4. SIGNIFICANT ACCOUNTING POLICIES
4.1. ADVANCES
4.1.1 Classification and measurement of advances
Advances are classified into performing and non-performing advances ('NPAs') as per the RBI guidelines and are stated net of bills rediscounted, specific provisions made towards NPAs, unrealized interest, claims received from Credit Guarantors and provisions for funded interest on term loan classified as NPAs.
The aggregate amount of the participation transferred to the Bank under Inter-Bank Participation on a risk-sharing basis is classified under advances, following the RBI guidelines
4.1.2Non-performing advances and provision on non-performing advances
NPAs are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by the RBI. NPAs are upgraded to standard as per the extant RBI guidelines.
Provisions for NPAs are made for sub-standard, doubtful and loss assets at rates as prescribed by the RBI. Higher accelerated provisioning is made basis recoverability and sound commercial judgement.
In case of NPAs referred to the National Company Law Tribunal ('NCLT') under the Insolvency and Bankruptcy Code, 2016 ('IBC') and where the NCLT has approved the resolution plan or liquidation order, provision is maintained at higher of the requirement under the RBI guidelines or the likely haircut as per resolution plan or liquidation order.
4.1.3Provision on Restructured Assets
In case of restructured/rescheduled assets, provision is made in accordance with the guidelines issued by the RBI as applicable.
4.1.4Write-offs and recoveries from written-off accounts
Write-offs are carried out in accordance with the Bank's policy. Recoveries from advances written-off are recognised in the Profit and Loss account under 'Other income' and recovery of Unrealised Interest under 'Income Interest on Loans & Advances'.
4.1.5Other provisions on advances
In respect of borrowers classified as non-cooperative or wilful defaulters, the Bank makes accelerated provisions as per the extant RBI guidelines.
Loans reported as fraud are classified as loss assets, and fully provided for immediately without considering the value of security.
For entities with Unhedged Foreign Currency Exposure ('UFCE'), provision is made in accordance with the guidelines issued by the RBI, which requires ascertaining the amount of UFCE, estimating the extent of likely loss and estimating the riskiness of the unhedged position. This provision is classified under Schedule 5 - Other Liabilities and Provisions in the Balance Sheet. Further, incremental capital is maintained in respect of such borrower counterparties in the highest risk category, in line with stipulations by the RBI.
As per extant RBI guidelines, the Bank assesses incremental exposure of specified borrowers of the banking system beyond the Normally Permitted Lending Limit ('NPLL'), and makes additional provisions, if required.
The Bank maintains a general provision on standard advances at the rates prescribed by the RBI. Additionally, on a prudent basis, for Special Mention Accounts (SMA), and identified stress sectors, higher provisioning is maintained.
4.1.6Securitisation and transfer of assets
In accordance with RBI guidelines on Transfer of Loan exposures, any profit or loss arising because of the transfer of loans, which is realised, is accounted for and reflected in the Profit and Loss Account for the accounting period during which the transfer is completed.
4.2. INVESTMENTS
4.2.1 Classification
In accordance with the RBI guidelines, investments are classified at the time of purchase as:
• Held for Trading ('HFT');
• Available for Sale ('AFS'); and
• Held to Maturity ('HTM').
Investments that are held principally for sale within 90 days are classified as HFT securities.
Investments that the Bank intends to hold till maturity are classified under the HTM category. Investments in the equity of subsidiaries is categorised as HTM in accordance with the RBI guidelines.
All other investments are classified as AFS securities.
For disclosure in the Balance Sheet, investments in India are classified under six categories - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investment in Subsidiaries/Joint Ventures and Units and Gold.
4.2.2 Transfer of security between categories
Transfer of security between categories of investments is accounted for as per the RBI guidelines.
4.2.3 Acquisition cost
Costs incurred at the time of acquisition, of investments, such as brokerage, commission etc., are charged to the Profit and Loss Account. Broken period interest is charged to the Profit and Loss Account. The cost of investment is computed based on the weighted average cost method.
4.2.4Valuation
Investments classified under the HTM category:
Investments are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised over the remaining maturity period of the security on a straight-line basis. Such amortization of premium is adjusted against interest income under the head 'Income from Investments' under "Schedule 13" in the Profit and Loss Account. As per the RBI guidelines, discount on securities held under the HTM category is not accrued and such securities are held at the acquisition cost till maturity.
