3. Significant accounting policies (Contd.)
A. Investments
Classification:
In accordance with the RBI guidelines on investment
classification and valuation, investments are classified
on the date of purchase into "Available for Sale”
('AFS'), "Fair Value Through Profit & Loss (FVTPL)/
Held for Trading” ('HFT’), and "Held to Maturity”
('HTM') categories (hereinafter called "categories”).
Subsequent shifting amongst the categories is done
in accordance with the RBI guidelines.
Under each of these categories, investments are
further classified under six groups (hereinafter
called "groups”) - Government Securities, Other
Approved Securities, Shares, Debentures and Bonds,
Investments in Subsidiaries / Joint Ventures and
Other Investments.
Purchase and sale transactions' in central and state
government securities are recorded under 'Settlement
Date' of accounting.
The Bank follows Settlement date accounting for
purchase and sale of investments in accordance with
RBI Guidelines.
Bank categorizes the investment portfolio under AFS
and FVTPL into three fair value hierarchies viz. Level
1, Level 2, and Level 3 as defined in the RBI Master
Direction - Classification, Valuation and Operation
of Investment Portfolio of Commercial Banks
(Directions), 2023.
Level 1: Level 1 inputs are quoted prices in active
markets for identical instruments that the bank can
access as on the measurement date.
Level 2: Level 2 inputs are other than quoted prices
included in Level 1, that are observable for the asset
or liability, either directly or indirectly.
Level 3: Level 3 inputs are unobservable inputs.
Basis of classification:
Investments which the Bank intends to hold till
maturity with the objective to collect the contractual
cash flows are classified as HTM securities The
contractual terms give rise to cash flows that are Solely
Payments of Principal and Interest (SPPI criterion) on
principal outstanding on the specified dates.
Investments which are acquired with the objective
that is achieved by both, collecting contractual cash
flows and selling securities are classified under AFS
category and meeting SPPI criteria. Also, provided
that on initial recognition, a bank may make an
irrevocable election to classify an equity instrument
that is not held with the objective of trading.
Fair Value through Profit and Loss (FVTPL): FVTPL is
a residual category, thus securities that do not qualify
for inclusion in HTM or AFS would be classified under
FVTPL. Held for Trading (HFT), which is a sub-category
of Fair Value through Profit and Loss (FVTPL).
Recognition and Measurement
• Initial Recognition
All investments are measured at fair value on
initial recognition.
In respect of government securities acquired through
auction (including devolvement), switch operations
and open market operations (OMO) conducted by the
RBI, the price at which the security is allotted shall be
the fair value for initial recognition purposes.
Brokerage, commission, etc. and broken period
interest on debts instruments are recognised in
Statement of profit or loss and are not included in the
cost of acquisition.
Day 1 Gain/loss on initial recognition: A day 1 gain
or loss arise on initial recognition of an investment,
due to the difference between the fair value and the
acquisition cost. Any Day 1 gain/ loss is recognised in
the Profit and Loss Account, under Schedule 14: 'Other
Income’ within the subhead 'Profit on revaluation of
investments' or 'Loss on revaluation of investments.
Any Day 1 loss arising from Level 3 investments is
recognised immediately.
In the case of debt instruments (Level 3), the Day 1
gain shall be amortized on a straight-line basis up to
the maturity date (or earliest call date for perpetual
instruments), while for unquoted equity instruments,
the gain shall be set aside as a liability until the
security is listed or derecognised.
Subsequent measurement
HTM
Securities held in HTM is carried at cost and is not
marked to market (MTM) after initial recognition.
Any discount or premium on the securities under HTM
is amortised over the remaining life of the instrument.
The amortised amount is reflected in the financial
statements under item II 'Income on Investments'
of Schedule 13: 'Interest Earned' with a contra in
Schedule 8:'Investments.
AFS
Any discount or premium on the acquisition of debt
securities under AFS is amortised over the remaining
life of the instrument. The amortised amount is
reflected in the financial statements under item II
'Income on Investments' of Schedule 13: 'Interest
Earned' with a contra in Schedule 8:'Investments'.
