corresponding impact from the increase or decrease in the value of investments.

Use of estimates

The preparation of financial statements in conformity with GAAP requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognized prospectively in the current and future periods.

C. Principal accounting policy

1. Investments

Classification:

In accordance with the RBI guidelines on classification, valuation and operation of Investment portfolio dated Sep 12, 2023, investments (except investments in own subsidiaries, joint ventures and associates) are classified 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 subcategory within FVTPL. Under each of these categories, investments are further classified under six groups (hereinafter called “groups”) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.

Basis of classification:

(a) HTM

As per Operating Guidelines of RBI, Payments Banks are not allowed to classify their investment as HTM category, unless the investments are made from Bank’s own funds. Securities that fulfil the following conditions are classified under HTM:

(i) The security is 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

(ii) 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.

(b) AFS

Securities that meet the following conditions are classified under AFS:

(i) The security is acquired with an objective that is achieved by both collecting contractual cash flows and selling securities; and

(ii) The contractual terms of the security meet the ‘SPPI criterion’

(a) Provided that on initial recognition, a bank may make an irrevocable election to classify an equity instrument that is not held with the objective of trading under AFS.

(b) AFS securities shall inter-alia include debt securities held for asset liability management (ALM) purposes that meet the SPPI criterion where the bank’s intent is flexible with respect to holding to maturity or selling before maturity.

(c) FVTPL

(a) Securities that do not qualify for inclusion in HTM or AFS are classified under FVTPL. HFT is a separate category within FVTPL.

Banks shall only include those financial instruments in HFT when there is no legal impediment against selling or fully hedging it. Banks shall fair value daily all HFT instruments and recognise any valuation change in the Profit and Loss Account.

Valuation:

(a) Initial Recognition:

All investments shall be measured at fair value 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. In respect of government securities acquired through auction (including devolvement), switch operations and open market operations (OMO) conducted by the RBI, the price at which the security is allotted shall be the fair value for initial recognition purposes. Where the securities are quoted or the fair value can be determined based on market observable inputs (such as yield curve, credit spread, etc.) any Day 1 gain/ loss shall be recognised in the Profit and Loss Account, under Schedule ‘Other Income’ within the subhead ‘Profit on revaluation of investments’ or ‘Loss on revaluation of investments’, as the case may be. Any Day 1 loss arising from Level 3 investments shall be recognised immediately. Any Day 1 gains arising from Level 3 investments shall be deferred. In the case of debt instruments, the Day 1 gain shall be amortized on a straight-line basis up to the maturity date (or earliest call date for perpetual instruments), while for unquoted equity instruments, the gain shall be set aside as a liability until the security is listed or derecognised.

(b) Subsequent Measurement:

HTM:

Securities held in HTM shall be carried at cost and shall not be marked to market (MTM) after initial recognition. Any discount or premium on the securities under HTM shall be amortized over the remaining life of the instrument.

AFS:

The securities held in AFS shall be fair valued at least on a quarterly basis, if not more frequently. Any discount or premium on the acquisition of debt securities under AFS shall be amortized over the remaining life of the instrument. 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 shall be aggregated. The net appreciation or depreciation shall be directly credited or debited to a reserve named AFS Reserve without routing through the Profit and Loss Account. The AFS Reserve shall be reckoned as Common Equity Tier (CET) 1 subject to clause 28 of these Directions. The unrealised gains transferred to AFS Reserve shall not be available for any distribution such as dividend and coupon on Additional Tier 1. Upon sale or maturity of a debt instrument in AFS category, the accumulated gain/ loss for that security in the AFS Reserve shall be transferred from the AFS Reserve and recognized in the Profit and Loss Account. In the case of equity instruments designated under AFS at the time of initial recognition, any gain or loss on sale of such 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.

FVTPL:

The securities held in FVTPL shall be fair valued and the net gain or loss arising on such valuation shall be directly credited or debited to the Profit and Loss Account. Securities that are classified under the HFT sub-category within FVTPL shall be fair valued on a daily basis, whereas other securities in FVTPL shall be fair valued at least on a quarterly, if not on a more frequent basis. Any discount or premium on the acquisition of debt securities under FVTPL shall be amortized over the remaining life of the instrument.

(c) Fair value of Investments:

1. Quoted SLR and Non SLR securities :

(a) The fair value for the quoted securities shall be the prices declared by the Financial Benchmarks India Private Ltd. For securities whose prices are not published by FBIL, the fair value of the quoted security shall be based upon quoted price as available from the trades/ quotes on recognised stock exchanges, reporting platforms or trading platforms authorized by RBI/SEBI or prices declared by the Fixed Income Money Market and Derivatives Association of India (FIMMDA).