Investments under these categories are marked to market. The market/fair value of quoted investments included in the AFS and HFT categories is the market price of the scrip as available from the trades/quotes on the stock exchanges or prices declared by the Fixed Income Money Market and Derivatives Association of India ('FIMMDA')/Financial Benchmark India Private Limited ('FBIL'), periodically. Net depreciation, if any, within each category of each investment classification is recognised in the Profit and Loss Account. The net appreciation, if any, under each category of each investment classification is ignored. Net depreciation on each type of investment falling under the residual category of 'Others' (i.e. mutual funds, Pass Through Certificates (PTCs), security receipts etc.) is not offset against gain in another class of investment falling within the 'Others' category. The depreciation on securities acquired by way of conversion of outstanding loans is provided in accordance with the RBI guidelines.
Provision for depreciation on investments is classified under Schedule-14 'Other Income'. The book value of individual securities is not changed consequent to the periodic valuation of investments.
Treasury Bills, Exchange Funded Bills, Commercial Paper and Certificate of Deposits being discounted instruments, are valued at carrying cost which includes discounts accreted over the period to maturity.
Units of mutual funds are valued at the latest repurchase price/Net Asset Value ('NAV') declared by the mutual fund.
The market value of investments where current quotations are not available is determined in accordance with the following norms prescribed by the RBI:
• The market/fair value of unquoted government securities which are in the nature of Statutory Liquidity Ratio ('SLR') securities forming part of AFS and HFT categories is computed as per the rates published by FIMMDA / FBIL.
• In case of special bonds issued by the Government of India that do not qualify for SLR purposes, unquoted bonds, debentures and preference shares where interest/dividend is received regularly (i.e. not overdue beyond 90 days), the market price is derived based on the Yield to maturity ('YTM') for Government Securities as published by FIMMDA/ FBIL and suitably marked up for credit risk applicable to the credit rating of the instrument. The matrix for credit risk markup for each category and credit ratings along with residual maturity issued by FIMMDA / FBIL is adopted for this purpose.
• In the case of bonds & debentures where interest is not received regularly (i.e. overdue beyond 90 days), the valuation is in accordance with the prudential norms for provisioning as prescribed by the RBI.
• Equity shares, for which current quotations are not available or where the shares are not quoted on the stock
exchanges, are valued at break-up value (without considering revaluation reserves, if any) which is ascertained from
the company's latest Balance Sheet (not older than 18 months). In case the latest Balance Sheet is not available, the shares are valued at H1 per company.
• Investments in Security Receipts (SRs.) are valued as per the NAV declared by the issuing Asset Reconstruction Company ('ARC') or net book value of loans transferred or estimated recoverable value based on Bank's internal assessment on case-to-case basis, whichever is lower. In case of investments in SRs. which are backed by more than 10% of the stressed assets sold by the Bank, the valuation of such SRs. is additionally subject to a floor of face value of the SRs. reduced by the provisioning rate as per the extant asset classification and provisioning norms as applicable to the underlying loans, assuming that the loan notionally continued in the books of the Bank.
• Where the sale of a 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 the Profit & Loss account. Where such a 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. to arrive at their Book Value.
• 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 1,2018 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.
• Units of Alternate Investment Fund ('AIF') held under the AFS category are marked to market using the NAV provided by AIF which is determined from the latest audited financial statements. In case the audited financials are not available for a period beyond 18 months, the investments are valued at H1 per AIF.
Realised gains are recognised in the Profit and Loss Account and subsequently appropriated to the Capital Reserve Account (net of taxes and transfer to statutory reserves) in accordance with the RBI guidelines. Losses are recognised in the Profit and Loss Account. The discount if any, on the acquisition of investments in the Held to Maturity (HTM) category is accounted for as follows:
a) on interest-bearing securities, it is accounted for at the time of sale/ redemption.
b) on zero-coupon securities, it is accounted for over the balance tenor of the security on a constant yield basis.
Investments classified under the AFS and HFT categories:
Realised gains/losses are recognised in the Profit and Loss Account.
