Mar 31, 2023
Schedule 17 - Significant accounting policies appended to and forming part of the financial statements for the year ended March 31, 2023A BACKGROUND
HDFC Bank Limited (âHDFC Bank'' or âthe Bank''), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949 and the Companies Act, 2013. The Bank has overseas branch operations in Bahrain, Hong Kong, Dubai and Offshore Banking Unit at International Financial Service Centre (IFSC), GIFT City, India. The financial accounting systems of the Bank are centralised and, therefore, accounting returns are not required to be submitted by branches of the Bank.
The standalone financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (âGAAP''), statutory requirements prescribed under the Third Schedule of the Banking Regulation Act, 1949, directions, circulars and guidelines issued by the Reserve Bank of India (âRBI'') from time to time (RBI guidelines), Accounting Standards (âAS'') specified under Section 133 of the Companies Act, 2013 read together with the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standards) Rules, 2021, in so far as they apply to banks.
The preparation of financial statements in conformity with GAAP requires the management to make estimates and necessary assumptions in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting year. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.
C SIGNIFICANT ACCOUNTING POLICIES
In accordance with the RBI guidelines, investments are classified on the date of purchase into âHeld for Tradingâ
(âHFT''), âAvailable for Saleâ (âAFS'') and âHeld to Maturityâ (âHTM'') categories (hereinafter called âcategoriesâ). 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 âgroupsâ) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.
Purchase and sale transactions in securities are accounted on settlement date except in the case of equity shares which are accounted on trade date.
Investments that are held for resale within 90 days from the date of purchase are classified under HFT category. Investments which the Bank intends to hold till maturity are classified under HTM category. Investments in the equity of subsidiaries / joint ventures are classified under HTM category. Investments which are not classified in either of the above categories are classified under AFS category.
Acquisition cost:
Brokerage, commission, etc. and broken period interest on debt instruments are recognised in the Profit and Loss Account and are not included in the cost of acquisition.
Profit / Loss on sale of investments under the aforesaid three categories is recognised in the Profit and Loss Account. Cost of investments is determined based on the weighted average cost method. The profit from sale of investment under HTM category, net of taxes and transfer to statutory reserve is appropriated from the Profit and Loss Account to âCapital Reserveâ.
The Bank undertakes short sale transactions in Central Government dated securities in accordance with the RBI guidelines. The short position is categorised under HFT category and netted off from investments. The short position is marked to market and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored. Profit / Loss on short sale is recognised on settlement date.
Valuation:
Investments classified under AFS and HFT categories are marked to market individually and depreciation / appreciation is aggregated for each group. Net depreciation, if any, compared to the acquisition cost, in any of the six groups, is charged to the Profit and Loss Account. The net appreciation, if any, in any of the six groups is not recognised except to the extent of depreciation provided earlier. The
book value of individual securities is not changed on such revaluation of investments.
Traded investments are valued based on the trades / quotes on the recognised stock exchanges or prices published by Financial Benchmarks India Pvt Ltd. (FBIL) with Fixed Income Money Market and Derivatives Association (FIMMDA) as the calculating agent. Investments denominated in foreign currencies are valued based on the prices provided by market information providers such as Bloomberg, Refinitiv, etc.
The market value of unquoted government of India securities, state government securities and special bonds such as oil bonds, fertilizer bonds etc. issued by the government of India is computed as per the prices published by FBIL with FIMMDA as the calculating agent.
The valuation of other unquoted fixed income securities (viz. other approved securities and bonds and debentures), and preference shares, is done with appropriate mark-up, i.e. applicable FIMMDA published credit spread over the Yield to Maturity (YTM) rates for government of India securities as published by FBIL with FIMMDA as the calculating agent.
Unquoted equity shares are valued at the break-up value, if the latest Balance Sheet is available or at '' 1 for each company.
Units of mutual funds are valued at the latest net asset value declared by the respective schemes of the mutual fund.
Treasury bills, commercial papers and certificate of deposits being discounted instruments, are valued at carrying cost.
Investments in Security receipts (SR) and unquoted units of Infrastructure Investment Trust (InvIT) are valued as per the net asset value provided by the issuing Asset Reconstruction Company and InvIT trust respectively.
Investments in unquoted units of Alternative Investment Fund (AIF) are categorised, at the discretion of the Bank, under HTM category for an initial period of three years and valued at cost during this period. Such investments are transferred to the AFS category after the said period of three years. Investments in AFS category are valued at NAV shown by the AIF in its financial statements. Units are valued based on the latest audited financials of the AIF, if available, or at '' 1 per AIF as per the RBI guidelines.
Pass Through Certificates (PTC) including Priority Sector-PTCs are valued by using FIMMDA credit spread as applicable for the NBFC category, based on the credit rating of the respective PTC over the YTM rates for government of India securities published by FBIL with FIMMDA as the calculating agent.
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortised over the remaining maturity period of the security on a constant yield-to-maturity basis. Such amortisation of premium is adjusted against interest income from investments. Any diminution, other than temporary, in the value of investments in HTM category is provided for.
Non-performing investments are identified and provision are made thereon based on the RBI guidelines. The provision on such non-performing investments is not set off against the appreciation in respect of other performing investments. Interest on non-performing investments is not recognised until received.
Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions 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.
Classification:
Advances are classified as performing and non-performing based on the RBI guidelines and are stated net of bills rediscounted, inter-bank participation with risk, specific loan loss provision, interest in suspense for non-performing advances, claims received from Credit Guarantors, provision for funded interest term loan and provision for diminution in the fair value of restructured assets.
The Bank classifies its loans and investments, including at overseas branches and overdues from crystallised derivative contracts, into performing and non-performing in accordance with RBI guidelines. Further the NPAs are classified into sub-standard, doubtful and loss assets based on the RBI guidelines. Non-performing assets are upgraded into standard as per the extant RBI guidelines.
Specific loan loss provision in respect of non-performing advances is made based on management''s assessment of the degree of impairment of advances, subject to the minimum provisioning prescribed by the RBI.
The specific provision for retail non-performing advances is also made based on the nature of product and delinquency levels.
Specific loan loss provision in respect of non-performing advances is included under Provisions and Contingencies.
Non-performing advances are written-off in accordance with the Bank''s policy. Recoveries from bad debts written-off are included under other income.
In relation to derivative contracts with non-performing borrowers, the Bank makes provision for the entire amount of overdue and future receivables relating to positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts and gold. The Bank also maintains general provision for unhedged foreign currency exposures of borrowers as prescribed by RBI. In the case of overseas branches, general provision on standard assets is maintained at the higher of the levels stipulated by the respective overseas regulator or RBI. The provision for standard assets is included under other liabilities.
In addition to the above, the Bank on a prudent basis makes provision 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.
Provision made in addition to the Bank''s policy for specific loan loss provision for non-performing assets, possible slippage of specific exposures and regulatory general provision is categorised as floating provision. Creation of floating provision is considered by the Bank up to a level approved by the Board of Directors. Floating provisions are used only for contingencies under extraordinary circumstances and for making specific provisions for nonperforming accounts. Floating provisions are included under other liabilities.