2. Unquoted SLR Securities

(a) Treasury Bills valued at carrying cost.

(b) Central/ State Government securities as per price / YTM published by FBIL.

(c) Other securities values at 25 basis point mark-up on FBIL published yield.

3. Unquoted Non-SLR Securities

(a) Unquoted debentures/ bonds shall be valued with appropriate mark-up over the YTM rates for Central Government Securities as being published by FBIL/ FIMMDA periodically. The mark-up applied shall be determined based on the ratings assigned to the debentures/ bonds by the credit rating agencies. The mark up shall be at least 50 basis points above the rate applicable to a Central Government security of equivalent maturity for rated debentures/bonds. The mark-up for unrated debentures or bonds shall not be less than the mark-up applicable to rated debentures or bonds of equivalent maturity.

(b) CPs/CD’s of tenure less than one year shall be valued at carrying cost.

(c) Investment in un-quoted mutual funds units shall be valued on the basis of the latest repurchase price declared by the MF in respect of each scheme. where repurchase price/ market quote is not available, units shall be valued at NAV of the scheme. If NAV is not available then valued at cost.

4. Equity Shares

Equity shares for which current quotations are not available i.e., which are classified as illiquid or which are not listed on a recognised exchange, the fair value for the purposes of these directions shall be the break-up value (without considering ‘revaluation reserves’, if any) which is to be ascertained from the company’s latest audited balance sheet. The date as on which the latest balance sheet is drawn up shall not precede the date of valuation by more than 18 months. In case the latest audited balance sheet is not available or is more than 18 months old, the shares shall be valued at T 1 per company.

RBI Master Direction dated September 12, 2023; the Bank has made an irrevocable option to classify an equity instrument that is not held with the objective of trading under AFS. Subsequent changes in the fair value of performing investments under AFS are recognized through the AFS Reserve.

(d) Reclassifications between categories:

Banks shall not reclassify investments between categories (viz. HTM, AFS and FVTPL) without the approval of their Board of Directors. Further, reclassification shall also require the prior approval of the Department of Supervision (DoS), RBI.

Income Recognition:

Banks shall recognize income on accrual basis for the following investments:

a. Government Securities, bonds and debentures of corporate bodies, where interest rates on these securities are predetermined and provided interest is serviced regularly and is not in arrears.

b. Income from units of mutual funds, alternative investment funds and other such pooled/collective investment funds shall be recognized on cash basis.

Banks shall not capitalize the broken period interest paid to the seller as part of cost and shall treat it as an item of expenditure under Profit and Loss Account in respect of investments in securities.

Non-performing investments are identified and depreciation/provision are made thereon based on the RBI guidelines. Once an investment is classified as an NPI, it should be segregated from rest of the portfolio and not considered for netting valuation gains and losses. Banks shall not accrue any income on NPIs. Income shall be recognized only on realization of the same. Further, any MTM appreciation in the security shall be ignored.

In accordance with RBI guidelines, repo transactions in government securities are reflected as borrowings, and the related borrowing cost is accounted for as interest expense. The Bank does not undertake reverse repo transactions; instead, it places excess funds with the RBI under the Standing Deposit Facility (SDF). Revenue on SDF transactions is accounted for as interest income.

2. Advances

As per the Operating Guidelines for Payments Banks issued by RBI on October 06, 2016 (‘the Operating Guidelines’), Payments Banks (PBs) are not permitted to lend to any person including their Directors. However, PBs may lend to their own employees out of the Bank’s own funds, as per a Board approved policy outlining the caps on such loans.

In accordance with the Operating guidelines, the Bank has classified employee loans as advances, as per the Employee loan policy, duly approved by Board. Employees who are confirmed and have completed at least one year of service with the Bank are entitled to avail loan. The Bank follows the process of recovering monthly installments due from respective employees while processing monthly salary.

3. Deposits

As per the Operating guidelines PBs can accept only savings and current deposits. The aggregate limit per customer has been extended to H200,000 from April 07, 2021 by RBI as against the previous limit of H1,00,000. PBs are permitted for making arrangements with any other Scheduled Commercial Bank / SFB (Small Finance Bank), for amounts in excess of the prescribed limits, to be swept into an account opened for the customer at that bank, with the prior written consent of the customer.