4.2.6Short Sales
In accordance with the RBI guidelines, the Bank undertakes short sale transactions in Central Government dated securities. Such short positions are categorised under the HFT category and netted off from investments in the Balance Sheet. These positions are marked-to-market along with the other securities under the HFT portfolio and the resultant Mark-to-Market ('MTM') gains/losses are accounted for as per the relevant RBI guidelines for valuation of investments discussed earlier.
4.2.7Repurchase and reverse repurchase transactions.
Repurchase transactions ('Repos')
Repurchase transactions in Government securities and corporate debt securities including those conducted under the Liquidity Adjustment Facility ('LAF') and Marginal Standby Facility ('MSF') with RBI are accounted for as collateralised borrowings. Accordingly, securities given as collateral under an agreement to repurchase them, continue to be held under the investment account and the Bank continues to accrue the coupon on the security during the repo period. Borrowing cost on such repo transactions is accounted as interest expense in "Schedule 15 - Interest Expended" in the Profit and Loss Account.
Reverse repurchase transactions ('Reverse repos')
Reverse repurchase transactions with RBI with original maturity upto 14 days from the date of issuance, including those conducted under the Liquidity Adjustment Facility ('LAF') and Standing Deposit Facility ('SDF'), are accounted for as collateralised lending under "Schedule 6 - Balances with RBI - in Other Accounts". Revenue on such reverse repos is accounted for as interest income under "Schedule 13 - Interest Earned - Interest on balances with Reserve Bank of India and Other Inter-bank Funds" in the Profit and Loss Account.
Reverse repos with an original maturity of more than 14 days from the date of issuance are accounted for as collateralised lending under "Schedule 9 - Advances". Revenue on such reverse repos are accounted for as interest income under "Schedule 13 - Interest Earned - Interest/discount on advances/bills" in the Profit and Loss account.
4.2.8 Non-Performing Investments
Non-performing investments are identified, and provision is made thereon as per the RBI guidelines. Provision for depreciation on such non-performing investments is not set off against the appreciation in respect of other performing securities as per RBI guidelines. Interest on non-performing investments is not recognized in the Profit and Loss Account until received.
The Bank also classifies an investment as a non-performing investment in case any credit facility availed by the same borrower/entity has been classified as a non-performing asset and vice versa. The above is applied to Preference Shares where the fixed dividend is not paid.
The investments in debentures/ bonds, which are deemed to be an advance, are also subjected to NPI norms as applicable to investments.
4.3. REVENUE RECOGNITION
Interest income is recognised on an accrual basis in accordance with AS-9, Revenue Recognition as notified under Section 133 of the Companies Act, 2013 read together with the Companies (Accounts) Rules, 2014, the Companies (Accounting Standards) Rules, 2021 and the RBI guidelines, except in the case of interest income on non-performing assets where it is recognised on receipt basis as per the income recognition and asset classification norms of RBI. Income on non-coupon-bearing discounted instruments or low coupon-bearing instruments is recognised over the tenor of the instrument on a constant yield basis.
Commission on Guarantees/Letters of Credit, Processing Fees and rent on safe deposit lockers are accounted for on a receipt basis. Other fees and commission income are recognised when due, where the Bank is reasonably certain of ultimate collection.
Dividend income is accounted for on an accrual basis when the right to receive the dividend is established. Gain/loss on selling down of loans and advances through direct assignment is recognised at the time of sale.
Recoveries in the non performing advances are appropriated as under:
a) In the case of Term Loan/DPN, recoveries are appropriated towards principal, interest and charges in order of demand.
b) In the case of non performing Overdraft accounts the recoveries are first appropriated towards excess allowed in overdraft account if any, followed by expired sanctioned TOD and then towards interest.
c) In the case of One-Time settlement (OTS) accounts the recoveries are first adjusted to the principal balance and then towards interest and charges
d) In the case of suit-filed accounts, related legal and other expenses incurred are charged to the Profit and Loss Account net of recovery.
Profit or Loss on sale of investments is recognised in the Profit and Loss Account. However, the profit on the sale of investments in the "Held to Maturity" category is appropriated to Capital Reserve (net of applicable taxes and the amount required to be transferred to the Statutory Reserve account) in accordance with the RBI guidelines.