Further to the provisions required to be held according to the asset classification status, provision is held for individual country exposures (other than for home country exposure). Countries are categorised into risk categories as per Export Credit Guarantee Corporation of India Ltd. (âECGC'') guidelines and provisioning is made in respect of that country where the net funded exposure is one percent or more of the Bank''s total assets. Provision for country risk is included under other liabilities.
In accordance with the RBI guidelines on the prudential framework for resolution of stressed assets and the resolution frameworks for COVID-19 related stress and its Board approved policy, the Bank has implemented resolution plans for eligible borrowers. The asset
classification and necessary provision thereon is made in accordance with the said RBI guidelines. The restructured loans are upgraded into standard category as per the extant RBI guidelines.
Assets transferred through securitisation and direct assignment of cash flows are de-recognised in the Balance Sheet when they are sold (true sale criteria being fully met with) and consideration is received. Sales / transfers that do not meet true sale criteria are accounted for as borrowings. For a securitisation or direct assignment transaction, the Bank recognises profit upon receipt of the funds and loss is recognised at the time of sale.
On sale of stressed assets, if the sale is at a price below the net book value (i.e., funded outstanding less specific provisions held), the shortfall is charged to the Profit and Loss Account and if the sale is for a value higher than the net book value, the excess provision is credited to the Profit and Loss Account in the year when the sum of cash received by way of initial consideration and / or redemption or transfer of security receipts issued by SC / RC exceeds the net book value of the loan at the time of transfer.
In respect of stressed assets sold under an asset securitisation, where the investment by the bank in security receipts (SRs) issued against the assets transferred by it is more than 10 percent of such SRs, provisions held against outstanding SRs are higher of the provisions required in terms of net asset value declared by the Securitisation Company (âSC'') / Reconstruction Company (âRC'') 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.
The Bank invests in Pass Through Certificates (PTCs) issued by Special Purpose Vehicles (SPVs). These are accounted at acquisition cost and are classified as investments. The Bank also buys loans through the direct assignment route which are classified as advances. These are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised based on effective interest rate method.
The Bank transfers advances through inter-bank participation with and without risk. In the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances. In case where the Bank is assuming risk by participation, the aggregate amount of the participation is classified under advances. In the case of issue of participation certificate without risk, the aggregate amount of participation issued by the
Bank is classified under borrowings and where the Bank is acquiring participation certificate, the aggregate amount of participation acquired is shown as due from banks under advances.
Fixed assets are stated at cost less accumulated depreciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets.
Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. The management believes that the useful life of assets assessed by the Bank, pursuant to Part C of Schedule II to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets. The estimated useful lives of key fixed assets are given below:
Asset |
Estimated useful life as assessed by the Bank |
Estimated useful life specified under Schedule II of the Companies Act, 2013 |
Owned Premises |
60 years |
60 years |
Automated Teller Machines (ATMs) |
10 years |
15 years |
Electrical equipments and installations |
6 to 8 years |
10 years |
Office equipments |
3 to 6 years |
5 years |
Computers |
3 years |
3 years |
Modems, routers, switches, servers, network and related IT equipments |
3 to 6 years |
6 years |
Motor cars |
4 years |
8 years |
Furniture and fittings |
16 years |
10 years |
⢠Improvements to lease hold premises are amortised over the remaining primary period of lease.
⢠Software and system development expenditure is amortised over a period of 5 years.
⢠Point of Sales (PoS) terminals are depreciated over a period of 4 years.
⢠For assets purchased and sold during the year, depreciation is provided on pro-rata basis.
⢠Whenever there is a revision of the estimated useful life of an asset, the unamortised depreciable amount
is charged over the revised remaining useful life of the said asset.
⢠Profit on sale of immovable property net of taxes and transfer to statutory reserve, are transferred to capital reserve.
⢠Assets (other than PoS terminals) costing less than '' 5,000 individually, are fully depreciated in the year of purchase.
The Bank assesses at each Balance Sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided to the extent the carrying amount of assets exceeds their estimated recoverable amount.
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Income and expenditure items of integral foreign operations (representative offices) are translated at the weekly average closing rates and of non-integral foreign operations (foreign branches and offshore banking units) at the monthly average closing rates.
Outstanding foreign currency monetary items of domestic and integral foreign operations are translated at the closing exchange rates notified by Foreign Exchange Dealers'' Association of India (FEDAI) as at the Balance Sheet date and the resulting net revaluation profit or loss is recognised in the Profit and Loss Account.
Both monetary and non-monetary foreign currency assets and liabilities of non-integral foreign operations are translated at closing exchange rates notified by FEDAI at the Balance Sheet date and the resulting profit / loss arising from exchange differences are accumulated in the Foreign Currency Translation Reserve until disposal of the non-integral foreign operations in accordance with AS-11, The Effects of Changes in Foreign Exchange Rates and the extant RBI guidelines.
Foreign currency denominated contingent liabilities on account of foreign exchange and derivative contracts, guarantees, letters of credit, acceptances and endorsements are translated at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
Foreign exchange spot and forward contracts, outstanding as at the Balance Sheet date and held for trading, are revalued at the closing spot and forward rates respectively as notified by FEDAI and at interpolated rates for contracts of interim maturities. The USD-INR exchange rate for
valuation of contracts having longer maturities i.e. greater than one year, is derived using the USD-INR spot rate as well as relevant INR yield curve and USD yield curve. For other currency pairs, and non-deliverable contracts, the forward points (for rates / tenors not published by FEDAI) are obtained / derived basis data published by Refinitiv or Bloomberg for valuation of the contracts. Valuation is considered on present value basis. For this purpose, the forward profit or loss on the contracts are discounted to the valuation date using the discounting yields. The resulting profit or loss on valuation is recognised in the Profit and Loss Account. Marked to market value of foreign exchange contracts are classified as assets when the fair value is positive or as liabilities when the fair value is negative.
Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premium or discount arising at the inception of such forward exchange contract is amortised on a straight line basis as expense or income over the life of the contract.
The Bank recognises all derivative contracts at fair value, on the date on which such derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet date. Marked to market values of such derivatives are classified as assets when the fair value is positive or as liabilities when the fair value is negative.
The Bank as part of its risk management strategy, makes use of derivative instruments, including foreign exchange forward contracts, for hedging the risk embedded in some of its financial assets or liabilities recognised on the balance sheet. The Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. Hedge effectiveness is ascertained at the time of the inception of the hedge and at the reporting date thereafter.
In case of a fair value hedge, the changes in the fair value of the hedging instruments and hedged items are recognised in the Profit and Loss Account and in case of cash flow hedges, the changes in fair value of effective portion are recognised in Reserves and Surplus under âCash flow hedge reserve'' and ineffective portion of an effective hedging relationship, if any, is recognised in the Profit and Loss Account. The accumulated balance in the cash flow hedge reserve, in an effective hedging relationship, is recycled in the Profit and Loss Account at the same time that the impact from the hedged item is recognised in the Profit and Loss Account.