The valuation gains and losses across all performing
investments, irrespective of classification (i.e.,
Government securities, Other approved securities,
Bonds and Debentures, etc.), held under AFS is
aggregated. The net appreciation or depreciation
is directly credited or debited to a reserve named
AFS Reserve without routing through the Profit
& Loss Account.
In the case of equity instruments designated under
AFS at the time of initial recognition, any gain or loss
on sale of such investments shall not be transferred
from AFS-Reserve to the Profit and loss A/c.
FVTPL
The securities held in FVTPL is fair valued and the
net gain or loss arising on such valuation is directly
credited or debited to the Profit and Loss Account.
Securities that are classified under the HFT sub¬
category within FVTPL is fair valued on a daily basis
whereas other securities in FVTPL is fair valued at
least on a quarterly, if not on a more frequent basis.
Any discount or premium on the acquisition of
debt securities under FVTPL is amortised over the
remaining life of the instrument. The amortised
amount is reflected in the financial statements
under item II 'Income on Investments' of Schedule
13: 'Interest Earned' with a contra in Schedule
8:'Investments'.
Reclassification between categories
Reclassifications of investments between categories,
if any are considered in accordance with the extant
RBI guidelines with the approval of the Board of
Directors and prior approval of the Department of
Supervision (DoS), RBI:
If a bank is permitted to reclassify its investment
portfolio, it applies the reclassification prospectively
from the reclassification date. The reclassification
date is to be the first day of the first reporting period
following the supervisory permission allowing
reclassification of financial asset.
Following is the accounting treatment is to be as
given at the time of reclassification of investments
from one category to another category:
a) Reclassification from HTM to AFS is made
at fair value. The fair value measured at the
reclassification date is to be the revised carrying
value. Any gain or loss arising from a difference
between the revised carrying value and the
previous carrying value is to be recognised
in AFS-Reserve.
b) Reclassification from HTM to FVTPL is made
at fair value. The fair value measured at the
reclassification date is to be the revised carrying
value. Any gain or loss arising from a difference
between the revised carrying value and previous
carrying value of the investments is to be
recognised in the Profit and Loss Account under
Item (III): 'Profit on revaluation of investments'
under Schedule 14: 'Other Income'.
c) Reclassification from AFS to HTM is made at its
fair value at the reclassification date. However,
the cumulative gain/loss previously recognised in
the AFS-Reserve is to be withdrawn therefrom and
adjusted against the fair value of the investments
at the reclassification date to arrive at the revised
carrying value. Thus, the revised carrying value is
to be the same as if the bank had classified the
investment in HTM ab initio itself.
d) Transfer from AFS to FVTPL is made at fair
value and The cumulative gain or loss previously
recognised in AFS-Reserve is to be withdrawn
therefrom and recognized in the Profit and Loss
Account, under Item (III): 'Profit on revaluation of
investments' under Schedule 14:'Other Income.
e) Transfer from FVTPL to HTM/AFS is made at
carrying value which represents fair value at the
reclassification date. Difference between the
book value after amortization and Fair value on
the reclassification date is to be booked under
P/L on Portfolio Shifting revaluation.
Disposal of Investments
Profit/Loss on sale of investments in HTM, AFS and
FVTPL is recognised in the Statement of profit or
Loss. The profit from sale of investment under HTM
category, net of taxes and transfer to statutory reserve
is appropriated from Statement of Profit and Loss to
"Capital Reserve” in accordance with the RBI Guidelines.
Upon sale or maturity of a debt instrument in AFS
category, the accumulated gain/ loss for that
security in the AFS-Reserve is transferred from the
AFS Reserve and recognized in the Profit and Loss
Account under item II Profit on sale of investments
under Schedule 14-Other Income.
In any financial year, the carrying value of investments
sold out of HTM does not exceed five per cent of
the opening carrying value of the HTM portfolio
(Except exclusions given in Chapter VII - "Sale of
Investment from HTM para 21 of Master Direction -
Classification, Valuation and Operation of Investment
Portfolio of Commercial Banks (Directions), 2023”.
Any sale beyond this threshold is require prior
approval from DoS, RBI.
Valuation
The fair value for the quoted securities are the prices
declared by the Financial Benchmarks India Private
Ltd. (FBIL) in accordance with RBI circular FMRD.
