Note 3 : Summary of significant accounting policies:
This note provides a list of the significant accounting policies adopted in the preparation of these financial statements.
These policies have been consistently applied to all the years presented, unless otherwise stated.
3.1 : Revenue recognition:
i) Interest Income
The Company recognises interest income using Effective Interest Rate (EIR) on all financial assets subsequently measured
at amortised cost or fair value through other comprehensive income (FVOCI). EIR is calculated by considering all costs and
incomes attributable to acquisition of a financial asset or assumption of a financial liability and it represents a rate that
exactly discounts estimated future cash payments/receipts through the expected life of the financial asset/financial liability to
the gross carrying amount of a financial asset or to the amortised cost of a financial liability.
The Company recognises interest income by applying the EIR to the gross carrying amount of financial assets other than
credit-impaired assets. In case of credit-impaired financial assets [as set out in note no. 3.4(i)] regarded as 'stage 3’, the
Company recognises interest income on the amortised cost net of impairment loss of the financial asset at EIR. If the
financial asset is no longer credit-impaired [as outlined in note no. 3.4(i)], the Company reverts to calculating interest
income on a gross basis.
Delayed payment interest (penal interest) levied on customers for delay in repayments/non payment of contractual
cashflows is recognised on realisation.
ii) Dividend income
Dividend income on equity shares is recognised when the Company’s right to receive the payment is established, which is
generally when shareholders approve the dividend.
Hi) Other revenue from operations
The Company recognises revenue from contracts with customers (other than financial assets to which Ind AS 109 ‘Financial
Instruments’ is applicable) based on a comprehensive assessment model as set out in Ind AS 115 'Revenue from contracts
with customers’. The Company identifies contract(s) with a customer and its performance obligations under the contract,
determines the transaction price and its allocation to the performance obligations in the contract and recognises revenue
only on satisfactory completion of performance obligations. Revenue is measured at fair value of the consideration received
or receivable.
fa) Fees and commission
The Company recognises service and administration charges towards rendering of additional services to its loan customers
on satisfactory completion of service delivery.
Fees on value added services and products are recognised on rendering of services and products to the customer.
Distribution income is earned by selling of services and products of other entities under distribution arrangements. The
income so earned is recognised on successful sales on behalf of other entities subject to there being no significant
uncertainty of its recovery.
Foreclosure charges are collected from loan customers for early payment/closure of loan and are recognised on realisation.
Late Fees charges are collected from loan customers for late payment of loan instalment and are recognised on realisation.
Cheque return charges are collected from loan customers for cheque return of loan instalment and are recognised on
realisation.
Postage charges are collected from loan customers for postage and courier expenses and recognised on realisation.
(b) Sale of services
The Company, on de-recognition of financial assets where a right to service the derecognised financial assets for a fee is
retained, recognises the fair value of future service fee Income over service obligations cost on net basis as service fee
income in the statement of profit or loss and, correspondingly creates a service asset in Balance Sheet. Any subsequent
Increase In the fair value of service assets Is recognised as service income and any decrease is recognised as an expense
in the period in which it occurs. The embedded interest component in the service asset is recognised as interest income in
line with Ind AS 109 ‘Financial instruments’.
Other revenues on sale of services are recognised as per Ind AS 115 ‘Revenue From Contracts with Customers’ as
articulated above in ‘other revenue from operations’.
(c) Recoveries of financial assets written off
The Company recognises income on recoveries of financial assets written off on realisation or when the right to receive the
same without any uncertainties of recovery is established.
iv) Taxes
Incomes are recognised net of the Goods and Services Tax, wherever applicable.
3.2: Expenditures:
(i) Finance costs
Borrowing costs on financial liabilities are recognised using the EIR [refer note no. 3.1 (i)].
(ii) Fees and commission expenses
Fees and commission expenses which are not directly linked to the sourcing of financial assets, such as
commission/incentive incurred on value added services and products distribution, recovery charges and fees payable for
management of portfolio etc., are recognised in the Statement of Profit and Loss on an accrual basis.
(iii) Taxes
Expenses are recognised net of the Goods and Services Tax except where credit for the input tax is not statutorily permitted.
3.3 : Cash and cash equivalents:
Cash and cash equivalents include cash on hand, other short term, highly liquid investments with original maturities of three
months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of
changes in value.
3.4: Financial instruments:
A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity. Trade receivables and payables, loan receivables, investments in securities and
subsidiaries, debt securities and other borrowings, preferential and equity capital etc. are some examples of financial
instruments.
All the financial instruments are recognised on the date when the Company becomes party to the contractual provisions of
the financial instruments. For tradable securities, the Company recognises the financial instruments on settlement date.
(i) Financial assets
Financial assets include cash, or an equity instrument of another entity, or a contractual right to receive cash or another
financial asset from another entity. Few examples of financial assets are loan receivables, investment in equity and debt
instruments, trade receivables and cash and cash equivalents.
Initial measurement
All financial assets are recognised initially at fair value including transaction costs that are attributable to the acquisition of
financial assets except in the case of financial assets recorded at FVTPL where the transaction costs are charged to profit
or loss.
The Company classifies its financial assets into various measurement categories. The classification depends on the
contractual terms of the financial assets’ cash flows and the Company’s business model for managing financial assets.
a) Financial assets measured at amortised cost
A financial asset is measured at Amortised Cost if it is held within a business model whose objective is to hold the asset 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.
To make the SPPI assessment, the Company applies judgment and considers relevant factors such as the nature of
portfolio, and the period for which the interest rate is set.
The Company determines its business model at the level that best reflects how it manages groups of 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. 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 financial assets going forward.
The business model of the Company for assets subsequently measured at amortised cost category is to hold and collect
contractual cash flows. However, considering the economic viability of carrying the delinquent portfolios on the books of the
Company, it may enter into immaterial and/or infrequent transactions to sell these portfolios to banks and/or asset
reconstruction companies without affecting the business model of the Company.
After initial measurement, such financial assets are subsequently measured at amortised cost on effective interest rate
(EIR). For further details, refer note no. 3.1 (i). The expected credit loss (ECL) calculation for debt instruments at amortised
cost is explained in subsequent notes in this section.
b) Financial assets measured at fair value through other comprehensive income (FVOCI)
A financial asset is measured at FVOCI if it is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets and contractual terms of financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal amount outstanding.
c) Financial assets measured at fair value through profit or loss (FVTPL)
A financial asset which is not classified in any of the above categories are measured at FVTPL.
Derecognition
The Company derecognizes a financial asset when the contractual cash flows from the asset expire or it transfers its rights
to receive contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of
ownership are transferred. Any interest in transferred financial assets that is created or retained by the Company is
recognized as a separate asset or liability.
Impairment of financial assets
In accordance with Ind AS 109, the Company uses ‘Expected Credit Loss’ model (ECL), for evaluating impairment of
financial assets other than those measured at Fair value through profit and loss.
Overview of the Expected Credit Loss (ECU model
Expected Credit Loss, at each reporting date, is measured through a loss allowance for a financial asset:
# At an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased
significantly since initial recognition.
# At an amount equal to 12-month expected credit losses, if the credit risk on a financial instrument has not increased
significantly since initial recognition.
Lifetime expected credit losses means expected credit losses that result from all possible default events over the expected
life of a financial asset.
12-month expected credit losses means the portion of Lifetime ECL that represent the ECLs that result from default events
on financial assets that are possible within the 12 months after the reporting date.