Interest income is recognised in the Profit and Loss Account on an accrual basis, except in the case of non-performing assets and overdue interest on retail EMI based performing advances, which are recognised when realised. In case of domestic advances, where interest is collected on rear end basis, such interest is accounted on receipt basis in accordance with the RBI communication.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over the tenor of the instrument on a constant yield basis.
Dividend on equity shares and preference shares is recognised as income when the right to receive the dividend is established.
Income from units of mutual funds / AIF is recognised on cash basis.
Loan processing fee is recognised as income when due. Syndication / Arranger fee is recognised as income when a significant act / milestone is completed.
Gain / loss on sell down of loans is recognised in line with the extant RBI guidelines.
Guarantee commission, commission on letter of credit, annual locker rent fees and annual fees for credit cards are recognised on a straight-line basis over the period of contract. Other fees and commission income are recognised when due, where the Bank is reasonably certain of ultimate collection.
Fees paid / received for priority sector lending certificates (PSLC) is recognised on straight-line basis over the period of the certificate.
Stock based Employee Compensation:
The Employee Stock Option Scheme (âthe Scheme'') provides for the grant of options to acquire equity shares of the Bank to its employees and whole time directors. The Employee Stock Incentive Master Scheme -2022 (ESIS-2022) provides for the grant of Restricted Stock Units (RSUs) to acquire equity shares of the Bank to its employees and whole-time directors. The options / units granted shall vest as per their vesting schedule and these may be exercised within a specified period.
The Bank follows the intrinsic value method to account for its stock-based employee compensation plans in respect of options granted up to March 31,2021. Compensation cost
is measured by the excess, if any, of the market price of the underlying stock over the exercise price as determined under the option plan. The market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant.
Effective April 01, 2021, the fair value of share-linked instruments on the date of grant for all instruments granted after March 31, 2021 is recognised as an expense in accordance with the RBI guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function staff. The fair value of the stock-based employee compensation is estimated on the date of grant using Black-Scholes model.
The compensation cost is amortised on a straight-line basis over the vesting period after adjusting estimated forfeiture. Ultimately, the cost for all instruments that vest is recognized. The compensation expense is recognised in the Profit and Loss Account with a corresponding credit to Employee Stock Options Reserve. On exercise of the stock options, corresponding balance in Employee Stock Options Reserve is transferred to Share Premium. In respect of the options which expire unexercised, the balance standing to the credit of Employee Stock Options Reserve is transferred to General Reserve.
Gratuity:
The Bank has an obligation towards gratuity, a defined benefit retirement plan covering all eligible employees. The plan benefit vests upon completion of five years of service and is in the form of lump sum amount, without an upper limit, equivalent to 15 days'' basic salary payable for each completed year of service to all eligible employees on resignation, retirement, death while in employment or on termination of employment. The Bank makes contributions to a recognised Gratuity Trust administered by trustees and whose funds are managed by insurance companies. In respect of erstwhile Lord Krishna Bank (eLKB) employees, the Bank makes contribution to a fund set up by eLKB and administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. The actuarial calculations entails assumptions about demographics, early retirement, salary increases and interest rates. Actuarial gain or loss is recognised in the Profit and Loss Account.
Superannuation:
The Bank has a Superannuation Plan under which employees of the Bank, above a prescribed grade, are entitled to receive retirement benefits either through salary or under a defined contribution plan. For those opting for a defined contribution plan, the Bank contributes a sum equivalent to 13% of the employee''s eligible annual basic salary (15% for the whole time directors and for certain eligible employees of the erstwhile Centurion Bank of Punjab (eCBoP staff)) to a Trust administered by trustees and whose funds are managed by insurance companies. The Bank has no liability towards future superannuation fund benefits other than its contribution and recognises such contribution as an expense in the year incurred.
Provident fund:
The Bank is covered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and accordingly all employees of the Bank are entitled to receive benefits under the provident fund. The Bank contributes an amount, on a monthly basis, at a determined rate (currently 12% of employee''s basic salary). Of this, the Bank contributes an amount equal to 8.33% of employee''s basic salary up to a maximum salary level of '' 15,000/- per month, to the Pension Scheme administered by the Regional Provident Fund Office. The balance amount out of the 12% employer''s share is contributed to an exempted Trust set up by the Bank and administered by a Board of Trustees. The Bank recognises such contributions as an expense in the year in which it is incurred.
Interest payable to the members of the exempted trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15, Employee Benefits, states that benefits involving employer established provident funds, which require interest shortfalls to be provided, are to be considered as defined benefit plan. Actuarial valuation of this Provident Fund interest shortfall is done as per the guidance note issued in this respect by The Institute of Actuaries of India (IAI) and provision towards this liability is made.
The overseas branches of the Bank make contribution to the respective applicable government social security scheme calculated as a percentage of the employees'' salaries. The Bank''s obligations are limited to these contributions, which are expensed when due, as such contribution is in the nature of defined contribution.
In respect of pension payable to certain eLKB employees under the Lord Krishna Bank (Employees) Pension Scheme, which is a defined benefit scheme, the Bank contributes 10% of basic salary to a pension trust set up by the Bank and administered by the Board of Trustees and an additional amount towards the liability shortfall based on an independent actuarial valuation as at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases and interest rates.
In respect of certain eLKB employees who had moved to a Cost to Company (CTC) based compensation structure and had completed less than 15 years of service, the contribution which was made until then, is maintained as a fund and will be converted into annuity on separation after a lock-in-period of two years. For this category of employees, liability stands frozen and no additional provision is required except for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and had completed service of more than 15 years, pension would be paid on separation based on salary applicable as on the date of movement to CTC structure. Provision thereto is made based on an independent actuarial valuation as at the Balance Sheet date.
In respect of employees who opt for contribution to the NPS, the Bank contributes certain percentage of the basic salary of employees to the aforesaid scheme, a defined contribution plan, which is managed and administered by pension fund management companies. The Bank has no liability other than its contribution and recognises such contributions as an expense in the year incurred.
The Bank estimates the probable redemption of debit and credit card reward points and cost per point using an actuarial method by employing an independent actuary, which includes assumptions such as mortality, redemption and spends. Provisions for liabilities on the outstanding reward points are made based on an independent actuarial valuation as at the Balance Sheet date and included in other liabilities and provisions.
The Bank imports bullion including precious metal bars on a consignment basis. The imports are typically on a back-to-back basis and are priced to the customer based on the price quoted by the supplier. The difference between the price recovered from customers and cost of bullion
is accounted at the time of sale to the customers and reported as ââOther Income''''.
The Bank also deals in bullion on a borrowing and lending basis and the interest thereon is accounted as interest expense / income respectively.
