SIGNIFICANT ACCOUNTING POLICIES 2016-17 A. Basis of Preparation:
The Bank’s financial statements are prepared under the historical cost convention, on the accrual basis of accounting and on going-concern basis, unless otherwise stated and conform in all material aspects to Generally Accepted Accounting Principles (GAAP) in India, which comprise applicable statutory provisions, regulatory norms/guidelines prescribed by the Reserve Bank of India (RBI) including special dispensations announced from time to time, Banking Regulation Act 1949, Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), and the practices prevalent in the banking industry in India.
B. Use of Estimates:
The preparation of financial statements requires the management to make estimates and assumptions considered in the reported amount of assets and liabilities (including contingent liabilities) as on the date of the financial statements and the reported income and expenses during the reporting period. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Future results could differ from these estimates. Any revision in the estimates is recognised prospectively in the year in which they are known/ materialised, unless otherwise stated.
1) FOREIGN EXCHANGE TRANSACTIONS
I. Transactions other than FCNR/EEFC/ RFC Accounts
a) Foreign Currency assets and liabilities and outstanding forward exchange contracts and swaps are translated at the year end rates as quoted by Foreign Exchange Dealers’ Association of India (FEDAI). The resultant profit/ loss is included in the Profit and Loss Account.
b) Income and expenditure items have been translated at the exchange rates ruling on the dates of the transactions.
c) Contingent liabilities on account of acceptances, endorsements and other obligations including guarantees and Letters of Credit issued in Foreign Currencies, shown in the Balance Sheet are valued at the exchange rates prevailing at the year end.
II. Transactions relating to FCNR/EEFC/ RFC accounts
Foreign Currency Deposits in FCNR/EEFC/ RFC accounts including interest accrued thereon and also the corresponding assets are recorded at market related notional rates, which are periodically reviewed. Assets and Liabilities at the year end are revalued at rates quoted by Foreign Exchange Dealers’ Association of India. The resultant profit / loss is shown as income / loss.
All the investment transactions are recorded on trade date and accounted on settlement date.
Investments are accounted for in accordance with the extant RBI guidelines on investment classification and , shown in the Balance Sheet under the following six groups:
a) Government Securities
b) Other Approved Securities
d) Debentures and Bonds
e) Investments in Subsidiaries/Joint Ventures
f) Others (Commercial Paper, Units of Mutual Fund, Venture Capital Funds etc.)
B) Classification of investments:
The Investment portfolio of the Bank
is classified into the following three
a) Held to Maturity
b) Available for Sale
c) Held for Trading
Basis of classification:
i. Investments that the Bank intends to hold till maturity are classified as “Held to Maturity (HTM)”.
ii. Investments that are held principally for resale within 90 days from the date of purchase are classified as “Held for Trading (HFT)”.
iii. Investments, which are not classified in the above two categories, are classified as “Available for Sale (AFS)”.
iv. Investments in subsidiaries, joint ventures and associates are classified as HTM.
C) Basis of Valuation:
In determining the acquisition cost of an investment:
(a) Brokerage, Commission, Securities Transaction Tax (STT) etc., paid in connection with acquisition of investments are expensed upfront and excluded from cost.
(b) Broken period interest paid / received on debt instruments is treated as interest expense/ income and is excluded from cost/sale consideration.
(c) Cost is determined on the weighted average cost method for investments under AFS and HFT and HTM Category.
An investment is classified as HTM, HFT or AFS at the time of its acquisiton and subsequent shifting amongst
categories is done in conformity with regulatory guidelines as follows:.
Transfer of scrips from AFS/HFT category to HTM category and vice versa is made at the lower of book value or market value. In cases where the market value is higher than the book value at the time of transfer, the appreciation is ignored and the security is transferred at the book value. In cases where the market value is less than the book value, the provision against depreciation held against this security (including the additional provision, if any, required based on valuation done on the date of transfer) is adjusted to reduce the book value to the market value and the security is transferred at the market value.
In the case of transfer of securities from HTM to AFS/HFT category, if the security was originally placed under the HTM category at a discount, it is transferred to AFS/HFT category at the acquisition price/book value. After transfer, it is immediately revalued and resultant depreciation, if any, is provided. If the security was originally placed in the HTM category at a premium, it is transferred to the AFS/HFT category at the amortised cost. After transfer, the security is immediately re-valued and resultant depreciation, if any, is provided.
In the case of transfer of securities from AFS to HFT category or vice-versa, the securities are not re-valued on the date of transfer.
a) Held to Maturity
(i) Investments classified under this category are valued at the year end at the acquisition cost, except where the acquisition cost is more than the face value, in which case the premium is amortized on constant yield method.
(ii) In the case of investments in subsidiaries/joint ventures, any diminution in value, other than temporary, is recognized and provided for each investment individually.