DIRD.7/14.03.025/2017-18 dated March 31, 2018,
as amended from time to time. For securities whose
prices are not published by FBIL, the fair value of
the quoted security is based upon quoted price as
available from the trades/ quotes on recognised
stock exchanges, reporting platforms or trading
platforms authorized by RBI/SEBI or prices declared
by the Fixed Income Money Market and Derivatives
Association of India (FIMMDA).
Units of mutual funds are valued at the latest
repurchase price / net asset value declared by
the mutual fund.
Treasury bills, commercial papers and certificate of
deposits being discounted instruments, are valued
at carrying cost.
Non-performing investments are identified and
depreciation / provision are made thereon based
on the RBI guidelines. The depreciation / provision
on such non-performing investments are not set
off against the appreciation in respect of other
performing securities. Interest on non-performing
investments is not recognised in the Statement of
Profit and Loss until received.
In accordance with the RBI guidelines, repurchase
and reverse repurchase transactions in government
securities including those conducted under the
Liquidity Adjustment Facility ('LAF') and Marginal
Standing Facility ('MSF') with RBI are accounted as
borrowing and lending transactions respectively.
Borrowing cost on repo transactions is accounted
for as interest expense and revenue on reverse repo
transactions is accounted for as interest income.
The valuation of other unquoted fixed income
securities (viz. State Government securities, other
approved securities, bonds and debentures)
and preference shares, is done with a mark-up
(reflecting associated credit and liquidity risk) over
the YTM rates for government securities published
by FIMMDA/FBIL.
Equity shares for which current quotations are not
available i.e., which are classified as illiquid or which
are not listed on a recognised exchange, the fair value
for the purposes of these directions is to be the break¬
up value (without considering 'revaluation reserves’, if
any) which is to be ascertained from the company’s
latest audited balance sheet. The date as on which
the latest balance sheet is drawn up does not precede
the date of valuation by more than 18 months. In case
the latest audited balance sheet is not available or is
more than 18 months old, the shares are to be valued
at H 1 per company.
Transition date accounting
Transition to the new guidelines of RBI
As on the date of transition, the Bank follows:
I. The securities under the earlier categories,
viz HTM, AFS and HFT are to be classified
under new categories HTM, AFS and FVTPL
(including FVTPL-HFT).
II. The balance in provision for depreciation,
as at March 31, 2024, is be reversed into the
General Reserve.
III. Amortisation of discounted securities of HTM
Portfolio (from last purchase date to March
31, 2024) is to be accounted through debit
the Investment ledger and credit the General
Reserve ledger.
IV. Securities in AFS and FVTPL portfolio are to be
transferred at market value. Also, the difference
between the book value as on March 31,
2024 and the market value is be accounted in
General Reserve.
Investment Fluctuation Reserve
The Bank creates an Investment Fluctuation Reserve
(IFR) until the amount of IFR is at least two per cent
of the AFS and FVTPL (including HFT) portfolio, on a
continuing basis, by transferring to the IFR an amount
not less than the lower of the following: i. Net profit on
sale of investments during the year. ii. Net profit for
the year, less mandatory appropriations.
The Bank is permitted to draw down the balance
available in IFR in excess of two percent of its AFS
and FVTPL (including HFT) portfolio, for credit to the
balance of profit/loss as disclosed in the profit and
loss account at the end of any accounting year.
Short Sale
The Bank undertakes short sale transactions in dated
central government securities in accordance with
RBI guidelines. The short positions are categorised
under HFT category and netted off from investments
in the Balance Sheet. These positions are marked-
to- market along with the other securities under HFT
portfolio. The mark to-market loss is charged to profit
and loss account and gain, if any, is ignored as per
RBI guidelines.
B. Advances
Classification
Advances are classified as performing and non¬
performing advances ('NPAs’) as per the RBI guidelines
on Income Recognition and Asset Classification and
are stated net of specific provisions made towards
NPAs and inter-bank participation with risk. Further,
NPAs are classified into sub-standard, doubtful and
loss assets based on the criteria stipulated by the RBI.
