1. Basis of Preparation
The financial statements have been prepared in accordance with requirements prescribed under the Third Schedule of the Banking Regulation Act, 1949. The accounting policies used in the preparation of these financial statements, in all material aspects, conform to Generally Accepted Accounting Principles in India (Indian GAAP), the guidelines issued by Reserve Bank of India (RBI) from time to time, the Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI) and prescribed under Section 133 of Companies Act, 2013 (‘Act’) read with Rule 7 of the Companies (Account) Rules, 2014, the provisions of the Act (to the extent notified) and practices generally prevalent in the banking industry in India. The Bank follows the accrual method of accounting, except where otherwise stated, and the historical cost convention
2. Use of Estimates
The preparation of financial statements requires the management to make estimates and assumptions that affect the reported amount of assets, liabilities, expenses, income and disclosure of contingent liabilities as at the date of the financial statements. Management believes that these estimates and assumptions are reasonable and prudent. However, actual results could differ from estimates. Any revision to accounting estimates is recognized prospectively in current and future periods.
3. Revenue Recognition
Revenue is recognized to the extent it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured
I. Interest income is recognized on accrual basis except in the case of non-performing assets where it is recognized upon realization as per the prudential norms of the RBI.
ii. Commissions on Letter of Credit (LC)/ Bank Guarantee (BG) are accrued over the period of LC/ BG.
iii. Fee based income are accrued on certainty of receipt and is based on milestones achieved as per terms of agreement with the client.
iv. Income on discounted instruments is recognized over the tenure of the instrument on a constant yield basis.
v. Dividend is accounted on an accrual basis when the right to receive the same is established.
vi. In case of Non-performing advances, recovery is appropriated as per the policy of the bank.
4. Advances and Provisions
i. Advances are classified into Standard, Sub-standard, Doubtful and Loss assets and provisions are made in accordance with the prudential norms prescribed by RBI and additional provisions as decided by the management. Advances are stated net of provisions towards non-performing advances.
ii. Advances are classified as ‘Secured by Tangible Assets’ when security of at least 10% of the advance has been stipulated/created against tangible security including book debts. Security in the nature of escrow, guarantee, comfort letter, charge on brand, license, patent, copyright etc are not considered as ‘Tangible Assets.
iii. Amounts recovered against debts written-off in earlier years and provisions no longer considered necessary in the context of the current status of the borrower are recognized as income in the Profit and Loss account.
iv. The Bank does not make any floating provision for bad and doubtful advances and investments.
v. Provision on loans and advances restructured/rescheduled is made in accordance with the applicable RBI guidelines on restructuring of loans and advances by Banks.
vi. The Bank had made countercyclical provisioning buffer as required by RBI guidelines, amended from time to time, with the approval of the Board, which can be utilized within the limits and in the circumstances permitted by Reserve Bank of India (RBI).
In terms of extant guidelines of the RBI on investment classification and valuation, the entire investment portfolio is categorized as
i. Held To Maturity,
ii. Available For Sale and
iii. Held For Trading.
Investments under each category are further classified as
i. Government Securities
ii. Other Approved Securities
iv. Debentures and Bonds
v. Subsidiaries/ Joint Ventures
vi. Others (Commercial Paper, Mutual Fund Units, Security Receipts, Pass through Certificate).
B. Basis of Classification
a) Investments that the Bank intends to hold till maturity are classified as ‘Held to Maturity.
b) Investments that are held principally for sale within 90 days from the date of purchase are classified as ‘Held for Trading.
c) Investments, which are not classified in the above two categories, are classified as ‘Available for Sale.
d) An investment is classified as ‘Held To Maturity’ ‘Available For Sale’ or ‘Held For Trading’ at the time of its purchase and subsequent shifting amongst categories and its valuation is done in conformity with RBI guidelines.
e) Investments in subsidiaries, joint venture are classified as ‘Held To Maturity.