The above limit shall apply to customer deposits and not to any security / earnest money deposit the Bank may collect from any of its service providers in the ordinary course of business.

4. Fixed assets and depreciation

Fixed Assets are stated at cost, net of accumulated depreciation and accumulated 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 costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are recognised in the Profit and Loss Account as incurred. Capital work in progress is valued at cost.

Gains and losses arising from retirement or disposal of the tangible assets are determined as the difference between the net disposal proceeds and the carrying amount of the assets and are recognised in Profit and Loss Account on the date of retirement or disposal.

Intangible assets are stated at acquisition cost, net of accumulated amortization and accumulated impairment losses if any. Capital work in progress includes cost of assets under development that are not ready for their intended use.

Depreciation is charged over the estimated useful life of the fixed assets. The management believes that the useful life of assets assessed by the Bank, pursuant to the Act, taking into account changes in the environment, changes to the technology, the utility and the efficacy of the asset in use, fairly reflects is estimate of useful life of the fixed assets.

All fixed assets are depreciated as per written down value method except for Leasehold improvements, Computer hardware, Servers & Networks, Computer software and Plant and machinery, which are being depreciated as per straight line method.

All fixed assets individually costing less than H5,000 are fully depreciated in the year of purchase.

5. Impairment

The carrying amounts of assets are 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 assets 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 its remaining useful life. An impairment loss is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss has previously been recognized.

6. Foreign currency transactions

Foreign currency transactions are recorded at the rates of exchange prevailing on the date of the transaction. Exchange differences, if any arising out of transactions settled during the year are recognised in the statement of Profit and Loss Account.

Monetary assets and liabilities denominated in foreign currencies as at the balance sheet date are translated at the closing exchange rates on that date. 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 transaction. The exchange differences, if any, are recognised in the Profit and Loss Account and related assets and liabilities are accordingly restated in the balance sheet.

7. Revenue recognition

(i) Interest income on deposits with Banks and financial institutions is recognised on a time proportion basis taking into account the amount outstanding and the implicit rate of interest.

(ii) Income on non-coupon bearing discounted instruments is recognised over the tenor of the instrument on a constant effective yield basis.

(iii) Transaction fee is recognised on the completion of individual transactions made through Point of Transaction (POT) devices.

(iv) Disbursement fee includes remittance and service fees which are recognised based on the amount of disbursements / remittances / collections made through POT devices.

(v) Business correspondent fee is recognised on the allotment of POT devices to individual agents.

(vi) Agent registration fee is recognised on receipt of non-refundable agent deposit.

(vii) Insurance broking income is recognised based on the numbers of policies sold to customers on behalf of insurance companies.

(viii) Service revenue is recognised on completion of provision of services. Revenue, net of discount is recognised on transfer of all significant risks and rewards to the customer and when no significant uncertainty exists regarding realization of consideration.

(ix) Third party financial products processing fees are recognised on an upfront basis.

(x) Retail income including subscription charges and annual charges relating to debit cards issuance is recognised to the extent of balance available in the customer’s account.

(xi) All other fees are accounted for as and when they become due.

8. Leases

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Leases where the lessor effectively retains substantially all the risks and rewards of ownership over the lease term are classified as operating leases. The total lease rentals in respect of assets taken on operating lease are charged to the Profit and Loss Account on a straight line basis over the lease term. A lease that transfers substantially all the risks and rewards incidental to ownership to the Bank is classified as a finance lease.

9. Taxation

Income tax expense comprises current tax (i.e. amount of tax for the year determined in accordance with the Income Tax Act, 1961) and deferred tax charge or benefit (reflecting the tax effect of timing differences between accounting income and taxable income for the year).

Current tax

Provision for current tax is recognised based on estimated tax liability computed after adjusting for allowances, disallowances and exemptions in accordance with the tax laws applicable.

Deferred taxation

Deferred income taxes reflect the impact of current year timing differences between taxable income and accounting income for the year and reversal of timing differences of earlier years. The deferred tax charge or benefit and the corresponding deferred tax liabilities and assets are recognised using the tax rates and tax laws that have been enacted or substantially enacted as at the balance sheet date. 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 realized, however, where there is unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is a virtual certainty supported by convincing evidence that they can be realized against future taxable profits. At each balance sheet date, unrecognized deferred tax asset of earlier years are re-assessed and recognized to the extent that it has become reasonably or virtually certain ,as the case may be, that future taxable income will be available against which such deferred tax asset can be realized.

