3. Significant accounting policies
3.1 Financial instruments - initial recognition
3.1.1 Date of recognition
Financial assets and liabilities, with the exception of loans, debt securities, and borrowings are initially recognised on the trade date, i.e., the date that the
company becomes a party to the contractual provisions of the instrument. 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). The company
recognises debt securities and borrowings when funds reach the company.
3.1.2 Initial measurement of financial instruments
The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments.
Financial instruments are initially measured at their fair value, except in the case of financial assets and financial liabilities recorded at amortised cost,
transaction costs are added to, or subtracted from, this amount.
3.1.3 Measurement categories of financial assets and liabilities
The company classifies all of its financial assets based on the business model for managing the assets and the asset's contractual terms, measured at:
• Amortised cost
3.2 Financial assets and liabilities
3.2.1 Bank balances and Loans at amortised cost
The Company measures Bank balances and Loans at amortised cost if both of the following conditions are met:
• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the
principal amount outstanding.
The details of these conditions are outlined below.
Business model assessment
The Company determines its business model at the level that best reflects how it manages Company's financial assets to achieve its business objective.
The Company's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on
observable factors such as:
• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key
management personnel
• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those
risks are managed
• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the
contractual cash flows collected)
• The expected frequency, value and timing of sales are also important aspects of the Company's assessment
The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case' scenarios into account. If cash flows
after initial recognition are realised in a way that is different from the Company's original expectations, the Company does not change the classification
of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased
financial assets going forward.
The SPPI test
3.2.2 Equity instruments at FVOCI
The Company subsequently measures all equity investments at fair value through profit or loss, unless the Company 's management has elected to
classify irrevocably some of its equity investments as equity instruments at FVOCI, when such instruments meet the definition of Equity under Ind AS 32
Financial Instruments and are not held for trading. 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.
3.2.3 Debt securities and other borrowed funds
After initial measurement, 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.
3.2.4 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. Undrawn loan commitments are in the scope of the ECL requirements.
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 together with the corresponding ECLs are disclosed in notes.
3.3 Reclassification of financial assets and liabilities
The Company does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the
Company acquires, disposes of, or terminates a business line. Financial liabilities are never reclassified. The Company did not reclassify any of its financial
assets or liabilities.
3.4 Derecognition of financial assets and liabilities
3.4.1 Derecognition of financial assets other than due to substantial modification
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive
cash flows from the financial asset have expired. The Company also derecognises the financial asset if it has both transferred the financial asset and the
transfer qualifies for derecognition.
The Company has transferred the financial asset if, and only if, either:
• The Company has transferred its contractual rights to receive cash flows from the financial asset
Or
• It retains 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.
Pass-through arrangements are transactions whereby the Company retains the contractual rights to receive the cash flows of a financial asset (the 'original
asset'), but assumes a contractual obligation to pay those cash flows to one or more entities, when all of the following three conditions are met:
• The Company has no obligation to pay amounts to the eventual recipients unless it has collected equivalent amounts from the original asset, excluding
short-term advances with the right to full recovery of the amount lent plus accrued interest at market rates
• The company cannot sell or pledge the original asset other than as security to the eventual recipients
• The company has to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the Company is not entitled
to reinvest such cash flows, except for investments in cash or cash equivalents including interest earned, during the period between the collection date
and the date of required remittance to the eventual recipients.
A transfer only qualifies for derecognition if either:
• The Company has transferred substantially all the risks and rewards of the asset
Or
• The Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset
The company considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third
party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer.
When the Company has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset 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 asset 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 asset 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.
In case where transfer of a part of financial assets qualifies for de-recognition, 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 financial asset previously carried under amortisation cost
category. The resulting interest only strip initially is recognised at FVTPL.
3.4.2 Financial Liabilities
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is
replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the
original financial liability and the consideration paid is recognised in profit or loss.
3.5 Impairment of financial assets
3.5.1 Overview of the ECL principles
The Company records allowance for expected credit losses for all loans, other debt financial assets not held at FVTPL, together with loan commitments, in
this section all referred to as 'financial instruments'. Equity instruments are not subject to impairment under Ind AS 109.