Lease payments including cost escalation for assets taken on operating lease are recognised in the Profit and Loss Account over the lease term on a straight-line basis in accordance with the AS-19, Leases.
Income tax expense comprises current tax provision (i.e. the amount of tax for the period determined in accordance with the Income Tax Act, 1961, the rules framed there under and considering the material principles set out in Income Computation and Disclosure Standards) and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carried forward, if any. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates as at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off-set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off-set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realised in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reviewed at each Balance Sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realised.
The Bank reports basic and diluted earnings per equity share in accordance with AS-20, Earnings per Share. Basic earnings per equity share has been computed by dividing net profit for the year attributable to equity shareholders by the weighted average number of equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.
Share issue expenses are adjusted against Share Premium Account in terms of Section 52 of the Companies Act, 2013.
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per guidelines issued by RBI.
In accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to settle the obligation at the Balance Sheet date, supplemented by experience of similar transactions. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
⢠a possible obligation arising from a past event, the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Bank; or
⢠a present obligation arising from a past event which is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets, if any, are not recognised in the financial statements since this may result in the recognition of income that may never be realised.
Cash and cash equivalents include cash including foreign currency notes and gold in hand, balances with RBI, balances with other banks and money at call and short notice.
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, is recognised in the Profit and Loss Account.
Mar 31, 2022
A BACKGROUND
HDFC Bank Limited (âHDFC Bank'' or âthe Bank''), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949 and the Companies Act, 2013. The Bank has overseas branch operations in Bahrain, Hong Kong, Dubai and Offshore Banking Unit at International Financial Service Centre (IFSC), GIFT City, India. The financial accounting systems of the Bank are centralised and, therefore, accounting returns are not required to be submitted by branches of the Bank.
The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (âGAAP''), statutory requirements prescribed under the Third Schedule of the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (âRBI'') from time to time (RBI guidelines), Accounting Standards (âAS'') specified under Section 133 of the Companies Act,
2013 read together with the Companies (Accounts) Rules,
2014 and the Companies (Accounting Standards) Rules, 2021, in so far as they apply to banks.
The preparation of financial statements in conformity with GAAP requires the management to make estimates and necessary assumptions in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting year. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.
C PRINCIPAL ACCOUNTING POLICIES 1 Investments Classification:
I n accordance with the RBI guidelines, investments are classified on the date of purchase into âHeld for Tradingâ
(âHFT''), âAvailable for Saleâ (âAFS'') and âHeld to Maturityâ (âHTM'') categories (hereinafter called âcategoriesâ). 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 âgroupsâ) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.
Purchase and sale transactions in securities are accounted on settlement date except in the case of equity shares which are accounted on trade date.
Investments that are held for resale within 90 days from the date of purchase are classified under HFT category. Investments which the Bank intends to hold till maturity are classified under HTM category. Investments in the equity of subsidiaries / joint ventures are categorised as HTM. Investments which are not classified in either of the above categories are classified under AFS category.
Acquisition cost:
Brokerage, commission, etc. and broken period interest on debt instruments are recognised in the Profit and Loss Account and are not included in the cost of acquisition.
Profit / Loss on sale of investments under the aforesaid three categories is recognised in the Profit and Loss Account. Cost of investments is based on the weighted average cost method. The profit from sale of investment under HTM category, net of taxes and transfer to statutory reserve is appropriated from the Profit and Loss Account to âCapital Reserveâ.
The Bank undertakes short sale transactions in Central Government dated securities. The short position is categorised under HFT category and netted off from investments. The short position is marked to market and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored. Profit / Loss on short sale is recognised on settlement date.
Valuation:
Investments classified under AFS and HFT categories are marked to market individually and depreciation / appreciation is aggregated for each group and net depreciation in each group is provided and net appreciation is ignored.
Traded investments are valued based on the trades / quotes on the recognised stock exchanges or prices published by Financial Benchmarks India Pvt Ltd.
(FBIL) with Fixed Income Money Market and Derivatives Association (FIMMDA) as the calculating agent. Investments denominated in foreign currencies are valued based on the prices provided by market information providers such as Bloomberg, Refinitiv, etc.
The market value of unquoted government of India securities, state government securities and special bonds such as oil bonds, fertilizer bonds, etc. issued by the government of India is computed as per the prices published by FBIL with FIMMDA as the calculating agent.
The valuation of other unquoted fixed income securities (viz. other approved securities and bonds and debentures), and preference shares, is done with appropriate mark-up, i.e. applicable FIMMDA published credit spread over the Yield to Maturity (YTM) rates for government of India securities as published by FBIL with FIMMDA as the calculating agent.
Unquoted equity shares are valued at the break-up value, if the latest Balance Sheet is available or at '' 1 for each company.
Units of mutual funds are valued at the latest net asset value declared by the respective schemes of the mutual fund.
Treasury bills, commercial papers and certificate of deposits being discounted instruments, are valued at carrying cost.
Investments in Security receipts (SR) and unquoted units of Infrastructure Investment Trust (InvIT) are valued as per the net asset value provided by the issuing Asset Reconstruction Company and InvIT trust respectively.
Investments in unquoted Venture Capital Fund (VCF) are categorised, at the discretion of the Bank, under HTM category for an initial period of three years and valued at cost during this period. Such investments are transferred to the AFS category after the said period of three years. Investments in AFS category are valued at NAV shown by the VCF in its financial statements. Units are valued based on the latest audited financials of the VCF, if available or at '' 1 per VCF as per the RBI guidelines.
Pass Through Certificates (PTC) including Priority Sector-PTCs are valued by using FIMMDA credit spread as applicable for the NBFC category, based on the credit rating of the respective PTC over the YTM rates for government of India securities published by FBIL with FIMMDA as the calculating agent.
Net depreciation, if any, compared to the acquisition cost, in any of the six groups, is charged to the Profit and Loss Account. The net appreciation, if any, in any of the six groups is not recognised except to the extent of depreciation
provided earlier. The book value of individual securities is not changed on such revaluation of investments.
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortised over the remaining maturity period of the security on a constant yield-to-maturity basis. Such amortisation of premium is adjusted against interest income from investments. Any diminution, other than temporary, in the value of investments in HTM category is provided for.
Non-performing investments are identified and provision are made thereon based on the RBI guidelines. The provision on such non-performing investments are not set off against the appreciation in respect of other performing investments. Interest on non-performing investments is not recognised until received.
Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions 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.
Advances are classified as performing and non-performing based on the RBI guidelines and are stated net of bills rediscounted, inter-bank participation with risk, specific provisions, interest in suspense for non-performing advances, claims received from Credit Guarantors, provisions for funded interest term loan and provision for diminution in the fair value of restructured assets.
Specific loan loss provisions in respect of non-performing advances are made based on management''s assessment of the degree of impairment of advances, subject to the minimum provisioning prescribed by the RBI.
The specific provision for retail non-performing assets are also based on the nature of product and delinquency levels. Specific loan loss provisions in respect of non-performing advances are included under Provisions and Contingencies.