Minimum Alternate Tax (‘MAT’)

MAT under the provisions of the Income Tax Act, 1961 is recognised as current tax in the Profit and Loss Account. The credit available under the Income Tax Act, 1961 in respect of MAT paid is recognised as an asset only when and to the extent there is convincing evidence that the Bank will pay normal income tax during the period for which the MAT can be carried forward for set off against the normal tax liability. MAT credit recognised as an asset is reviewed at each balance sheet date and written down to the extent the aforesaid convincing evidence no longer exists.

10. Earnings per share

The Bank reports basic and diluted earnings per share in accordance with Accounting Standard 20 - Earnings Per Share. Basic earnings per share is computed by dividing the net profit or loss after tax for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the year.

Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the year. Diluted earnings per share is computed by dividing the net profit after tax by weighted average number of equity shares and dilutive potential equity shares outstanding during the year.

11. Provisions, contingent liabilities and contingent assets

The Bank creates a provision when there is present obligation as a result of a past event that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. A disclosure for a contingent liability is made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. 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.

Loss contingencies arising from claims, litigations, assessment fines, penalties etc. are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that the outflow of resources would be required to settle the obligation, the provision is reversed. Contingent assets are not recognised in the financial statements. However, contingent assets are assessed continually and if it is virtually certain that an economic benefit will arise, the asset and related income are recognised in the period in which the change occurs.

12. Provision for bad and doubtful debts

The Bank creates 100% provision against all receivables outstanding for more than 180 days or earlier where recovery is considered doubtful.

13. Cash and cash equivalents

Cash and cash equivalents include cash in hand, balances with RBI, balances with other Bank’s and money at call and short notice.

14. Employee benefits Post-employment benefits Defined contribution plan

The Bank makes specified monthly contributions towards employee provident fund to Government administered provident fund scheme which is a defined contribution plan. The Bank’s contribution is recognised as an expense in the Profit and Loss Account during the period in which the employee renders the related service.

Defined benefit plan

The Bank’s gratuity benefit scheme is a defined benefit plan. The Bank’s net obligation in respect of a defined benefit plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The calculation of the Bank’s obligation under the plan is performed quarterly by a qualified actuary using the projected unit credit method.

The Bank recognizes all actuarial gains and losses arising from defined benefit plans immediately in the Profit and Loss Account. All expenses related to defined benefit plans are recognised in employee benefits expense in the Profit and Loss Account. When the benefits of a plan are improved, the portion of the increased benefit related to past service by employees is recognised in Profit and Loss Account on a straight-line basis over the average period until the benefits become vested. The Bank recognizes gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs.

Compensated absences

Compensated absences balance upto 7 days are encashed at the end of financial year on the basic salary. Encashment of more than 7 days of leave is not permitted. Leave balance over 7 days will lapse at the end of financial year.

15. Segment Information

The segment information as per AS 17, “Segment Reporting”, has been disclosed as per guidelines issued by RBI on AS 17 vide circular dated April 18, 2007. Attributable assets, liabilities, income and expenses are either specifically identified with individual segment or are allocated to the segment on reasonable basis or are classified as unallocated.

16. Share Issue Expenses

As per the section 52 (2) (c) of the Companies Act 2013, securities premium account may be utilized for writing off the expenses/ commission paid/discount allowed on, any issue of shares or debentures by a company. Further, as per RBI DBOD mailbox clarification dated October 9, 2007 on ‘Prudential Norms - Utilization of Share Premium Account’, banks can utilize share premium account for meeting the expenses relating to the issue of shares.

17. Employee Stock Option Scheme

The Bank has Employee Stock Option Plan which provides for grant of options on the Bank’s equity shares to employees of the Bank. The plan provides that the Banks’s employees are granted an option to acquire equity shares of the Company that vests in a graded manner. The Option may be exercised with in specified period. Employee stock compensation cost for stock options is recognised as per the Guidance Note on Accounting for Employee Share-based Payments, issued by the Institute of Chartered Accountants of India. The Bank measures compensation cost relating to the employee stock options using the fair value method. The amortization of fair value is recognized as an expense in the Statement of Profit and Loss within employee benefits as employee’s compensation expenses, with corresponding increase in employee stock option outstanding reserve.

Gains on cancellation/forfeiture of unvested options are recognized as a decrease in expenses in Profit and Loss Account within employee benefits. Further, employees stock option outstanding reserve transferred to General Reserve at the time of cancellation/ expiry/forfeiture of vested options.