2 Material accounting policy information
The principal accounting policies applied in the preparation of these Standalone Financial Statements are set out below. These
policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of Preparation of Standalone financial statements
The Standalone Financial Statements have been prepared in accordance with the requirements of the information and disclosures
mandated by division HI of Schedule III to the Act, applicable Ind AS, other applicable pronouncements and regulations.
(i) Compliance with Ind AS and regulation
The financial statements of the Company have been prepared in accordance with Indian Accounting Standards (Ind
AS) as notified by Ministry of Corporate Affairs pursuant to Section 133 of the Companies Act, 2013 to be read with
Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 and the Companies (Indian Accounting Standards)
Amendment Rules, 2016 & The Master Direction - Non-Banking Financial Company - Non-Deposit taking Company
(Reserve Bank) Directions, 2016 (‘the NBFC Master Directions’).
(ii) Historical cost convention and going concern assumption
The financial statements have been prepared on a historical cost basis, except for certain financial assets and liabilities
(including derivative instruments) are measured at fair value. The financial statements are prepared on a going concern
basis, as the Management is satisfied that the Company shall be able to continue its business for the foreseeable future
and no material uncertainty exists that may cast significant doubt on the going concern assumption. In making this
assessment, the Management has considered a wide range of Information relating to present and future conditions,
including future projections of profitability, cash flows and capital resources.
2.2 Investment in subsidiary
The Company recognises investments in subsidiaries and associates at cost and are not adjusted to fair value at the end of each
reporting period as allowed by Ind AS 27 ‘Separate Financial Statement.
2.3 Use of estimates and judgements
The preparation of the Financial Statement in conformity with Ind AS requires management to make estimates, judgments
and assumptions. These estimates, judgments and assumptions affect the application of accounting policies and the reported
amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the Financial statements and
reported amounts of revenues and expenses during the period. Accounting estimates could change from period to period. Actual
results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Appropriate
changes in estimates are made as management becomes aware of changes in circumstances surrounding the estimates. Changes
in estimates are reflected in the Financial statement in the period in which changes are made and, if material, their effects are
disclosed in the notes to the Financial statements.
i) Business model assessment
Classification and measurement of financial assets depends on the results of business model and the solely payments of
principal and interest (“SPPI”) test. The Company determines the business model at a level that reflects how groups of
financial assets are managed together to achieve a particular business objective. This assessment includes judgement
reflecting all relevant evidence including how the performance of the assets is evaluated and their performance
measured, the risks that affect the performance of the assets and how these are managed and how the managers of the
assets are compensated. The Company monitors financial assets measured at amortised cost or fair value through other
comprehensive income (FVOCI) that are derecognised prior to their maturity to understand the reason for their disposal
and whether the reasons are consistent with the objective of the business for which the asset was held. Monitoring is part
of the Company’s continuous assessment of whether the business model for which the remaining financial assets are
held continues to be appropriate and if it is not appropriate whether there has been a change in business model and so a
prospective change to the classification of those assets.
ii) Fair value of financial instruments
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market
conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation
technique. When the fair values of financial assets and financial liabilities recorded in the balance sheet cannot be
derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation
models. The inputs to these models are taken from observable markets where possible, but where this is not feasible,
estimation is required in establishing fair values.
(iii) Impairment of financial assets
Expected credit losses (‘ECL’) are recognised for all financial assets except those classified as FVTPL and equity
instruments as per the Board approved policy.
The Company follows a staging methodology for ECL computation. Financial assets where no significant increase
in credit risk has been observed since inception are classified in ‘stage 1’ for which a 12 month ECL is recognised.
Financial assets which have significant increase in credit risk since inception are considered to be in ‘stage 2’ and those
which are in default or for which there is an objective evidence of impairment are considered to be in ‘stage 3’. Life time
ECL is recognised for stage 2 and stage 3 financial assets.
Stage 1 (12-month ECL) is provided basis the default events that are likely to occur in the next 12 months from the
reporting date. Stage 2 and Stage 3 (lifetime ECL) is provided for basis all possible default events likely to occur during
the life of the financial instrument.
Treatment of the different stages of financial assets and the methodology of determination of ECL
(a) Credit impaired (stage 3)
Loans considered credit-impaired. A default on a financial asset is when the counterparty fails to make the
contractual payments within 90 days of when they fall due. Accordingly, the financial assets shall be classified as
Stage 3, if on the reporting date, it has been 90 days past due. Further if the customer has requested forbearance
in repayment terms, such restructured, rescheduled or renegotiated accounts are also classified as Stage 3. Non¬
payment on another obligation of the same customer is also considered as a stage 3. Once an account defaults as
a result of the Days past due condition, it will be considered to be cured only when entire arrears of interest and
principal are paid by the borrower.
(b) Significant increase in credit risk (stage 2)
When a loan has shown a significant increase in credit risk i.e. loan accounts which are overdue for more than 1
day but up to 90 days as on the reporting date, 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.
(c) Without significant increase in credit risk since initial recognition (stage 1)
The company recognises Performing assets i.e. loan accounts where there are no overdue outstanding amounts,
in Stage 1. ECL resulting from default events that are possible in the next 12 months are recognised for financial
assets in stage 1.
(d) Measurement of ECL
The Company calculates ECLs based on a probability-weighted scenario to measure the expected cash shortfalls.
Cash shortfall is the difference between the cash flows that are due to the Company in accordance with the contract
and the cash flows that the Company expects to receive.
The Company has calculated ECL using three main components: a probability of default (PD), a loss given default
(LGD) and the exposure at default (EAD). ECL is calculated by multiplying the PD, LGD and EAD.
The mechanics of the ECL calculations are outlined below and the key elements are, as follows:
Probability of Default (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.
Exposure at Default (EAD): The Exposure at Default is an estimate of the exposure at a future default date,
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.
Loss Given Default (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.
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