(iii) Investments in venture capital funds are valued at cost of acquisition.
(iv) Profit on sale of investments in this category is first taken to Profit and Loss Account and there after appropriated to the “Capital Reserve Account”. Loss on sale is recognised in the Profit and Loss Account.
b) Available for Sale and Held for Trading categories:
Investments held under AFS and HFT categories are individually valued at the market price or fair value determined as per Regulatory guidelines, and only the net depreciation of each group for each category (viz., (i) Government securities (ii) Other Approved Securities (iii) Shares (iv) Bonds and Debentures (v) Subsidiaries and Joint Ventures; and (vi) others) is provided for and net appreciation, is ignored. On provision for depreciation, the book value of the individual security remains unchanged after marking to market.
Depreciation on the instruments acquired by way of conversion, whether classified as standard or NPA, is not offset against the appreciation in any other securities held under the AFS category
Profit/Loss on sale of investments in AFS/HFT category is recognised in Profit and Loss Account.
III. Prudential Norms
(a) i) Securities with
guarantees of the Central Government are treated as performing investments, notwithstanding arrears of principal/interest
interest if not realized for more than 90 days is recognized as income only on cash basis.
ii) Securities guaranteed by the State Government, where the principal/interest is due but not paid for a period of more than 90 days, are treated as Non Performing Investments and provided for as per the RBI guidelines. Further, for securities guaranteed by the State Governments, where the principal/interest is due but not paid for a period of more than 90 days, interest is recognized as income only on cash basis.
(b) Preference Shares/Securities not guaranteed by the Central Government/State Governments: Where the Principal/Interest/Fixed Dividend is due but not paid for a period of more than 90 days are treated as Non Performing Investments and provided for as per the Reserve Bank of India guidelines.
(c) In the case of debentures/bonds where principal/ interest is in arrears, provision is made as in the case of advances.
(d) If any credit facility availed by the issuer from the Bank is NPA, investments in any of the securities issued by the same issuer is also treated as Non
Performing Investments and vice versa, except in the case of investment in preference shares, becoming NPA.
(e) The depreciation/provision requirement in respect of nonperforming investments is not set off against the appreciation in respect of other performing investments.
3) TRANSACTIONS RELATING TO DERIVATIVES
Derivative contracts are designated as hedging
or trading and accounted for as follows:
a) Hedge Swaps: The interest rate swaps which hedges interest bearing assets and liabilities are accounted for on accrual basis except the swaps designated with an asset or liability that is carried at market value or lower of cost or market value in the financial statements. In such cases the swaps are marked to market with the resulting gain or loss recorded as an adjustment to the market value of designated asset or liability.
The gain or loss on the terminated swaps is deferred and recognized over the shorter of the remaining contractual life of the swap or the remaining life of the asset/liability.
b) Re-designation of Hedge items: If a hedge is redesignated from one item of asset/ liability to another item of asset/liability, such redesignation is accounted for as the termination of one hedge and acquisition of another. On the date of redesignation, the swap is marked to market and the mark to market value is amortized over the shorter period of the remaining life of the swap or remaining life of the asset/liability. The offsetting mark to market entry adjustments would be treated as premium received or paid for hedge on the newly designated item of asset/liability and this would be amortized over the life of the redesignated asset/liability or remaining term of the swap whichever is shorter.
c) Trading Swaps: The trading swaps are marked to market with the resulting gain or loss recorded in the income statement.
Gain or loss on termination of the swap is
recorded as immediate income or expense.
4) FIXED ASSETS/DEPRECIATION &
I) Fixed Assets
a) Premises of the bank include free hold as well as lease hold properties. Land and buildings purchased or allotted have been capitalised based on agreements/letters of allotment and physical possession. Other Fixed Assets are capitalized on the date of put to use. Premises and other Fixed Assets are stated at their historical cost, except those which have been re-valued. Such Fixed Assets are stated on the revalued amount.
b) Advance payments made for acquisition of capital assets and deposits made in respect of properties taken on lease/rent are included under ‘Other Assets’.
II) Depreciation / Amortization
a) Fixed Assets (other than computers and software) including leasehold land and building are depreciated at the rates prescribed under the rules framed under ‘Income Tax Act 1961’ on reducing balance method, including on the composite cost of certain properties, where it is not possible to segregate the land cost. Computers (including operating software) are depreciated on Straight Line Method at the rate of 33.33% per annum as per RBI guidelines. Other software expenses, treated as intangible assets are amortized at 100% in the year of acquisition. Depreciation on additions to Fixed Asset during the financial year is provided at 100% of the rate of depreciation prescribed, if the asset is put to use for 180 days and above during the year and at 50% of the rate of depreciation prescribed, if the asset is put to use for less than 180 days during the year. No depreciation is provided in the year of sale/disposal of fixed assets.
b) Incremental depreciation on revalued amount in respect of premises is adjusted from Revaluation Reserve account and credited to Profit and Loss account.