The bank transfers advances through Inter- Bank
Participation arrangements with and without risk,
which are accounted for in accordance with the RBI
guidelines, as follows:
a) In the case of participation with risk, the
aggregate amount of participation transferred
out of the Bank is reduced from Advances; and
participations transferred in to the Bank are
classified under Advances.
b) In the case of participation without risk, the
aggregate amount of participation issued by
the Bank is classified under borrowings; and
where the bank is participating in, the aggregate
amount of participation is shown as due from
banks under Advances.
Provisioning
Provisions for NPAs are made for sub-standard,
doubtful assets and Loss at rates as prescribed by
the RBI guidelines or the policy of the Bank whichever
is higher. The bank has stipulated accelerated
provisioning based on past experience, evaluation of
securities, if any, and other related factors
Loans given under Emergency Credit Line Guarantee
Scheme (ECLGS) classified as NPA are not provided
for since these are fully guaranteed under the ECGLS
scheme of Government of India.
Loans covered by Credit Guarantee Fund for Micro
Units Scheme administered by National Credit
Guarantee Trustee Company Limited (CGFMU
Scheme) classified as NPA are provided to the extent
of portion not guaranteed under the CGFMU Scheme.
NPA accounts are written off in accordance with
RBI guidelines and Bank’s Policy post approval
from Board of Directors (BOD). Amounts recovered
against debts written-off are recognised in the Profit
and Loss account.
For restructured/rescheduled assets, provision
is made in accordance with guidelines issued by
RBI. The restructured accounts are classified in
accordance with RBI guidelines.
Provisions created against individual accounts as
per RBI guidelines are not netted in the individual
account. For presentation in financial statements,
provision created is netted against gross amount of
Advance. Provision held against an individual account
is adjusted against account balance at individual
level only at the time of write-off / settlement
of the account.
The Bank maintains a general provision on standard
advances at the rates prescribed by RBI. Provision
made against standard assets is included in
"Other liabilities & provisions and not netted off
against Advances.
In addition to the above, the Bank on a prudent basis
makes provisions on advances or exposures which
are not NPAs but has reasons to believe on the basis
of the extant environment or specific information
or basis regulatory guidance / instructions, of a
possible slippage of a specific advance or a group of
advances or exposures or potential exposures. These
are classified as contingent provisions and included
under other liabilities.
Floating Provision
Provisions made in excess of the Bank’s policy for
specific loan provisions for non-performing assets
and regulatory general provisions are categorised as
floating provisions. Creation of floating provisions is
considered by the Bank up to a level approved by the
BOD. In accordance with the RBI guidelines, floating
provisions are used up to a level approved by the BOD
and RBI only for contingencies under extraordinary
circumstances and for making specific provisions
for impaired accounts as per these guidelines or any
other regulatory guidelines as applicable. The floating
provision is netted-off from advances.
The Bank recognises the provision for unhedged
foreign currency exposure of its borrowers as per
regulatory guidelines stipulated by the RBI from
time to time and as per methodology prescribed.
The provisions are included in provision for standard
assets and reported under other liabilities.
C. Transfer and Servicing of Assets
The Bank transfers loans through securitisation
transactions in accordance with Master Direction -
Reserve Bank of India (Transfer of Loan Exposures)
Directions, 2021. The transferred loans are de¬
recognised, and gains/losses are accounted for, only
if the Bank surrenders the rights to benefits specified
in the underlying securitised loan contract.
In accordance with the RBI guidelines for securitisation
of standard assets, the profit/premium arising from
sell down/securitisation to be amortised over the life
of the transaction based on the method prescribed
in the guidelines and the loss, if any, arises in the
sell down/securitisation transaction, is recognised
upfront in the Profit or Loss Account.
The Bank transfers advances through inter-bank
participation with risk. In accordance with the RBI
guidelines, for participation with risk, the aggregate
amount of the participation issued by the Bank is
reduced from advances.
On sale of stressed assets, if the sale is at a price
below the net book value, the shortfall shall be
charged to the Profit and Loss Account and if the
sale is for a value higher than the net book value, the
excess shall be credited as profit to the Profit and
Loss Account in the year when the initial consideration
is received in cash and / or security receipts issued
by Securitisation company ('SC’) / Reconstruction
Company ('RC’).