The Company performs an assessment, at the end of each reporting period, of whether a financial assets credit risk has
increased significantly since initial recognition. When making the assessment, the change in the risk of a default occurring
over the expected life of the financial instrument is used instead of the change in the amount of expected credit losses. ^
Based on the above process, the Company categorises its loans into three stages as described below:
For non-impaired financial assets
# Stage 1 is comprised of all non-impaired financial assets which have not experienced a significant increase in credit risk
(SICR) since initial recognition. A 12-month ECL provision is made for stage 1 financial assets. In assessing whether credit
risk has increased significantly, the Company compares the risk of a default occurring on the financial asset as at the
reporting date with the risk of a default occurring on the financial asset as at the date of initial recognition.
# Stage 2 is comprised of all non-impaired financial assets which have experienced a significant increase in credit risk since
initial recognition. The Company recognises lifetime ECL for stage 2 financial assets. In subsequent reporting periods, if the
credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial
recognition, then entities shall revert to recognizing 12 months ECL provision.
For impaired financial assets:
Financial assets are classified as stage 3 when there is objective evidence of impairment as a result of one or more loss
events that have occurred after initial recognition with a negative impact on the estimated future cash flows of a loan or a
portfolio of loans. The Company recognises lifetime ECL for impaired financial assets.
The Company recognises a financial asset to be credit impaired and in stage 3 by considering relevant objective evidence,
primarily whether:
# Contractual payments of either principal or interest are past due for more than 90 days;
# The loan is otherwise considered to be in default.
Restructured loans, where repayment terms are renegotiated as compared to the original contracted terms due to
significant credit distress of the borrower, are classified as credit impaired. Such loans continue to be in stage 3 until they
exhibit regular payment of renegotiated principal and interest over a minimum observation period, typically 12 months- post
renegotiation, and there are no other indicators of impairment. Having satisfied the conditions of timely payment over the
observation period these loans could be transferred to stage 1 or 2 and a fresh assessment of the risk of default be done for
such loans.
Interest income is recognised by applying the EIR to the net amortised cost amount i.e. gross carrying amount less ECL
allowance.
The Company recognises loss allowance for ECLs on Loans and advances to customers as per Income recognition, Asset
Classification and Provisioning (IRACP) norms notified by RBI.
A more detailed description of the methodology used for ECL is covered in the ‘credit risk’ section of note no. 27.
Estimation of Expected Credit Loss
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.
The Company uses historical information where available to determine PD. Considering the different products and
schemes, the Company has bifurcated its loan portfolio into various pools. For certain pools where historical information is
available, the PD is calculated considering fresh slippage of past years. For those pools where historical information is not
available, the PD/ default rates as stated by external reporting agencies is considered.
Exposure at Default (EAD) - The Exposure at Default is an estimate of the exposure at a future default date, considering
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.
Forward looking information ^
While estimating the expected credit losses, the Company reviews macro-economic developments occurring in the
economy and market it operates in. On a periodic basis, the Company analyses if there is any relationship between key
economic trends like GDP, unemployment rates, benchmark rates set by the Reserve Bank of India, inflation etc. with the
estimate of PD, LGD determined by the Company based on its internal data. While the internal estimates of PD, LGD rates
by the Company may not be always reflective of such relationships, temporary overlays, if any, are embedded in the
methodology to reflect such macro-economic trends reasonably.
To mitigate its credit risks on financial assets, the Company seeks to use collateral, where possible. The collateral comes in
various forms, such as cash, securities, letters of credit/guarantees, vehicles, etc. However, the fair value of collateral
affects the calculation of ECL. The collateral is majorly the property for which the loan is given. The fair value of the same is
based on data provided by third party or management judgements.
Loans are written off (either partially or in full) when there is no realistic prospect of recovery. 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. Any subsequent recoveries against such loans are credited to the
statement of profit and loss.
(ii) Financial liabilities
Financial liabilities include liabilities that represent a contractual obligation to deliver cash or another financial assets to
another entity, or a contract that may or will be settled in the entities own equity instruments. Few examples of financial
liabilities are trade payables, debt securities and other borrowings.