5) LEASED OUT ASSETS
Accounting for leased assets is done as per Accounting Standard 19. Provision in respect of non-performing assets, is made by applying the asset classification norms prescribed by the RBI for advances.
6) NON BANKING ASSETS
Non-Banking assets are shown at cost.
Advances are classified as per the RBI guidelines into standard, sub-standard, doubtful and loss assets after considering subsequent recoveries to date. Provision for non-performing assets is made in conformity with the guidelines issued by RBI from time to time.
a) In terms of the guidelines of the Reserve Bank of India, advances are classified as “Performing” and “Non-Performing” assets based on recovery of principal/interest and advances are classified as “Non Performing Assets” as per the delinquency norms stipulated by RBI. In case of State Government Guaranteed advances, requirement of invocation of the Guarantee has been de-linked for classification of an account as NPA. Non Performing Advances (NPAs) are categorized as Sub-Standard, Doubtful and Loss Assets for the purpose of computing provision requirements.
Advances shown in the Balance Sheet are net of provisions [including floating provisions other than provision on standard assets] in respect of non-performing advances, interest suspense and ECGC/ DICGC claims received.
b) Advances include the Bank’s participation in/ contributions to Pass through Certificates (PTCs) and /or to the asset-backed assignment of loan assets of other banks
/ financial institutions where the Bank has participated on risk-sharing basis.
c) Amounts recovered against bad debts written off in earlier years are recognised in the Profit and Loss account.
d) Provisions on Standard Advances are shown under “Other Liabilities and Provisions”.
e) Provision on advances is made as per the RBI guidelines as under:
1. Standard Assets: provision is made as per the extant RBI guidelines.
2. Sub Standard Assets: 15% of the
outstanding advances. However, in case of sub standard assets which are identified ab-initio as “unsecured exposures” provision at 25% of the outstanding balance is made.
3. Doubtful Assets: 25% to 100% as applicable on the secured portion of advances, depending upon the period for which the asset has remained doubtful and 100% of the unsecured portion of the outstanding advance after netting realized amount in respect of realized/realizable amount of guarantee cover under the ECGC/ CGSTI Schemes.
4. Loss Assets: 100% of the outstanding advances.
f) Restructured / rescheduled accounts:
In case of restructured / rescheduled accounts provision is made for the sacrifice against erosion/ diminution in fair value of restructured loans, in accordance with the general framework of restructuring of advances issued by RBI.
The diminution in the fair value is recomputed on each balance sheet date till satisfactory completion of all repayment obligations and full repayments of the outstanding, so as to capture the changes in the fair value on account of changes in base rate, term premium and credit category of the borrower.
The restructured accounts are classified in accordance with RBI guidelines.
8) REVENUE RECOGNITION
Income is accounted on accrual basis except in
the following cases:
a) In the case of Non Performing Assets, income is recognized on cash basis, in terms of guidelines of the Reserve Bank of India. Where recovery is not adequate to upgrade the Non Performing Asset accounts by way of regularization, such recovery is being appropriated towards the principal/ book balance in the first instance and towards interest dues thereafter. In respect of Non Performing Investments, the same accounting treatment, as above, is followed.
b) Income from Units of Mutual Funds, Commission on Insurance and Depository Participant business, Merchant Banking transactions, General Insurance business, Money transfer services, Sale of Mutual Fund products, Locker Rent, Commission on Government business, etc. are accounted on cash/realisation basis.
c) Commission earned from Non-fund based business viz., Letter of Credits and Bank Guarantees is accounted on cash basis.
d) Interest on securities which is due and not paid for a period of more than 90 days is recognized on realisation basis as per RBI guidelines.
e) In the case of suit filed accounts, legal expenses are charged to the profit and loss account. Similarly, at the time of recovery of legal expenses in respect of such suit filed accounts, the amount recovered is accounted as income.
f) Dividend is recognised as income in the year the right to receive the dividend is established.
9) NET PROFIT
The net profit is arrived at after
a) Provisions for Income Tax in accordance with statutory requirements
b) Provision on advances/investments
c) Adjustments to the value of investments
d) Transfers to provisions and contingencies
e) Provision for Inter Branch accounts lying unadjusted for more than six months as per RBI norms
f) Other usual and necessary provisions
10) EMPLOYEE BENEFITS
a) Expenses arising out of claims in respect of employee matters under dispute/ negotiation are accounted during the year of final settlement/determination.
b) In respect of employees who have opted for Provident Fund scheme, matching contribution as applicable is made by the Bank to the recognised Provident Fund. For others who have opted for pension scheme, contribution to Pension Fund is made based on actuarial valuation, as per Accounting Standard 15.
c) Contribution to Gratuity Fund is made based on actuarial valuation, as per Accounting Standard 15.
d) Liability towards leave encashment, privilege leave and sick leave is provided based on actuarial valuation, as per Accounting Standard 15.