Non-performing advances are written-off in accordance with the Bank''s policy. Recoveries from bad debts written-off are included under other income.
In relation to derivative contracts with non-performing borrowers, the Bank makes provision for the entire amount
of overdue and future receivables relating to positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts and gold. In the case of overseas branches, general provision on standard assets is maintained at the higher of the levels stipulated by the respective overseas regulator or RBI. Provision for standard assets is included under other liabilities.
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.
Provisions made in addition to the Bank''s policy for specific loan loss provisions for non-performing assets, possible slippage of specific exposures 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 Board of Directors. Floating provisions are used only for contingencies under extraordinary circumstances and for making specific provisions for nonperforming accounts. Floating provisions are included under other liabilities.
Further to the provisions required to be held according to the asset classification status, provisions are held for individual country exposures (other than for home country exposure). Countries are categorised into risk categories as per Export Credit Guarantee Corporation of India Ltd. (âECGC'') guidelines and provisioning is done in respect of that country where the net funded exposure is one percent or more of the Bank''s total assets. Provision for country risk is included under other liabilities.
In accordance with the RBI guidelines on the prudential framework for resolution of stressed assets and the resolution frameworks for COVID-19 related stress and its Board approved policy, the Bank has implemented resolution plans for eligible borrowers. The asset classification and necessary provisions thereon are done in accordance with the said RBI guidelines.
3 Securitisation and transfer of assets
Assets transferred through securitisation and direct assignment of cash flows are de-recognised in the Balance Sheet when they are sold (true sale criteria being fully met
with) and consideration is received. Sales / transfers that do not meet true sale criteria are accounted for as borrowings. For a securitisation or direct assignment transaction, the Bank recognises profit upon receipt of the funds and loss is recognised at the time of sale.
On sale of stressed assets, if the sale is at a price below the net book value (i.e., funded outstanding less specific provisions held), the shortfall is charged to the Profit and Loss Account and if the sale is for a value higher than the net book value, the excess provision is credited to the Profit and Loss Account in the year when the sum of cash received by way of initial consideration and / or redemption or transfer of security receipts issued by SC / RC exceeds the net book value of the loan at the time of transfer.
In respect of stressed assets sold under an asset securitisation, 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 are higher of the provisions required in terms of net asset value declared by the Securitisation Company (âSC'') / Reconstruction Company (âRC'') 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.
The Bank invests in Pass Through Certificates (PTCs) issued by other Special Purpose Vehicles (SPVs). These are accounted at acquisition cost and are classified as investments. The Bank also buys loans through the direct assignment route which are classified as advances. These are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised based on effective interest rate method.
The Bank transfers advances through inter-bank participation with and without risk. In the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances. In case where the Bank is assuming risk by participation, the aggregate amount of the participation is classified under advances. In the case of issue of participation certificate without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is acquiring participation certificate, the aggregate amount of participation acquired is shown as due from banks under advances.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees
incurred on the asset before it is ready to use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets.
Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. The management believes that the useful life of assets assessed by the Bank, pursuant to Part C of Schedule II to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets. The estimated useful lives of key fixed assets are given below:
Asset |
Estimated useful life as assessed by the Bank |
Estimated useful life specified under Schedule II of the Companies Act, 2013 |
Owned Premises |
61 years |
60 years |
Automated Teller Machines (ATMs) |
10 years |
15 years |
Electrical equipments and installations |
6 to 10 years |
10 years |
Office equipments |
3 to 6 years |
5 years |
Computers |
3 years |
3 years |
Modems, routers, switches, servers, network and related IT equipments |
3 to 6 years |
6 years |
Motor cars |
4 years |
8 years |
Furniture and fittings |
16 years |
10 years |
⢠Improvements to lease hold premises are amortised over the remaining primary period of lease.
⢠Software and system development expenditure is depreciated over a period of 5 years.
⢠Point of sales terminals are depreciated over a period of 4 years.
⢠For assets purchased and sold during the year, depreciation is provided on pro-rata basis.
⢠Whenever there is a revision of the estimated useful life of an asset, the unamortised depreciable amount is charged over the revised remaining useful life of the said asset.
⢠Profit on sale of immovable property net of taxes and transfer to statutory reserve, are transferred to capital reserve account.
⢠Assets (other than POS terminals) costing less than '' 5,000 individually, are fully depreciated in the year of purchase.
The Bank assesses at each Balance Sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided to the extent the carrying amount of assets exceeds their estimated recoverable amount.
6 Translation of foreign currency items
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Income and expenditure items of integral foreign operations (representative offices) are translated at the weekly average closing rates and of non-integral foreign operations (foreign branches and offshore banking units) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign operations are translated at the closing exchange rates notified by Foreign Exchange Dealers'' Association of India (FEDAI) as at the Balance Sheet date and the resulting net revaluation profit or loss arising due to a net open position in any foreign currency is recognised in the Profit and Loss Account.
Both monetary and non-monetary foreign currency assets and liabilities of non-integral foreign operations are translated at closing exchange rates notified by FEDAI at the Balance Sheet date and the resulting profit / loss arising from exchange differences are accumulated in the Foreign Currency Translation Account until disposal of the non-integral foreign operations in accordance with AS - 11, The Effects of Changes in Foreign Exchange Rates and the extant RBI guidelines.
Foreign currency denominated contingent liabilities on account of foreign exchange and derivative contracts, guarantees, letters of credit, acceptances and endorsements are reported at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
7 Foreign exchange and derivative contracts
Foreign exchange spot and forward contracts, both deliverable and non-deliverable, outstanding as at the Balance Sheet date and held for trading, are revalued at the closing spot and forward rates respectively as notified by FEDAI and at interpolated rates for contracts of interim maturities. The USD-INR exchange rate for valuation of contracts having longer maturities i.e. greater than one year, is derived using the USD-INR spot rate as well as relevant INR yield curve and USD yield curve. For other currency pairs, the forward points (for rates / tenors not published by FEDAI) are obtained from Refinitiv or Bloomberg for valuation of the forex deals. Valuation is considered on
present value basis. For this purpose, the forward profit or loss on the deals are discounted till the valuation date using the discounting yields. The resulting profit or loss on valuation is recognised in the Profit and Loss Account. Foreign exchange contracts are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premium or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.
The Bank recognises all derivative contracts at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet date. Derivatives are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
The Bank as part of its risk management strategy, makes use of financial derivative instruments, including foreign exchange forward contracts, for hedging the risk embedded in some of its financial assets or liabilities recognised on the balance sheet. The Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. Hedge effectiveness is ascertained at the time of the inception of the hedge and at the reporting date thereafter.
In case of a fair value hedge, the changes in the fair value of the hedging instruments and hedged items are recognised in the Profit and Loss Account and in case of cash flow hedges, the changes in fair value of effective portion are recognised in Reserves and Surplus under âCash flow hedge reserve'' and ineffective portion of an effective hedging relationship, if any, is recognised in the Profit and Loss Account. The accumulated balance in the cash flow hedge reserve, in an effective hedging relationship, is recycled in the Profit and Loss Account at the same time that the impact from the hedged item is recognised in the Profit and Loss Account.