i) In determining the acquisition cost of an investment:
a) Brokerage, commission, stamp duty, and other taxes paid are included in cost of acquisition in respect of acquisition of equity instruments from the secondary market whereas in respect of other investments, including treasury investments, such expenses are charged to Profit and Loss Account.
b) Broken period interest paid/ received is excluded from the cost of acquisition/ sale and treated as interest expense/ income.
c) Cost is determined on the weighted average cost method.
ii) Investments ‘Held To Maturity’ are carried at acquisition cost unless it is more than the face value, in which case the premium is amortized on straight line basis over the remaining period of maturity. Diminution, other than temporary, in the value of investments in subsidiaries/ joint venture under this category is provided for each investment individually.
iii) Investments ‘Held For Trading’ and Available For Sale’ are marked to market scrip-wise and the resultant net depreciation, if any, in each category is recognized in the Profit and Loss Account, while the net appreciation, if any, are ignored.
a) Treasury Bills, commercial papers and certificates of deposit being discounted instruments are valued at carrying cost.
b) In respect of traded/ quoted investments, the market price is taken from the trades/ quotes available on the stock exchanges.
c) The quoted Government Securities are valued at market prices and unquoted/non-traded government securities are valued at prices declared by Primary Dealers Association of India (PDAI) jointly with Fixed Income Money Market and Derivative Association of India (FIMMDA).
d) The unquoted shares are valued at break-up value or at Net Asset Value if the latest balance sheet is available, else, at Rs.1/- per company and units of mutual fund are valued at repurchase price as per relevant RBI guidelines.
e) The unquoted fixed income securities (other than government securities) are valued on Yield to Maturity (YTM) basis with appropriate mark-up over the YTM rates for Central Government securities of equivalent maturity. Such mark-up and YTM rates applied are as per the relevant rates published by FIMMDA.
f) Security receipts issued by the asset reconstruction companies are valued in accordance with the guidelines applicable to such instruments, prescribed by RBI from time to time. Accordingly, in cases where the cash flows from security receipts issued by the asset reconstruction companies are limited to the actual realisation of the financial assets assigned to the instruments in the concerned scheme, the Bank reckons the net asset value obtained from the asset reconstruction company from time to time, for valuation of such investments at each reporting period end.
g) Quoted Preference shares are valued at market rates and unquoted/non-traded preference shares are valued at appropriate yield to maturity basis, not exceeding redemption value as per RBI guidelines.
Profit or Loss on sale of investments is credited/ debited to Profit and Loss Account. However, profits on sale of investments in ‘Held to Maturity’ category is first credited to Profit and Loss Account and thereafter appropriated, net of applicable taxes to the Capital Reserve Account at the year/period end. Loss on sale is recognized in the Profit and Loss Account.
Investments are shown net of provisions.
D. Repo and reverse repo transactions
In accordance with the RBI guidelines repo and reverse repo transactions in government securities and corporate debt securities (excluding transactions conducted under Liquidity Adjustment Facility (‘LAF’) and Marginal Standby Facility (‘MSF’) with RBI) are reflected as borrowing and lending transactions respectively. Borrowing cost on repo transactions is accounted as interest expense and revenue on reverse repo transactions is accounted as interest income.
In respect of repo transactions under LAF and MSF with RBI, amount borrowed from RBI is credited to investment account and reversed on maturity of the transaction. Costs thereon are accounted for as interest expense. In respect of reverse repo transactions under LAF, amount lent to RBI is debited to investment account and reversed on maturity of the transaction. Revenues thereon are accounted as interest income.
6. Derivative Transactions
In Transactions designated as ‘Hedge’:
a) Net interest payable/ receivable on derivative transactions is accounted on accrual basis.
b) On premature termination of Hedge swaps, any profit/ losses are recognised over the remaining contractual life of the swap or the residual life of the asset/ liability whichever is lesser.
c) Re-designation of hedge swaps by change of underlying liability is accounted as the termination of one hedge and acquisition of another.
d) Hedge contracts are not marked to market unless the underlying is also marked to market. In respect of hedge contracts that are marked to market, changes in the market value are recognized in the profit and loss account.