Details are as under:
Long term employee benefits:
Long term employee benefits (benefits which are payable after the end of twelve months from the end of the period in which employees render service), and post employment benefits (benefits which are payable after completion of employment), are measured on a discounted basis by the projected Unit Credit Method, on the basis of annual third party actuarial valuations. The bank provides for the following long term employee benefits as per actuarial valuation:
1. Leave encashment: The Bank provides for liability accruing on account of deferred entitlement towards leave encashment in the year in which the employees concerned render their services based on third party actuarial valuation obtained as of each year end balance sheet date.
2. Sick Leave : Provision for sick leave is non-funded.
3. Pension: The Bank provides for liability accruing on account of the employees who have opted for pension based on the actuarial valuation obtained as of each year end balance sheet date.
4. Gratuity: The Bank provides for gratuity liability based on the actuarial valuation obtained as of each year end balance sheet date.
The pension and gratuity contributions are transferred to self-managed trusts.
11) PROVISION FOR TAXATION
Tax expenses comprise current and deferred taxes. Current income tax is measured at the amount expected to be paid to the tax authorities in accordance with the provisions of Income Tax Act, 1961. 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 tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the balance sheet date.
The carrying amounts of assets are reviewed at each Balance Sheet date for any indication of impairment based on internal/external factor. An impairment loss is recognized whenever the carrying amount of an asset exceeds its estimated recoverable amount.
13) SEGMENT REPORTING:
In accordance with the guidelines issued by RBI, Bank has adopted Segment Reporting as under:
1. Treasury includes all investment portfolio, profit/ loss on sale of investments, profit/ loss on foreign exchange transactions, equities, income from derivatives and money market operations. The expenses of this segment consist of interest expenses on funds borrowed from external sources as well as internal sources and depreciation / amortisation of premium on Held to Maturity category investments.
2. Corporate/ Wholesale Banking includes lending and deposits from corporate customers and identified earnings and expenses of the segment.
3. Retail Banking includes lending and deposits from retail customers and identified earnings and expenses of the segment.
4. Other Banking Operations includes all other operations not covered under Treasury, Wholesale Banking and Retail Banking.
14) EARNINGS PER SHARE:
Earnings per share are calculated by dividing the net profit or loss for the period attributable to equity shareholders (after deducting preference dividend and attributable taxes thereto) by the weighted average number of equity shares outstanding during the period. Diluted earnings per equity share have been computed using the weighted average number of equity shares and dilutive potential equity shares outstanding as at the end of the year.
15) CONTINGENT LIABILITIES AND PROVISIONS:
1. A provision is recognised when there is an obligation as a result of past event if it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to their present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates.
2. Transactions in Government securities and others which were pending for settlement on the balance sheet date are shown as off balance sheet items under contingent liabilities head.
16) CASH FLOW STATEMENT
Cash and cash equivalents in the cash flow statement comprise cash and balances with RBI and balances with banks and money at call and short notice.
17) The Bank has followed the same accounting policies as in the previous year’s subject to regulatory changes, if any.
1. Reconciliation of entries outstanding as on 31.03.2017 in the inter-branch and other accounts has been done. Matching of entries outstanding in inter-branch and inter-bank accounts including balances in drafts accounts, suspense accounts, branch adjustment accounts, clearing transactions, funds transfers, balances pertaining to dividends / interest / refund orders paid / payable accounts, advances paid for acquisition of assets, etc. is complete up to 31.03.2017. In the opinion of the Bank, consequential effect of the above on the revenue / assets / liabilities is not material.
2. In respect of certain premises acquired by the Bank having written down value of '''' 3.96 Crore (PY '''' 4.39 Crore) documentation / registration are yet to be completed pending legal or other formalities.
3. In the case of un-audited branches, the returns / classification of advances as reported by the concerned branches/by the concurrent auditors have been adopted.
4. Claims pending and to be preferred with ECGCI Limited amounting to '''' 98.80 Crore ('''' 53.82 Crore) have been considered as realisable for the purpose of computing provisions.
5. No provision other than those made, has been considered necessary by the Management in respect of disputed tax liabilities in view of the judgements in favour of the Bank. Further, certain deductions have been considered while working out tax provisions in respect of some claims under Income Tax Act based on the legal opinions obtained.
6. As per Indian Banks’ Association (IBA) communication vide letter ref no LEGAL/CIR dt March 03rd 2015, Ministry of Company Affairs (MCA) has advised that in so far as Banks not registered as companies and nationalized banks are concerned, provisions relating to CSR do not apply as they are not registered under the Companies Act.
7. In terms of the guidelines issued by the Reserve Bank of India, the following disclosures are made: