1.1 Corporate information
Sulabh Engineers and Services Limited ("the Company") is a company limited by shares, incorporated on 27April
1983 and domiciled in India. The Company is engaged in the business of lending. The Company has a
diversified lending portfolio across retail, SME and commercial customers. The Company is non-deposit taking
non-banking financial company (NBFC) registered with the Reserve Bank of India (RBI).
1.2 Basis of preparation
The financial statements have been prepared in accordance with Indian Accounting Standards (Ind AS) as per the
Companies (Indian Accounting Standards) Rules, 2015 as amended from time to time and notified under
section 133 of the Companies Act, 2013 (the Act) along with other relevant provisions of the Act and the Master
Direction — Non-Banking Financial Company — Systemically Important Non-Deposit taking Company and Deposit
taking Company (Reserve Bank) Directions, 2016 ('the NBFC Master Directions') issued by RBI. The financial
statements have been prepared on a going concern basis.
The Company uses accrual basis of accounting except in case of significant uncertainties.
1.2.1 Presentation of financial statements
The Company presents its Balance Sheet in order of liquidity.
The Company generally reports financial assets and financial liabilities on a gross basis in the Balance Sheet.
They are offset and reported net only when Ind AS specifically permits the same or it has an
unconditional legally enforceable right to offset the recognised amounts without being contingent on a future
event. Similarly, the Company offsets incomes and expenses and reports the same on a net basis when
permitted by Ind AS specifically unless they are material in nature.
Critical accounting estimates and judgments
The preparation of the Company's financial statements requires Management to make use of estimates and
judgments. In view of the inherent uncertainties and a level of subjectivity involved in measurement of
items, it is possible that the outcomes in the subsequent financial years could differ from those on which the
Management's estimates are based.
Accounting estimates and judgments are used in various line items in the financial statements for e.g.:
• Fair value of financial instruments [Refer note no. 1.3.11, 4.10]
• Effective Interest Rate (EIR) [Refer note no. 1.3.1(i)]
• Impairment on financial assets [Refer note no. 1.3.4(i)]
• Provisions and other contingent liabilities [Refer note no. 1.3.10 and 4.1]
• Provision for tax expenses [Refer note no. 1.3.6(i)]
• Residual value and useful life of property, plant and equipment [Refer note no. 1.3.7]
1.3 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.
(i) Interest income
The Company recognizes interest income using Effective Interest Rate (EIR) on all financial assets
subsequently measured at amortized 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
amortized cost of a financial liability.
The Company recognizes 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. 1.3.4(i)] regarded as
'stage 3', the Company recognizes interest income on the amortized 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. 1.3.4(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 cash flows is recognized on realization.
Interest on financial assets subsequently measured at fair value through profit or loss (FVTPL) is recognized
at the contractual rate of interest.
(ii) Dividend income
Dividend income on equity shares is recognized when the Company's right to receive the payment is established,
which is generally when shareholders approve the dividend.
(iii) Other revenue from operations
Revenue is measured at fair value of the consideration received or receivable.
(a) Fees and commission
The Company recognizes 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 recognized on rendering of services and products to the customer.
Foreclosure charges are collected from loan customers for early payment/closure of loan and are recognized on
realization.
(b) Net gain on fair value changes
Financial assets are subsequently measured at fair value through profit or loss (FVTPL) or fair value through
other comprehensive income (FVOCI), as applicable. The Company recognizes gains/losses on fair value
change of financial assets measured as FVTPL and realized gains/losses on de-recognition of financial
asset measured at FVTPL and FVOCI.
(c) Sale of service
The Company, on de-recognition of financial assets where a right to service the derecognized financial assets
for a fee is retained, recognizes 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 recognized as service income and
any decrease is recognized as an expense in the period in which it occurs. The embedded interest component in
the service asset is recognized as interest income in line with Ind AS 109 'Financial instruments'.
(d) Recoveries of financial assets written off
The Company recognizes income on recoveries of financial assets written off on realization or when the right
to receive the same without any uncertainties of recovery is established.
(iv)Taxes
Incomes are recognized net of the Goods and Services Tax/Service Tax, wherever applicable.
1.3.2 Expenditures
(i) Finance costs
Borrowing costs on financial liabilities are recognized 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 recognized in the Statement of Profit and Loss on an accrual
basis.
(iii) Taxes
Expenses are recognized net of the Goods and Services Tax/Service Tax, except where credit for the input tax is
not statutorily permitted.
1.3.3 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.
1.3.4 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 recognized on the date when the Company becomes party to the
contractual provisions of the financial instruments. For tradable securities, the Company recognizes 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 recognized 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.