In Transactions designated as ‘Trading’:
Outstanding derivative transactions designated as ‘Trading’, which includes interest rate swaps, cross currency swaps, cross currency options and credit default swaps, are measured at their fair value. The resulting profits/ losses are included in the profit and loss account. Premium on options is recorded as a balance sheet item and transferred to Profit and Loss Account on maturity/ cancellation.
Derivative Transactions in Exchange Traded Currency Futures (ETCF’s) segments designated as trading includes Currency Futures, Currency Options and Interest Rate Futures which are measured at their fair value and are cash settled on T 1 basis. The resulting profits / losses on these transactions are transferred to Profit and Loss Account on the month end settlement date stipulated by Respective Exchanges.
7. Fixed Assets (Property, Plant & Equipment) and depreciation
i) Fixed assets other than Premises are stated at cost less accumulated depreciation. Premises are revalued in accordance with the Bank’s policy and RBI guidelines and the same are stated at revalued amount less accumulated depreciation.
ii) Cost of asset includes purchase cost and all expenditure incurred on the asset before put to use. Subsequent expenditure incurred on assets put to use is capitalized only when it increases the future benefits from such assets or their functioning capability.
iii) The appreciation on revaluation, if any, is credited to Revaluation Reserve.
iv) Depreciation in respect of fixed assets is calculated on Straight Line Method with reference to cost or revalued amounts, in case of assets revalued and the same is charged to Profit and Loss account.
v) In respect of revalued assets, the additional depreciation consequent to revaluation is transferred from revaluation reserve to general reserve in the balance sheet.
vi) Fixed assets individually costing less than Rs.5000 are fully depreciated in the year of addition.
vii) Depreciation on tangible assets is allocated over useful life of the asset as prescribed under Part C of Schedule II of the Companies Act 2013. The useful lives and residual values are reviewed periodically. If the management estimate useful lives of an asset at the time of acquisition of the asset or of remaining useful life on subsequent review is shorter, depreciation is provided at a higher rate based on management’s estimate of useful life / remaining useful life.
viii) Depreciation on additions/ sale of fixed assets during the year is provided for the period for which assets were actually held.
ix) The useful lives of Fixed assets are as follows:
x) Leasehold land is amortized over the period of lease.
xi) Computer Software (non-integral) individually costing more than Rs.2.50 Lacs is capitalised and depreciated in 6 years.
8. Securitisation Transactions:
Securitisation of various loans results in sale of these assets to Special Purpose Vehicles (‘SPVs’), which, in turn issue securities to investors. Financial assets are partially or wholly derecognised when the control of the contractual rights in the securitised assets is lost. The Bank accounts for any loss arising on sale immediately at the time of sale and the profit/ premium arising on account of sale is amortised over the life of the securities issued or to be issued by the SPV to which the assets are sold.
9. Sale of financial assets to Securitization Companies/ Reconstruction Companies:
Sale of financial assets to Securitisation Companies (SCs)/ Reconstruction Companies (RCs) is reckoned at the lower of the redemption value of Security Receipts (SRs) / Pass Through Certificates (PTCs) received and the net book value of the financial asset.
In accordance with RBI guidelines on Sale of Non-performing Advances, in case the sale is at a price below the net book value (NBV) (i.e book value less provision held), the shortfall is charged to profit and loss account. Further, as per the extant RBI guidelines dated 13.06.2016, shortfall is amortised over a period of 4 quarters from the quarter in which the sale has taken place.
In case, sale value is higher than the NBV, the excess provision is reversed to the profit and loss account in the year in which cash amounts are received. However, such reversal of excess provision is limited to the extent to which cash received exceeds the NBV of the asset.