Interest on income-tax refund is recognised based on the refund intimation/order received under the provisions of the Income Tax Act, 1961 from time to time.
In accordance with RBI guidelines on the sale of non-performing advances, if the sale is at a price below the net book value (i.e. book value less provisions held), the shortfall is charged to the Profit and Loss Account. If the sale is for a value higher than the net book value, the excess provision is credited to the Profit and Loss Account in the year the amounts are received.
4.4. FOREIGN CURRENCY TRANSACTIONS 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 the foreign currency on the date of the transaction.
Conversion
Monetary Assets and Liabilities, Forward Exchange Contracts, Guarantees, Letters of Credit, Acceptances, Endorsements, and other obligations are evaluated at the closing spot rates/forward rates for the residual maturity of the contract, as notified by the Foreign Exchange Dealers Association of India ('FEDAI') / Financial Benchmarks India Private Limited (FBIL) and the resulting profit and loss is recognised in the Profit and Loss account, as per the guidelines issued by RBI.
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.
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.
Outstanding forward exchange contracts are revalued at the Balance Sheet date at the rates notified by FEDAI/FBIL 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.
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.
4.5. DERIVATIVE CONTRACTS
Derivative contracts are designated as hedging or trading and accounted in accordance with Reserve Bank of India's guidelines.
Derivative deals for trading are marked to market and net depreciation is recognised while net appreciation is ignored.
Derivatives used for hedging are marked to market in cases where the underlying assets/ liabilities are marked to market and income /expenditure is accounted on accrual basis.
4.6. FIXED ASSETS, DEPRECIATION, REVALUATION AND IMPAIRMENT
Fixed assets (except premises revalued) are carried at the cost of acquisition less accumulated depreciation and impairment, if any. Cost includes initial handling and delivery charges, duties, taxes, and incidental expenses related to the acquisition and installation of the asset. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future economic benefit / functioning capability from / of such assets.
The portfolio of immovable properties is revalued periodically by an independent valuer to reflect the current market valuation. All land and buildings owned by the Bank and used as branches, offices and employee's residential quarters are grouped under "Land and Building" in the fixed assets category. Appreciation, if any, on revaluation is credited to the Revaluation Reserve. Additional Depreciation on the revalued asset is charged to the Profit and Loss Account and appropriated from the Revaluation Reserves to Revenue Reserves.
Computer Software is capitalised along with computer hardware and included under other fixed assets.
Capital work-in-progress includes the cost of fixed assets that are not ready for their intended use and also includes advances paid to acquire fixed assets.
Depreciation is provided over the estimated useful life of a fixed asset on a straight-line method from the date of addition. The Management believes that depreciation rates currently used, fairly reflect its estimate of the useful lives and residual values of fixed assets based on the historical experience of the Bank, though these rates in certain cases are different from those prescribed under Schedule II of the Companies Act, 2013. Whenever there is a revision of the estimated useful life of an asset, the unamortised depreciable amount is charged over the revised remaining useful life of the said asset.
Where during any financial year, an addition has been made to any asset or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such asset is calculated on pro rata basis from the date of such addition or as the case maybe, up to the date on which such asset has been sold, discarded, demolished or destroyed.
Gain or losses arising from the retirement or disposal of fixed assets are determined as the difference between the net disposal proceeds and the carrying amount of assets and are recognised as income or expense in the Profit and Loss Account. Further, profit on sale of premises is appropriated to the Capital Reserve Account (net of taxes and transfer to Statutory Reserve) in accordance with RBI instructions.
The carrying amounts of assets are reviewed at each Balance Sheet date to ascertain 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 at the weighted average cost of capital. After impairment, depreciation is provided on the revised carrying amount of the asset over its remaining useful life.
4.7. EMPLOYEE BENEFITS
Short-term employee benefits
Short-term employee benefits comprise salaries and other compensations payable for services which the employee has rendered during the period. These are recognized at the undiscounted amount in the Profit and Loss Account.
Provident Fund
Contributions made by the Bank to the Provident Fund and Contributory Pension Scheme in the form of retirement benefits are charged to the Profit and Loss account. There is no other obligation other than the contribution payable to the fund. Shortterm employee benefits are accounted for on an actual basis.