Subsequent measurement
For the purpose of subsequent measurement, financial assets are classified into four categories:
a. Debt instruments at amortized cost
b. Debt instruments at FVOCI
c. Debt instruments at FVTPL
d. Equity instruments designated at FVOCI
a) Debt instruments at amortised cost
The Company measures its financial assets at amortized cost if both the following conditions are met:
• The asset is held within a business model of collecting contractual cash flows; and
• Contractual terms of the asset give rise on specified dates to cash flows that are Sole 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 realized 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 amortized cost category is to hold
and collect contractual cash flows. However, considering the economic viability of carrying the delinquent
portfolios in the books of the Company, it may sell these portfolios to banks and/or asset reconstruction
companies.
After initial measurement, such financial assets are subsequently measured at amortized 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 amortized cost is explained in subsequent notes in this section.
(b) Debt instruments at FVOCI
The Company subsequently classifies its financial assets as FVOCI, only if both of the following criteria are met:
• The objective of the business model is achieved both by collecting contractual cash flows and selling the
financial assets; and
• Contractual terms of the asset give rise on specified dates to cash flows that are Solely Payments of
Principal and Interest (SPPI) on the principal amount outstanding.
Debt instruments included within the FVOCI category are measured at each reporting date at fair value withsuch
changes being recognized in other comprehensive income (OCI). The interest income on these assets
isrecognized in profit or loss. The ECL calculation for debt instruments at FVOCI is explained in subsequent notesin
this section.
Debt instruments such as long-term investments in Government securities to meet regulatory liquid
assetrequirement of the Company's deposit program and mortgage loans portfolio where the Company
periodicallyresorts to partially selling the loans by way of assignment to willing buyers are classified as FVOCI.
On de-recognition of the asset, cumulative gain or loss previously recognized in OCI is reclassified to
profit or loss.
(c) Debt instruments at FVTPL
The Company classifies financial assets which are held for trading under FVTPL category. Held for trading
assetsare recorded and measured in the Balance Sheet at fair value. Interest and dividend incomes are
recorded ininterest income and dividend income, respectively according to the terms of the contract, or when
the rightto receive the same has been established. Gain and losses on changes in fair value of debt instruments
are recognized on net basis through profit or loss. The Company's investments into mutual funds, Government
securities (trading portfolio) and certificate ofdeposits for trading and short-term cash flow management
have been classified under this category.
(d) Equity investments designated under
FVOCI
All equity investments in scope of Ind AS 109 'Financial Instruments' are measured at fair value. The Companyhas
strategic investments in equity for which it has elected to present subsequent changes in the fair value mother
comprehensive income. The classification is made on initial recognition and is irrevocable.
All fair value changes of the equity instruments, excluding dividends, are recognized in OCI and not availablefor
reclassification to profit or loss, even on sale of investments. Equity instruments at FVOCI are not subjectto an
impairment assessment.
Derecognition of Financial Assets
The Company derecognizes a financial asset (or, where applicable, a part of a financial asset) when:
• The right to receive cash flows from the asset have expired; or
• The Company has transferred its right to receive cash flows from the asset or has assumed an obligation topay
the received cash flows in full without material delay to a third party under an assignment arrangementand the
Company has transferred substantially all the risks and rewards of the asset. Once the asset isderecognized,
the Company does not have any continuing involvement in the same.
The Company transfers its financial assets through the partial assignment route and accordingly derecognizes
the transferred portion as it neither has any continuing involvement in the same nor does it retain any control. If
the Company retains the right to service the financial asset for a fee, it recognizes either a servicing asset or a
servicing liability for that servicing contract. A service liability in respect of a service is recognized at fair value if
the fee to be received is not expected to compensate the Company adequately for performing the service. If the
fees to be received is expected to be more than adequate compensation for the servicing, a service asset is
recognized for the servicing right at an amount determined on the basis of an allocation of the carrying
amount of the larger financial asset.
On de-recognition of a financial asset in its entirety, the difference between:
• the carrying amount (measured at the date of de-recognition) and
• the consideration received (including any new asset obtained less any new liability assumed) is recognized in
profit or loss.
Impairment of financial assets
ECL are recognized for financial assets held under amortized cost, debt instruments measured at FVOCI, and
certain loan commitments.
Financial assets where no significant increase in credit risk has been observed are considered to be in 'stage 1'
and for which a 12-month ECL is recognized. Financial assets that are considered to have significant increase in
credit risk are considered to be in 'stage 2' and those which are in default or for which there is objective evidence
of impairment are considered to be in 'stage 3'. Lifetime ECL is recognized for stage 2 and stage 3 financial assets.
At initial recognition, allowance (or provision in the case of loan commitments) is required for ECL towards default
events that are possible in the next 12 months, or less, where the remaining life is less than 12 months.
In the event of a significant increase in credit risk, allowance (or provision) is required for ECL towards all
possible default events over the expected life of the financial instrument ('lifetime ECL').
Financial assets (and the related impairment loss allowances) are written off in full, when there is no realistic
prospect of recovery.
