2. Significant Accounting Policies
A. Cash and cash equivalents
Cash, Cash equivalents and bank balances include fixed
deposits, (with an original maturity of three months or less
from the date of placement), margin money deposits, and
earmarked balances with banks are carried at amortised cost.
Short term and liquid investments which are not subject to
more than insignificant risk of change in value, are -included
as part of cash and cash equivalents.
B. Financial Instruments
A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity. Financial assets and financial
liabilities are recognized when the entity becomes a party to
the contractual provisions of the instruments.
Financial Assets
Initial Measurement and recognition
Financial assets are initially recognized on the trade date, i.e.,
the date that the Company becomes a party to the contractual
provisions of the instrument. The classification of financial
instruments at initial recognition depends on their purpose
and characteristics and the management's intention when
acquiring them.All financial assets (not measured subsequently
at fair value through profit or loss) are recognized initially at
fair value plus transaction costs that are attributable to the
acquisition of the financial asset.
Subsequent measurement
For the purpose of subsequent measurement, financial assets
are classified in the following categories:
- Loan Portfolio at amortized cost
- Loan Portfolio at fair value through other comprehensive
income (FVOCI)
- Equity instruments and mutual funds
Loan Portfolio at amortized cost:
Loan Portfolio is subsequently measured at amortized
cost where:
- contractual terms that give rise to cash flows on specified
dates, that represent solely payments of principal and
interest (SPPI) on the principal amount outstanding; and
- are held within a business model whose objective is
achieved by holding to collect contractual cash flows.
After initial measurement, these financial assets are
subsequently measured at amortized cost using the effective
interest rate (EIR) method less impairment. Amortized cost
is calculated by taking into account any discount or premium
on acquisition and fees or costs that are an integral part of
the EIR. The EIR amortization is included in finance income
in the profit or loss. The losses arising from impairment are
recognized in the statement of profit and loss.
The measurement of credit impairment is based on the
three-stage expected credit loss model described in Note:
Impairment of financial assets.
Loan Portfolio at FVOCI:
Loan Portfolio is subsequently measured at FVOCI where:
- contractual terms that give rise to cash flows on specified
dates, that represent solely payments of principal and
interest (SPPI) on the principal amount outstanding; and
- the financial asset is held within a business model where
objective is achieved by both collecting contractual cash
flows and selling financial assets.
Loans included within the FVTOCI category are measured
initially as well as at each reporting date at fair value. Fair value
movements are recognized in the other comprehensive income
(OCI). However, the Company recognizes interest income,
impairment losses & reversals and foreign exchange gain or
loss in the statement of profit and loss. On de-recognition of
the asset, cumulative gain or loss previously recognized in OCI
is reclassified from the equity to the statement of profit and
loss. Interest earned whilst holding FVTOCI debt instrument
is recognized as interest income using the EIR method.
Equity instruments and Mutual Funds
Equity instruments and mutual funds included within the
FVTPL category are measured at fair value with all changes
recognized in the Statement of profit and loss.
Financial liabilities
Initial Measurement
Financial liabilities are classified and measured at amortized
cost. All financial liabilities are recognized initially at fair value
and, in the case of loans and borrowings and payables, net
of directly attributable transaction costs. The Company's
financial liabilities include trade and other payables, loans
and borrowings including bank overdrafts and derivative
financial instruments.
Subsequent Measurement
Financial liabilities are subsequently carried at amortized cost
using the effective interest method.
De-recognition of financial assets and financial liabilities
Financial Assets
A financial asset (or, where applicable, a part of a financial asset
or part of a group of similar financial assets) is de-recognized
when the rights to receive cash flows from the financial asset
have expired. The Company also de-recognizes the financial
asset if it has transferred the financial asset and the transfer
qualifies for de-recognition.
The Company has transferred the financial asset if, and only
if, either:
- It 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 (the 'eventual recipients'), 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 de-recognition
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
recognized only to the extent of the Company's continuing
involvement, in which case, the Company also recognizes 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.
On derecognition of a financial asset in its entirety, the
difference between: (a) the carrying amount (measured
at the date of derecognition) and (b) the consideration
received (including any new asset obtained less any new
liability assumed) is recognized in the statement of profit or
loss account.
Financial Liabilities
Financial liability is de-recognized 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 de-recognition of the original
liability and the re-cognition of a new liability. The difference in
the respective carrying amounts is recognized in the statement
of profit and loss.
C. Fair value measurement
The Company measures financial instruments at fair value at
each balance sheet date using various valuation techniques.
Fair value is the price at the measurement date, at which
an asset can be sold or paid to transfer a liability, in an
orderly transaction between market participants at the
measurement date.
The Company's accounting policies require, measurement
of certain financial instruments at fair values (either on
a recurring or non-recurring basis). Also, the fair values of
financial instruments measured at amortized cost are required
to be disclosed in the said standalone financial statements.