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) as
outlined in Notes.
The 12mECL is the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12
months after the reporting date.
Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial
instruments.
The company has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument'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.
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.
3.5.2 The Calculation of ECLs
The Company calculates ECLs to measure the expected cash shortfalls, 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.
The key elements of the ECL are summarised below:
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
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.
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.
The mechanics of the ECL method are summarised below:
Stage 1: The 12mECL is calculated as the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are
possible within the 12 months after the reporting date. The company calculates the 12mECL allowance based on the expectation of a default occurring in
the 12 months following the reporting date. These expected 12-month default probabilities are applied to a forecast EAD and multiplied by the expected
LGD and discounted by an approximation to the original EIR.
Stage 2: When a loan has shown a significant increase in credit risk since origination, the Company records an allowance for the LTECLs PDs and LGDs are
estimated over the lifetime of the instrument. The expected cash shortfalls are discounted by an approximation to the original EIR.
Stage 3: For loans considered credit-impaired, the Company recognises the lifetime expected credit losses for these loans. The method is similar to that for
Stage 2 assets, with the PD set at 100%.
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 onthe 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.
3.5.3 Forward Looking Information
In its ECL models, the Company relies on a broad range of forward looking information as economic inputs, such as:
• GDP growth
• Unemployment rates
The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the financial statements.
To reflect this, qualitative adjustments or overlays are made as temporary adjustments.
3.5.4 Write-offs
Financial assets 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 recorded as an expense in the period of write off. Any subsequent recoveries are
credited to impairment on financial instrument on statement of profit and loss.
3.6 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. The Company considers the modification of the loan only before the loans gets credit impaired.
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.
3.7 Recognition of interest income
3.7.1 The effective interest rate method
Under Ind AS 109 interest income is recorded using the effective interest rate ('EIR') method for all financial instruments measured at amortised cost.
The EIR is the rate that discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the
financial asset.
3.7.2 Interest Income
The EIR (and therefore, the amortised cost of the asset) is calculated by taking into account of fees and costs that are an integral part of the EIR. The
Company recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the life of the loan.
3.8 Taxes
3.8.1 Current tax
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 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.
3.8.2 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, except:
• In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences
can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred
tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporarydifferences, and the
carry forward of unused tax credits and unused tax losses can be utilised, except:
• When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction
that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss
• In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets
are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be
available against which the temporary differences 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.
3.9 Property, Pant and Equipment
Property plant and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in
value. 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.
Depreciation on tangible property, plant & equipment is charged on straight line method over the useful life/remaining useful life of the asset as per
Schedule II of the Companies Act 2013. Depreciation on assets purchased / acquired during the year is charged from the date of purchase / acquisition of
the asset or from the day the asset is ready for its intended use. Similarly, depreciation on assets sold / discarded during the year is charged up to the date
when the asset is sold / discarded.
Intangible Assets consisting Softwares are amortised over the period of three years.
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 in accordance with the requirements for determining when a performance obligation is
satisfied in Ind AS 115.
3.10 Impairment of non-financial assets
The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual
impairment testing for an asset is required, the Company estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an
asset's or cash-generating unit's (CGU) fair value less costs of disposal and its value in use. Recoverable amount is determined for an individual asset,
unless the asset does not generate cash inflows that are largely independent of those from other assets or Group of assets. When the carrying amount of
an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
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 the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are
taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation
multiples, quoted share prices for publicly traded companies or other available fair value indicators.
The company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company's
CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long¬
term growth rate is calculated and applied to project future cash flows after the fifth year. To estimate cash flow projections beyond periods covered by
the most recent budgets/forecasts, the Company extrapolates cash flow projections in the budget using a steady or declining growth rate for
subsequent years, unless an increasing rate can be justified. In any case, this growth rate does not exceed the long-term average growth rate for the
products, industries, or country or countries in which the entity operates, or for the market in which the asset is used.
Impairment losses of continuing operations, are recognised in the statement of profit and loss.
For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised
impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset's or CGU's recoverable amount. A
previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount
since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor
exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years.
Such reversal is recognised in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a
revaluation increase.
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