8 Revenue recognition
Interest income is recognised in the Profit and Loss Account on an accrual basis, except in the case of non-performing assets and overdue interest on retail EMI based performing advances, which are recognised when realised. In case of domestic advances, where interest is collected on rear
end basis, such interest is accounted on receipt basis in accordance with the RBI communication.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over the tenor of the instrument on a constant yield basis.
Loan processing fee is recognised as income when due. Syndication / Arranger fee is recognised as income when a significant act / milestone is completed.
Gain / loss on sell down of loans is recognised in line with the extant RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units is recognised as income when the right to receive the dividend is established.
Guarantee commission, commission on letter of credit, annual locker rent fees and annual fees for credit cards are recognised on a straight-line basis over the period of contract. Other fees and commission income are recognised when due, where the Bank is reasonably certain of ultimate collection.
Fees paid / received for priority sector lending certificates (PSLC) is recognised on straight-line basis over the period of the certificate.
Employee Stock Option Scheme (ESOS):
The Employee Stock Option Scheme (âthe Scheme'') provides for the grant of options to acquire equity shares of the Bank to its employees and whole time directors. The options granted to employees vest as per their vesting schedule and these may be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its stock-based employee compensation plans in respect of options granted up to March 31,2021. Compensation cost is measured by the excess, if any, of the market price of the underlying stock over the exercise price as determined under the option plan. The market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost, if any is amortised over the vesting period.
Effective April 01, 2021, the fair value of share-linked instruments on the date of grant for all instruments granted after March 31, 2021 is recognised as an expense in
accordance with the RBI guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff. The fair value of the stock-based employee compensation is estimated using Black-Scholes model. The compensation cost is amortised on a straight-line basis over the vesting period of the option with a corresponding credit to Employee Stock Options Reserve. On exercise of the stock options, corresponding balance in Employee Stock Options Reserve is transferred to Share Premium. In respect of the options which expire unexercised, the balance standing to the credit of Employee Stock Options Reserve is transferred to General Reserve.
The Bank has an obligation towards gratuity, a defined benefit retirement plan covering all eligible employees. The plan benefit vests upon completion of five years of service and is in the form of lump sum amount, without an upper limit, equivalent to 15 days'' basic salary payable for each completed year of service to all eligible employees on resignation, retirement, death while in employment or on termination of employment. The Bank makes contributions to a recognised Gratuity Trust administered by trustees and whose funds are managed by insurance companies. In respect of erstwhile Lord Krishna Bank (eLKB) employees, the Bank makes contribution to a fund set up by eLKB and administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. The actuarial calculations entails assumptions about demographics, early retirement, salary increases and interest rates. Actuarial gain or loss is recognised in the Profit and Loss Account.
The Bank has a Superannuation Plan under which employees of the Bank, above a prescribed grade, are entitled to receive retirement benefits either through salary or under a defined contribution plan. For those opting for a defined contribution plan, the Bank contributes a sum equivalent to 13% of the employee''s eligible annual basic salary (15% for the whole time directors and for certain eligible employees of the erstwhile Centurion Bank of Punjab (eCBoP) staff) to a Trust administered by trustees and whose funds are managed by insurance companies. The Bank has no liability towards future superannuation fund benefits other than its contribution and recognises such contribution as an expense in the year incurred.
The Bank is covered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and accordingly all employees of the Bank are entitled to receive benefits under the provident fund. The Bank contributes an amount, on a monthly basis, at a determined rate (currently 12% of employee''s basic salary). Of this, the Bank contributes an amount equal to 8.33% of employee''s basic salary up to a maximum salary level of '' 15,000/- per month, to the Pension Scheme administered by the Regional Provident Fund Office. The balance amount of the 12% employer''s share is contributed to an exempted Trust set up by the Bank and administered by a Board of Trustees. The Bank recognises such contributions as an expense in the year in which it is incurred.
Interest payable to the members of the exempted trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15, Employee Benefits, states that benefits involving employer established provident funds, which require interest shortfalls to be provided, are to be considered as defined benefit plans. Actuarial valuation of this Provident Fund interest shortfall is done as per the guidance note issued in this respect by The Institute of Actuaries of India (IAI) and provision towards this liability is made.
The overseas branches of the Bank make contribution to the respective applicable government social security scheme calculated as a percentage of the employees'' salaries. The Bank''s obligations are limited to these contributions, which are expensed when due, as such contribution is in the nature of defined contribution.
In respect of pension payable to certain eLKB employees under the Lord Krishna Bank (Employees) Pension Scheme, which is a defined benefit scheme, the Bank contributes 10% of basic salary to a pension trust set up by the Bank and administered by the Board of Trustees and an additional amount towards the liability shortfall based on an independent actuarial valuation as at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases and interest rates.
In respect of certain eLKB employees who had moved to a Cost to Company (CTC) based compensation structure and had completed less than 15 years of service, the contribution which was made until then, is maintained as a fund and will be converted into annuity on separation after a
lock-in-period of two years. For this category of employees, liability stands frozen and no additional provision is required except for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and had completed service of more than 15 years, pension would be paid on separation based on salary applicable as on the date of movement to CTC structure. Provision thereto is made based on an independent actuarial valuation as at the Balance Sheet date.
In respect of employees who opt for contribution to the NPS, the Bank contributes certain percentage of the basic salary of employees to the aforesaid scheme, a defined contribution plan, which is managed and administered by pension fund management companies. The Bank has no liability other than its contribution and recognises such contributions as an expense in the year incurred.
10 Debit and credit card reward points
The Bank estimates the probable redemption of debit and credit card reward points and cost per point using an actuarial method by employing an independent actuary, which includes assumptions such as mortality, redemption and spends. Provisions for liabilities on the outstanding reward points are made based on an independent actuarial valuation as at the Balance Sheet date and included in other liabilities and provisions.
The Bank imports bullion including precious metal bars on a consignment basis. The imports are typically on a back-to-back basis and are priced to the customer based on the price quoted by the supplier. The difference between the price recovered from customers and cost of bullion is accounted at the time of sale to the customers and reported as ââOther Income''.
The Bank also deals in bullion on a borrowing and lending basis and the interest thereon is accounted as interest expense / income respectively.
Lease payments including cost escalation for assets taken on operating lease are recognised in the Profit and Loss Account over the lease term on a straight-line basis in accordance with the AS-19, Leases.
Income tax expense comprises current tax provision (i.e. the amount of tax for the period determined in accordance
with the Income Tax Act, 1961, the rules framed there under and considering the material principles set out in Income Computation and Disclosure Standards) and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carried forward, if any. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates as at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off-set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off-set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realised in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reviewed at each Balance Sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realised.