Gratuity
The Bank contributes towards the Gratuity Fund "Karnataka Bank Employees' Gratuity Fund" (Defined Retirement Benefit Scheme) administered by a Trust formed for the benefits to eligible employees on the Bank's instruction. Under this Scheme, the settlement obligations remain with the Bank. The Gratuity payable to vested employees on termination of employment is determined based on the respective employee's salary & number of years of employment with the Bank. The liability with regard to the Gratuity is recognised on the basis of actuarial valuation conducted by an independent actuary using the Projected Unit Credit Method as at 31st March every year based on certain assumptions regarding Discount rate, Salary Escalation, mortality and employee attrition. Actuarial gain/loss is immediately recognized in the Profit and Loss Account of the Bank and is not deferred.
Pension
The Bank makes contribution towards the Pension obligation (Defined Retirement Benefit Scheme) to a separate Trust formed for the purpose of management of the Fund, which determines the pension payable to the eligible employee based on the Industry-wide Pension Scheme. The Trust has purchased a Group Superannuation Policy from LIC of India for payment of pension. However, the ultimate obligation of payment of pension remains with the Bank. The liability with regard to the Pension is recognised on the basis of actuarial valuation conducted by an independent actuary using the Projected Unit Credit Method as at 31st March every year based on certain assumptions regarding Discount rate, Salary Escalation, mortality and employee attrition. Actuarial gain/loss is immediately recognized in the Profit and Loss Account of the Bank and is not deferred.
National Pension Scheme ('NPS')
In respect of employees who have joined the Bank on or after 1st April 2010, the Bank contributes prescribed percentage of the Basic pay and dearness allowance of such employees (defined contribution plan), which is managed and administered by pension fund management companies. NPS contributions are recognised in the Profit and Loss Account in the period in which they accrue.
4.8. TAXATION
Tax expenses comprise current and deferred taxes. Current income tax is measured as the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961, considering the material principles set out in the Income Computation and Disclosure Standards (ICDS) to the extent applicable, rules framed thereunder and after due consideration of the judicial pronouncement and legal opinions. 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. Deferred tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of change.
Deferred tax assets and liabilities are recognised for future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carry forwards.
Deferred tax is recognized subject to consideration of prudence on timing difference being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent period. In the event of unabsorbed depreciation and carry forward losses and items relating to capital losses, deferred tax assets are recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available to realize such assets. In other situations, deferred tax assets are recognized only to the extent that there is reasonable certainty that sufficient future taxable income will be available to realize these assets.
Deferred tax assets and liabilities are offset if such items relate to taxes on income levied by the same governing tax laws and the Company has a legally enforceable right for such set off.
Deferred tax assets are reviewed at each balance sheet date and appropriately adjusted.
4.9. SHARE ISSUE EXPENSES
Share issue expenses are adjusted from the Share Premium Account in terms of Section 52 of the Companies Act, 2013.
4.10. EARNINGS PER SHARE
The Bank reports basic and diluted earnings per share in accordance with AS-20, Earnings per Share, as notified under Section 133 of the Companies Act, 2013 read together with the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standards) Rules, 2021. Basic earnings per share is computed by dividing the net profit after tax by the weighted average number of equity shares outstanding for 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 using the weighted average number of equity shares and dilutive potential equity shares outstanding at the year-end except where the results are anti-dilutive.
4.11. EMPLOYEE STOCK/UNIT OPTION SCHEME
In accordance with the SEBI (Share Based Employee Benefits) Regulations, 2021 / Guidance Note on Accounting for the Employee Share-based Payments issued by The Institute of Chartered Accountants of India ('ICAO, the cost of equity-settled transactions is measured using intrinsic value method for all options granted on or before 31 March 2021.
RBI vide its clarification dated 30th August 2021, circular reference no. RBI/2021-22/95 DOR.GOV.REC.44/29.67.001/2021-22 on Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function Staff, advised Banks that fair value of share-linked instruments on the date of grant should be recognised as an expense for all instruments. For Employee Stock options granted after March 31, 2021, to Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function Staff and employees of the Bank, as per the extant guidelines of RBI, follows the fair value method and recognises the fair value of such option as on the date of grant computed using the Black-Scholes model without reducing estimated forfeitures, as compensation expense over the vesting period.
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