Accordingly, the Company uses valuation techniques that
are appropriate in the circumstances and for which sufficient
data is available to measure fair value, maximizing the use
of relevant observable inputs and minimizing the use of
unobservable inputs.
All assets and liabilities for which fair value is measured or
disclosed in the standalone financial statements are categorized
within the fair value hierarchy described as follows:
Level 1 financial instruments - Those where the inputs used
in the valuation are unadjusted quoted prices from active
markets for identical assets or liabilities that the Company has
access to at the measurement date. The Company considers
markets as active only if there are sufficient trading activities
with regards to the volume and liquidity of the identical assets
or liabilities and when there are binding and exercisable price
quotes available on the balance sheet date.
Level 2 financial instruments - Those where the inputs that are
used for valuation and are significant, are derived from directly
or indirectly observable market data available over the entire
period of the instrument's life.
Level 3 financial instruments - include one or more
unobservable input where there is little market activity for
the asset/liability at the measurement date that is significant
to the measurement as a whole.
D. Property, plant, and equipment
i. Recognition and measurement
Property, plant and equipment are stated at cost, net of
accumulated depreciation and accumulated impairment
losses, if any. The cost comprises purchase price, directly
attributable cost of bringing the asset to its working
condition for the intended use and initial estimate of
decommissioning, restoring and similar liabilities. Any
trade discounts and rebates are deducted in arriving at
the purchase price.
ii. Subsequent expenditure
Subsequent expenditure is capitalized only if it is probable
that the future economic benefits associated with the
expenditure will flow to the company.
iii. Depreciation
Depreciation on property, plant and equipment (except
motor vehicles) is provided on straight line method at
estimated useful life, which is in line with the estimated
useful life as specified in Schedule II of the Companies
Act, 2013.
The Company uniformly estimates a five percent residual value
for all these assets. Items costing less than ' 5,000 are fully
depreciated in the year of purchase. Depreciation is pro-rated
in the year of acquisition as well as in the year of disposal.
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.
E. Other intangible assets
Software and system development expenditure are capitalized
at cost of acquisition including cost attributable to readying the
asset for use. Such intangible assets are subsequently measured
at cost less accumulated amortization and any accumulated
impairment losses. The useful life of these intangible assets is
estimated at 3 years with zero residual value.Any expenses on
such software for support and maintenance payable annually
are charged to the statement of profit and loss.
F. Impairment of financial assets
The Company applies the ECL model in accordance with Ind-
AS 109 for recognizing impairment loss on financial assets.
The ECL allowance is based on the credit losses expected to
arise from all possible default events over the expected life
of the financial asset (‘lifetime ECL') unless there has been
no significant increase in credit risk since origination. ECL is
calculated on a collective basis, considering the retail nature
of the underlying portfolio of financial assets.
The impairment methodology applied depends on whether
there has been a significant increase in credit risk. When
determining whether the risk of default on a financial asset
has increased significantly since initial recognition, the
Company considers reasonable and supportable information
that is relevant and available without undue cost or effort.
This includes both quantitative and qualitative information
and analysis based on a provision matrix which takes into
account the Company's historical credit loss experience,
current economic conditions, forward-looking information
and scenario analysis. The expected credit loss is a product
of exposure at default (‘EAD'), probability of default (‘PD')
and loss given default (‘LGD'). The Company has evaluated
the PD and LGD based on the management's best estimate in
accordance with Ind-AS 109.
G. Finance Cost
Finance costs represent interest expense recognised by
applying the Effective Interest Rate (EIR) to the gross carrying
amount of financial liabilities other than financial liabilities
classified as FVTPL.
The EIR in case of a financial liability is computed:
- At the rate that exactly discounts estimated future
cash payments through the expected life of the financial
liability to the gross carrying amount of the amortised
cost of a financial liability.
- By considering all the contractual terms of the financial
instrument in estimating the cash flows.
- Including all fees paid between parties to the contract
that are an integral part of the effective interest rate,
transaction costs, and all other premiums or discounts.
Any subsequent changes in the estimation of the future
cash flows are recognised in interest expense with the
corresponding adjustment to the carrying amount of the
financial liability. Interest expense includes issue costs that
are initially recognised as part of the carrying value of the
financial liability and amortised over the expected life using the
effective interest method.These include fees and commissions
payable to advisers and other expenses such as external legal
costs, rating fee etc, provided these are incremental costs that
are directly related to the issue of a financial liability.
H. Write Offs
The gross carrying amount of a financial asset is written
off (either partially or in full) to the extent that there is no
reasonable expectation of recovering the asset in its entirety
or a portion thereof. This is generally the case when the
Company determines that the borrower does not have assets
or sources of income that could generate sufficient cash flows
to repay the amounts subjected to write-offs.
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