The Bank reports basic and diluted earnings per equity share in accordance with AS-20, Earnings per Share. Basic earnings per equity share has been computed by dividing net profit for the year attributable to equity shareholders by the weighted average number of equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.
Share issue expenses are adjusted against Share Premium Account in terms of Section 52 of the Companies Act, 2013.
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per guidelines issued by RBI.
17 Accounting for provisions, contingent liabilities and contingent assets
In accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to settle the obligation at the Balance Sheet date, supplemented by experience of similar transactions. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
⢠a possible obligation arising from a past event, the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Bank; or
⢠a present obligation arising from a past event which is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets, if any, are not recognised in the financial statements since this may result in the recognition of income that may never be realised.
18 cash and cash equivalents
Cash and cash equivalents include cash including foreign currency notes and gold in hand, balances with RBI, balances with other banks and money at call and short notice.
19 corporate social responsibility
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, is recognised in the Profit and Loss Account.
Mar 31, 2021
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Corporation and the revenue can be reliably measured and there exists reasonable certainty of its recovery.
3.1.1 Interest
Interest income on financial instruments is recognised on a time proportion basis taking into account the amount outstanding and the effective interest rate (âEIRâ) applicable.
The EIR is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount. The future cash flows are estimated taking into account all the contractual terms of the instrument.
The calculation of the EIR includes all fees paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts. For financial assets measured at fair value through profit and loss (âFVTPLâ), transaction costs are recognised in the statement of profit and loss at initial recognition.
Interest income/expenses is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial assets/liabilities (i.e. at the amortised cost of the financial asset before adjusting for any expected credit loss allowance). For credit-impaired financial assets, interest income is calculated by applying the EIR to the amortised cost of the credit-impaired financial assets (i.e. the gross carrying amount less the allowance for expected credit losses).
Dividend income is recognised when the Corporation''s right to receive dividend is established.
Fee and commission income include fees other than those that are an integral part of EIR. The Corporation recognises the fee and commission income in accordance with the terms of the relevant contracts / agreement and when it is probable that the Corporation will collect the consideration.
Income from operating leases are recognised in the statement of profit and loss as per the contractual rentals unless another systematic basis is more representative of the time pattern in which benefits are derived from the leased assets.
Other Income represents income earned from the activities incidental to the business and is recognised when the right to receive the income is established as per the terms of the contract.
Some of the Corporation''s Investments (other than Investment in Subsidiaries and Associates) are measured at fair value. In determining the fair value of such Investments, the Corporation uses quoted prices (unadjusted) in active markets for identical assets or based on inputs which are observable either directly or indirectly. However in certain cases, the Corporation adopts valuation techniques and inputs which are not based on market data. When Market observable information is not available, the Corporation has applied appropriate valuation techniques and inputs to the valuation model.
The Corporation uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
Information about the valuation techniques and inputs used in determining the fair value of Investments are disclosed in Note 44.3.2.
All financial assets and liabilities, (including financial instruments received in settlement of erstwhile loan assets) with the exception of loans, debt securities, deposits and borrowings are initially recognised on the trade date, i.e., the date that the Corporation becomes a party to the contractual provisions of the instrument. Loans are recognised when fund transfer is initiated or disbursement cheque is issued to the customer. The Corporation recognises debt securities, deposits and borrowings when funds are received by the Corporation.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs and revenues that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities measured at FVTPL) are added to or deducted from the fair value of
the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs and revenues directly attributable to the acquisition of financial assets or financial liabilities measured at FVTPL are recognised immediately in the statement of profit and loss.
If the transaction price differs from fair value at initial recognition, the Corporation recognise for such difference as follows:
⢠if fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets, then the difference is recognised in the statement of profit and loss on initial recognition (i.e. day 1 profit or loss);
⢠in all other cases, the fair value will be adjusted to defer the difference between the fair value at initial recognition and the transaction price.
After initial recognition, the deferred gain or loss will be recognised in the statement of profit and loss on a rational basis, only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.
3,2,31 Financial Assets
The Corporation classifies and measures all its financial assets based on the business model for managing the assets and the asset''s contractual terms, either at:
⢠Amortised cost
⢠Fair Value through other comprehensive income
⢠Fair Value through Profit and Loss
3.2.311 Amortised Cost
The Corporation classifies and measures cash and bank balances, Loans, Trade receivable, certain debt investments and other financial assets at amortised cost if the following condition is met:
⢠Financial Assets that are held within a business model whose objective is to hold financial assets in order to collect the contractual cash flows, and that have contractual cash flows that are SPPI;
The Corporation classifies and measures certain debt instruments at FVOCI when the investments are held within a business model, the objective of which is achieved by both, collecting contractual cash flows and selling the financial instruments and the contractual terms of the financial instruments meet the Solely Payment of Principal and Interest on principal amount outstanding (''SPPI'') test.
The Corporation measures all equity investments at fair value through profit or loss, unless the investments is not for trading and the Corporation''s management has elected to classify irrevocably some of its equity instruments at FVOCI, when such instruments meet the definition of Equity under Ind AS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis.
Financial assets at FVTPL are:
⢠assets with contractual cash flows that are not SPPI; and/or
⢠assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or
⢠assets designated at FVTPL using the fair value option.
These assets are measured at fair value, with any gains/losses arising on remeasurement is recognised in the statement of profit and loss.
Classification and measurement of financial instruments depends on the results of the Solely Payments of Principal and Interest on the principal amount outstanding (âSPPIâ) and the business model test (refer note). The Corporation determines the business model at a level that reflects how the Corporation''s financial instruments are managed together to achieve a particular business objective.
The Corporation monitors financial assets measured at amortised cost or fair value through other comprehensive income that are derecognised prior to their maturity to understand the reason for their disposal and whether the reasons are consistent with the objective of the business for which the asset was held. Monitoring is part of the Corporation''s continuous assessment of whether the business model for which the remaining financial assets are held continues to be appropriate and if it is not appropriate whether there has been a change in business model and so a prospective change to the classification of those instruments.
3.2.4.1 Business Model Test
An assessment of business model for managing financial assets is fundamental to the classification of a financial asset. The Corporation determines the business model at a level that reflects how financial assets are managed together to achieve a particular business objective. The Corporation''s business model does not depend on management''s intentions for an individual instrument, therefore the business model assessment is performed at a higher level of aggregation rather than on an instrument-by-instrument basis.
The Corporation considers all relevant information and evidence available when making the business model assessment such as:
⢠how the performance of the business model and the financial assets held within that business model are evaluated and reported to the Corporation''s key management personnel;
⢠the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed; and
⢠how managers of the business are compensated (e.g. whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected).
At initial recognition of a financial asset, the Corporation determines whether newly recognised financial assets are part of an existing business model or whether they reflect a new business model. The Corporation reassesses it''s business model at each reporting period to determine whether the business model has changed since the preceding period. For the current and prior reporting period the Corporation has not identified a change in its business model.