In respect of stressed assets transferred to
Asset Reconstruction Company (ARC), where the
investment by the bank in security receipts (SRs)
backed by the assets sold by it is more than 10
percent of such SRs, provisions held on the SRs are
higher of the provisions required in terms of net asset
value declared by the SC / RC and provisions as per
the extant norms applicable to the underlying loans,
notionally treating the book value of these SRs as the
corresponding stressed loans assuming the loans
remained in the books of the Bank.
D. Priority Sector Lending Certificates
The Bank enters into transactions for the sale or
purchase of Priority Sector Lending Certificates
(PSLCs). In the case of a sale transaction, the Bank
sells the fulfilment of priority sector obligation and
in the case of a purchase transaction, the Bank buys
the fulfilment of priority sector obligation through the
RBI trading platform. There is no transfer of risks or
loan assets. The fee received for the sale of PSLCs
is recorded as 'Miscellaneous Income’ and the fee
paid for purchase of the PSLCs is recorded as 'Other
Expenditure’ in Profit and Loss account. The Bank
accounts for the income and expense on upfront basis.
E. Foreign Currency Transactions
Initial Recognition:
Transactions in foreign currencies entered into by the
Bank are accounted at the exchange rates prevailing
on the date of the transaction or at rates that closely
approximate the rate at the date of the transaction.
Measurement at the Balance Sheet date
Foreign currency monetary items, if any, of the
Bank, outstanding at the balance sheet date are
restated at the rates prevailing at the year-end as
notified by Foreign Exchange Dealers Association of
India('FEDAI’). Non-monetary items of the Bank are
carried at historical cost.
Contingent liabilities on account of foreign exchange
contracts, currency future contracts, guarantees,
letters of credit, acceptances and endorsements
are reported at closing rates of exchange notified by
FEDAI as at the Balance Sheet date.
Treatment of Exchange differences
Exchange differences arising on settlement /
restatement of foreign currency monetary assets and
liabilities of the Bank are recognised as income or
expense in the Profit and Loss Account.
F. Revenue Recognition
(i) Interest income is recognised in the Profit and
Loss Account on an accrual basis, except in the
case of non-performing assets is recognised
upon realisation as per income recognition and
asset classification norms of RBI.
(ii) Interest on advances transferred under
securitisation arrangements meeting the criteria
stipulated in para C above are not recognised
in Profit and Loss Account. The bank’s share
of the securitization income is recognised
on receipt basis.
(iii) Income on non-coupon bearing discounted
instruments is recognised over the tenor of the
instrument on a constant effective yield basis.
(iv) Loan processing fees including processing fees
on committed lines is accounted for upfront
when it becomes due.
(v) Interest income on deposits with banks and
financial institutions is recognized on a time
proportion basis taking into accounts the amount
outstanding and the implicit rate of interest.
(vi) Dividend is recognised as income when the right
to receive the dividend is established.
(vii) Profit or loss on sale of mutual fund units is
recognised on trade date.
(viii) All other fees are accounted for as and when
they become due.
G. Property, Plant and Equipment (PPE) (Fixed Assets)
and Depreciation
Tangible Assets
PPE are stated at cost less accumulated depreciation
/ amortization and impairment loss, if any. The cost
comprises purchase price and any attributable cost
of bringing the asset to its working condition for its
intended use. Any trade discounts and rebates are
deducted in arriving at the purchase price.
Subsequent expenditure on PPE is capitalised only
if such expenditure results in an increase in the
future benefits from such asset beyond its previously
assessed standard of performance.
Depreciation is charged over the estimated useful
life of the fixed asset on written down value basis
when the asset is available for use i.e. when it is
capable of operating in the manner intended by
management, considering residual value of 5% of
the cost.. Assets individually costing H 5,000 or less
are fully depreciated in the year of purchase. Assets
purchased / sold during the year are depreciated on a
pro-rata basis. Depreciation rate used by the Bank are
in line with those specified under Schedule II of the
Companies Act, 2013.
Leasehold Improvements: Improvements to leasehold
premises are amortised over the primary period of
lease or estimated useful life, whichever is lower.