10. Foreign Currency Transactions:
i. Foreign currency transactions, on initial recognition are recorded at the exchange rate prevailing on the date of transaction. Monetary foreign currency assets and liabilities are translated at the closing rates prescribed by Foreign Exchange Dealers Association of India (FEDAI) and the resultant gain or loss is recognized in the Profit and Loss account. Exchange differences arising on the settlement of monetary items are recognized as income or expense in the period in which they arise.
ii. Premium or discount arising at the inception of Forward Exchange Contracts which are not intended for trading is amortized as expense or income over the life of the contract. Premium or discount on other Forward Exchange Contracts is not recognized.
iii. Outstanding Forward Exchange Contracts which are not intended for trading are revalued at closing FEDAI rates. Other outstanding Forward Exchange Contracts are valued at rates of exchange notified by FEDAI for specified maturities or at interpolated rates for in-between maturities. The resultant profit/ losses are recognized in the Profit and Loss Account.
iv. Profit/ losses arising on premature termination of Forward Exchange Contracts, together with unamortized premium or discount, if any, is recognized on the date of termination.
v. Contingent liability in respect of outstanding forward exchange contracts is calculated at the contracted rates of exchange and in respect of guarantees; acceptances, endorsements and other obligations are calculated at the closing FEDAI rates.
vi. Operations of foreign branch are classified as ‘Integral Foreign Operations’. Assets and Liabilities are translated at the closing rates prescribed by Foreign Exchange Dealers Association of India (FEDAI) Income and Expenditure items are translated at quarterly average rates. The resultant gain or loss is recognized in the Profit and Loss Account.
11. Employee Benefits
i. Payments to defined contribution schemes are charged to Profit and Loss Account of the year when contribution are due.
ii. For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each Balance Sheet date. Actuarial gains or losses are recognized in the profit and loss account for the period in which they occur.
iii. The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognized during the period when the employee renders the service.
12. Segment Reporting
The Bank operates in three segments wholesale banking, retail banking and treasury services. These segments have been identified in line with AS-17 on segment reporting after considering the nature and risk profile of the products and services, the target customer profile, the organization structure and the internal reporting system of the Bank.
Segment revenue, results, assets, and liabilities include the amounts identifiable to each of the segments as also amounts allocated, as estimated by the management. Assets and liabilities that cannot be allocated to identifiable segments are grouped under unallocated assets and liabilities.
13. Income Tax
i. Tax expense comprises of current and deferred tax.
Current tax is the amount of Income tax determined to be payable (recoverable) in respect of taxable income (tax loss) for a period calculated in accordance with the provisions of the Income Tax Act, 1961 and the Income Computation and Disclosure Standards (ICDS).
ii. Deferred tax for timing differences between the book and tax profits for the year is accounted for, using the tax rates and laws that have been substantively enacted as of the balance sheet date. Deferred tax assets arising from timing differences are recognized to the extent there is reasonable certainty that these would be realized in future.
iii. Deferred tax assets in case of unabsorbed depreciation/ losses are recognized only if there is virtual certainty that such deferred tax asset can be realized against future taxable profits.
iv. Disputed taxes not provided for including departmental appeals are included under Contingent Liabilities.
14. Earnings Per Share
i. The Bank reports basic and diluted Earnings Per Share in accordance with AS 20. Basic Earnings per Share is computed by dividing the net profit after tax by the weighted average number of equity shares outstanding at the year end.
ii. Diluted Earnings per Share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the period. Diluted Earnings per Share is computed by dividing the net profit after tax by the sum of the weighted average number of equity shares and dilutive potential equity shares outstanding at the year end.
15. Impairment of Assets
Fixed Assets are reviewed for impairment whenever events or changes in circumstances warrant that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated current realizable value and value in use. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds estimated current realizable value of the asset or value in use.
16 . Provisions, Contingent Liabilities and Contingent Assets
i. In conformity with AS 29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognizes provisions only when it has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when a reliable estimate of the amount of the obligation can be made.
ii. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date.
iii. Reimbursement expected in respect of expenditure required to settle a provision is recognized only when it is virtually certain that the reimbursement will be received.
iv. Contingent Assets are neither recognized nor disclosed.