Treatment of the different stages of financial assets and the methodology of determination of
ECL
(a) Credit impaired (stage 3)
The Company recognizes a financial asset to be credit impaired and in stage 3 by considering
relevantobjective 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
termsdue to significant credit distress of the borrower, are classified as credit impaired. Such loans
continue to be instage 3 until they exhibit regular payment of renegotiated principal and interest over
a minimum observationperiod, typically 12 months— post renegotiation, and there are no other indicators of
impairment. Havingsatisfied 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 recognized by applying the EIR to the net amortized cost amount i.e. gross carrying amountless
ECL allowance.
(b) Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each
reporting period by considering the change in the risk of default of the loan exposure. However, unless identified
at an earlier stage, 30 days past due is considered as an indication of financial assets to have suffered a significant
increase in credit risk. Based on other indications such as borrower's frequently delaying payments beyond due
dates though not 30 days past due are included in stage 2 for mortgage loans.
The measurement of risk of defaults under stage 2 is computed on homogenous portfolios, generally by nature
of loans, tenors, underlying collateral, geographies and borrower profiles. The default risk is assessed using PD
(probability of default) derived from past behavioral trends of default across the identified homogenous
portfolios. These past trends factor in the past customer behavioral trends, credit transition probabilities
and macroeconomic conditions.
The assessed PDs are then aligned considering future economic conditions that are determined to have a
bearing on ECL.
(c ) Without significant increase in credit risk since initial recognition (stage 1)
ECL resulting from default events that are possible in the next 12 months are recognized for financial instruments
in stage 1. The Company has ascertained default possibilities on past behavioral trends witnessed for each
homogenous portfolio using application/behavioral score cards and other performance indicators, determined
s tati s ti ca l l y.
(d) Measurement of ECL
The assessment of credit risk and estimation of ECL are unbiased and probability weighted. It incorporates all
information that is relevant including information about past events, current conditions and reasonable
forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL
takes into account the time value of money. Forward looking economic scenarios determined with reference to
external forecasts of economic parameters that have demonstrated a linkage to the performance of our
portfolios over a period of time have been applied to determine impact of macroeconomic factors.
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 and
adjusted for time value of money using a rate which is a reasonable approximation of EIR.
• Determination of PD is covered above for each stages of ECL.
• EAD represents the expected balance at default, taking into account the repayment of principal and
interest from the Balance Sheet date to the date of default together with any expected drawdown ofcommitted
facilities.
• LGD represents expected losses on the EAD given the event of default, taking into account, among other
attributes, the mitigating effect of collateral value at the time it is expected to be realized and the time value of
money.
A more detailed description of the methodology used for ECL is covered in the 'credit risk' section of note no.
4.7.
(ii) Financial liabilities
Financial liabilities include liabilities that represent a contractual obligation to deliver cash or another
financial assetto another entity, or a contract that may or will be settled in the entities own equity instruments.
Few examples offinancial liabilities are trade payables, debt securities and other borrowings and subordinated
debts .
I nitial measurement
All financial liabilities are recognized initially at fair value and, in the case of borrowings and payables,
net ofdirectly attributable transaction costs. The Company's financial liabilities include trade payables, other
payabIes,debt securities and other borrowings.
Subsequent measurement
After initial recognition, all financial liabilities are subsequently measured at amortized cost using the EIR
[Refer note no. 1.3.1(i)]. Any gains or losses arising on derecognition of liabilities are recognized in the
Statement of Profit and Loss.
De-recognition
The Company derecognizes a financial liability when the obligation under the liability is discharged, cancelled or
expired.
(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 recognized amounts with an intention to settle on a net basis or to
realize the assets and settle the liabilities simultaneously.
1.3.5 Investment in subsidiaries
Investment in subsidiaries is recognized at cost and is not adjusted to fair value at the end of each
reporting period.
Cost of investment represents amount paid for acquisition of the said investment.
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.
1.3.6 Taxes
(i) Current tax
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 recognized outside profit or loss is recognized 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 recognized for all taxable temporary differences and deferred tax assets are
recognized 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 utilized.
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
utilized. Unrecognized deferred tax assets, if any, are reassessed at each reporting date and are recognized 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 realized 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 recognized outside profit or loss is recognized 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.
1.3.7 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'.
Depreciation on property, plant and equipment Depreciation on property, plant & equipment has been provided
on straight line method based on the useful life specified in Schedule II of the Companies Act, 2013 except
where management estimate of useful life is different. Depreciation commences when the assets are ready
for their intended use.
Assets costing Rs. 5,000/- or less have been depreciated over period of one year.
1.3.8 Intangible assets and amortization thereof
Intangible assets, representing software are initially recognized at cost and subsequently carried at cost less
accumulated amortization and accumulated impairment. The intangible assets are amortized 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 year end and adjusted prospectively, if appropriate.
An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying
amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in
profit or loss within other income or other expenses, as applicable.
1.3.9 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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