Initial measurement
All financial liabilities are recognised initially at fair value and, in the case of borrowings and payables, net of directly
attributable transaction costs. The Company's financial liabilities include trade payables, other payables, and other
borrowings.
Subsequent measurement
After initial recognition, all financial liabilities are subsequently measured at amortised cost using the EIR [Refer note no.
3.1 (i)]. Any gains or losses arising on derecognition of liabilities are recognised in the Statement of Profit and Loss.
Derecognition
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 de-recognition 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.
(iii) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the Balance Sheet only if there is an
enforceable legal right to offset the recognised amounts with an intention to settle on a net basis or to realise the assets and
settle the liabilities simultaneously.
I.5: Investments in Subsidiaries, Associates and Joint Ventures:
Investment in subsidiaries is recognised 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’. Cost of investment represents amount paid for acquisition of the said
investment and a proportionate recognition of the fair vale of shares granted to employees of subsidiary under a group
share based payment arrangement.
The Company assesses at the end of each reporting period, if there are any indications that the said investment may be
impaired. If so, the Company estimates the recoverable value/amount of the investment and provides for impairment, if any
i.e. the deficit in the recoverable value over cost.
Other Equity Investments
All other equity investments are measured at fair value, with value changes recognised in Statement of Profit and Loss,
except for those equity investments for which the Company has elected to present the changes in fair value through other
comprehensive income (FVOCI).
1.6: Taxes:
(i) Current tax A,
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation
authorities, in accordance with the Income Tax Act, 1961 and the Income Computation and Disclosure Standards (ICDS)
prescribed therein. The tax rates and tax laws used to compute the amount are those that are enacted or substantively
enacted, at the reporting date.
Current tax relating to items recognised outside profit or loss is recognised in correlation to the underlying transaction either
in OCI or directly in other 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.
(ii) Deferred tax
Deferred tax is provided using the Balance Sheet approach on temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised for
deductible temporary differences to the extent that it is probable that taxable profits will be available against which the
deductible 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, if any, are reassessed 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 either in OCI or in other 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.
3.7 : Property, plant and equipment:
Property, plant and equipment are carried at historical cost of acquisition less accumulated depreciation and impairment
losses, consistent with the criteria specified in Ind AS 16 ‘Property, Plant and Equipment’. Cost of an item of property, plant
and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates, any directly attributable cost of bringing the item to its working condition for its intended use
and estimated costs of dismantling and removing the item and restoring the site on which it is located.
Advances paid towards the acquisition of fixed assets, outstanding at each reporting date are shown under other non¬
financial assets. The cost of property, plant and equipment not ready for its intended use at each reporting date are
disclosed as capital work-in-progress.
Subsequent expenditure related to the asset are added to its carrying amount or recognised as a separate asset only if it
increases the future benefits of the existing asset, beyond its previously assessed standards of performance and cost can
be measured reliably. Other repairs and maintenance costs are expensed off as and when incurred.
Depreciation
Depreciation on Property, Plant and Equipment is calculated using Straight line method (SLM) to write down the cost of
property and equipment to their residual values over their estimated useful lives which is in line with the estimated useful life
as specified in Schedule II of the Companies Act, 2013.
‘The company has estimated useful life which is different from schedule II useful life based on
technical advice obtained by the management.
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. 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.
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.
3.8 : Intangible assets and amortisation thereof:
Intangible assets, representing softwares are initially recognised at cost and subsequently carried at cost less accumulated
amortisation and accumulated impairment. The intangible assets are amortised using the straight line method over a period
of five years, which is the Management’s estimate of its useful life. The useful lives of intangible assets are reviewed at
each financial vear end and adiusted Drosoectivelv. if aDDroDriate.
3.9 : Impairment of non-financial assets:
An assessment is done at each Balance Sheet date to ascertain whether there is any indication that an asset may be
impaired. If any such indication exists, an estimate of the recoverable amount of asset is determined. If the carrying value of
relevant asset is higher than the recoverable amount, the carrying value is written down accordingly.
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