An item of PPE is derecognised on disposal or when
no future economic benefits are expected from its use
or disposal. The gain or loss arising on derecognition
is recognised in the Profit and Loss Account.
Gains or losses arising from disposal or retirement
of PPE are measured as the difference between
the net disposal proceeds and the carrying amount
of the asset and are recognised net, within "Other
Income” as Profit/ (Loss) on sale of PPE, as the case
maybe, in the Profit and Loss Account in the year of
disposal or retirement.
PPE held for sale is valued at lower of their carrying
amount and net realisable value, any write-down is
recognised in the Profit and Loss
H. Intangible Assets
Intangible Assets acquired separately are measured
on initial recognition at cost. Following initial
recognition, intangible assets are carried at cost
less accumulated amortization and accumulated
impairment losses, if any.
Intangible assets, primarily comprise of software,
goodwill, patents, trademarks, and copyrights are
amortized over a period of 60 months or license
period whichever is lower on a straight-line basis with
zero residual value.
Capital Work in Progress
Costs incurred towards acquisition of assets,
including expenses incurred prior to those assets
being put to use and directly attributable to bringing
them to their working condition are included under
"Capital Work in Progress”. Capital Work in Progress
including Software under development are stated at
the amount incurred up to the date of Balance Sheet.
I. Leases
Operating Lease
Leases, where the lessor effectively retains
substantially all the risks and benefits of ownership
for the leased term are classified as operating
leases in accordance with Accounting Standard 19
on Leases. The office premises are generally rented
on cancellable terms or renewable at the option of
both the parties. Computers and tablets are rented
on operating lease. Operating lease rentals are
recognised as an expense on straight-line basis over
the lease period in accordance with the AS 19 - Leases
J. Impairment
The carrying amounts of assets are reviewed at
each balance sheet date if there is any indication
of impairment based on internal / external factors.
An impairment loss is recognized in profit and loss
account 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 using a pre-tax discount rate that
reflects current market assessments of the time
value of money and risks specific to the asset.
After impairment, depreciation is provided on
the revised carrying amount of the asset over its
remaining useful life.
When there is indication that an impairment loss
recognised for an asset in earlier accounting periods
no longer exists or may have decreased, such
reversal of impairment loss is recognised in the Profit
and Loss Account, to the extent the amount was
previously charged to the Profit and Loss Account
K. Taxation
Tax expense comprises current and deferred tax
Current Tax :
Current income tax is measured at the amount
expected to be paid to the tax authorities in
accordance with the Income Tax Act, 1961 enacted in
India. "Current income tax relating to items recognised
directly in reserve is recognised in respective reserve
and not in Profit and Loss Account.”
Deferred Tax :
Deferred 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 income
tax relating to items recognised directly in reserve
is recognised in respective reserve and not in Profit
and Loss Account.”
Deferred tax is measured based on the tax rates
and the tax laws enacted or substantively enacted
at the balance sheet date. Deferred tax assets are
recognised only to the extent that there is reasonable
certainty that sufficient future taxable income will
be available against which such deferred tax assets
can be realised. In situations where the Bank has
unabsorbed depreciation or carry forward tax losses,
all deferred tax assets are recognised only if there is
virtual certainty supported by convincing evidence
that they can be realised against future taxable profits.
The carrying amount of deferred tax assets are
reviewed at each balance sheet date. The Bank writes-
down the carrying amount of a deferred tax asset to
the extent that it is no longer reasonably certain or
virtually certain, as the case may be, that sufficient
future taxable income will be available against which
deferred tax asset can be realised.
L. Earnings Per Share
Basic and diluted earnings per share are computed
in accordance with Accounting Standard 20 -
Earnings per share.
Basic earnings per share are calculated by dividing
the net profit or loss for the period attributable to
equity shareholders by the weighted average number
of equity shares outstanding during the period.
Diluted earnings per equity share reflect the potential
dilution that could occur if securities or other
contracts to issue equity shares were exercised or
converted to equity during the year. Diluted earnings
per equity share are computed using the weighted
average number of equity shares and potential
dilutive equity shares outstanding during the period
except where the results are anti-dilutive.
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