The loans initiated by the Corporation and outstanding include loans for which an option is given to a third party to acquire loans by way of assignment. This is consequent to an arrangement with the party that sources loans for the Corporation and has an option to acquire through assignment, a fixed percentage of the aggregate value of loans sourced by it for the Corporation at a predetermined price. As per the arrangement, loans assigned are substituted by newly sourced loans which ensures contractual cash flows are collected by the Corporation. Accordingly, all such outstanding loans have been classified at amortised cost.
For an asset to be classified and measured at amortised cost or at FVOCI, its contractual terms should give rise to cash flows that meet SPPI test.
For the purpose of SPPI test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.
Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are SPPI, such financial assets are either classified as fair value through profit & loss account or fair value through other comprehensive income.
3.2.4.1.2 Subsequent Measurement and Gain and Losses Financial Assets at Amortised Cost
These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses. Interest income and impairment loss are recognised in statement of profit and loss. Any gain or loss on derecognition is recognised in statement of profit and loss.
Debt Instrument at FVOCI
These assets are subsequently measured at fair value. Interest income and impairment loss are recognised in statement of profit and loss. Any gain or loss on subsequent measurement is recognised in OCI and on derecognition the cumulative gain or loss recognised in OCI will be recycled to statement of profit and loss.
Equity Instrument at FVOCI
Gains and losses on equity instruments measured at FVOCI are recognised in other comprehensive income and never recycled to the statement of profit and loss. Dividends are recognised in profit or loss as dividend income when the right to receive payment has been established, except when the Corporation benefits from such proceeds as a recovery of whole or part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are fair valued at each reporting date and not subject to an impairment assessment.
Financial assets at FVTPL
These assets are subsequently measured at fair value. Net gain or losses, including any interest or dividend income, are recognised in the statement of profit and loss.
3.2.4.1.3 Reclassifications
If the business model under which the Corporation holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that result in reclassifying the Corporation''s financial assets.
3.2.4.2.1 Classification as Debt or Equity
Debt and equity instruments that are issued are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Corporation or a contract that will or may be settled in the Corporation''s own equity instruments and is a non-derivative contract for which the Corporation is or may be obliged to deliver a variable number of its own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Corporation''s own equity instruments.
3.2.4.2 2 Equity Instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Corporation are recognised at the face value and proceeds received in excess of the face value are recognised as Securities Premium.
3.2.4.2 3 Subsequent Measurement and Gain and Losses
Financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense is recognised in statement of profit and loss. Any gain or loss on derecognition is recognised in statement of profit and loss.
The Corporation recognises loss allowances for Expected Credit Losses on the following financial instruments that are not measured at FVTPL:
- Loans and advances to customers;
- Other financial assets;
- Debt instruments measured at amortised cost and at FVOCI;
- Loan commitments; and
- Financial guarantees.
Equity instruments are measured at fair value and not subject to an impairment loss.
ECL is required to be measured through a loss allowance at an amount equal to:
⢠12-month ECL, i.e. loss allowance on default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or
⢠Lifetime ECL, i.e. lifetime ECL that results from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3).
A loss allowance for lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECL is measured at an amount equal to the 12-month ECL.
The Corporation has established a policy to perform an assessment at the end of each reporting period whether a financial instrument''s credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instruments.
Based on the above process, the Corporation categorises its loans into Stage 1, Stage 2 and Stage 3 as described below:
Stage 1: When loans are first recognised, the Corporation recognises an allowance based on 12 months ECL.
Stage 1 loans also include facilities where the credit risk has improved and the loan has been reclassified from Stage 2 to Stage 1.
Stage 2: When a loan has shown a significant increase in credit risk since origination, the Corporation records an allowance for the life time expected credit losses. Stage 2 loans also include facilities, where the credit risk has improved and the loan has been reclassified from Stage 3 to Stage 2.
Stage 3: When loans are considered credit-impaired, the Corporation records an allowance for the life time expected credit losses.
For financial assets for which the Corporation has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset.
The measurement of impairment losses (ECL) across all categories of financial assets requires judgement.
In particular, the estimation of the amount and timing of future cash flows based on Corporation''s historical experience and collateral values when determining impairment losses along with the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.
Elements of the ECL models that are considered accounting judgments and estimates include:
⢠Bifurcation of the financial assets into different portfolios when ECL is assessed on a collective basis.
⢠Corporation''s criteria for assessing if there has been a significant increase in credit risk. (Refer Note)
⢠Development of ECL models, including choice of inputs / assumptions used.
The various inputs used and the process followed by the Corporation in measurement of ECL has been detailed in Note.
3.2.6.1 Measurement of Expected Credit Losses
The Corporation calculates ECL based on probability-weighted scenarios to measure expected cash shortfalls, discounted at an approximation to the portfolio EIR. A cash shortfall is a difference between the cash flows that are due to the Corporation in accordance with the contract and the cash flows that the Corporation expects to receive.
When estimating ECL for undrawn loan commitments, the Corporation estimates the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan.
The Corporation''s ECL for financial guarantee is estimated based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs.
The Corporation measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic risk characteristics. The measurement of the loss allowance is based on the present value of the asset''s expected cash flows using the asset''s original EIR, regardless of whether it is measured on an individual basis or a collective basis.
The mechanics of the ECL calculations are outlined below and the key elements are, as follows:
Exposure at Default (EAD) is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities after considering the credit conversion factor (for Stage 1 and Stage 2 assets), and accrued interest from missed payments.
Probability of Default (PD) is the probability of whether borrowers will default on their obligations which are calculated based on historical default rate summary of past years using origination vintage analysis.
Loss Given Default (LGD) is an estimate of the loss from a financial asset given that a default occurs. The LGD is computed using the Corporation''s own loss and recovery experience. It is usually expressed as a percentage of the EAD.
3.2.6 2 Significant Increase in Credit Risk
The Corporation monitors all financial assets, including loan commitments and financial guarantee contracts issued that are subject to impairment requirements, to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk the Corporation measures the loss allowance based on lifetime rather than 12-month ECL. The Corporation''s accounting policy is not to use the practical expedient that financial assets with ''low'' credit risk at the reporting date are deemed not to have had a significant increase in credit risk. As a result the Corporation monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to impairment for a significant increase in credit risk.
In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Corporation compares the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognised. In making this assessment, the Corporation considers both quantitative and qualitative information that is reasonable and supportable, including historical experience that is available without undue cost or effort.
The qualitative factors that indicate a significant increase in credit risk are reflected in PD models on a timely basis. However, the Corporation still considers separately some qualitative factors to assess if credit risk has increased significantly. For corporate lending, there is a particular focus on assets that are included on a ''watch list''. Given an exposure is on a watch list once, there is a concern that the creditworthiness of the specific counterparty has deteriorated. ECL assessment for watch list accounts is done on a case by case approach after considering the probability of weighted average in a different recovery scenario. For individual loans the Corporation considers the expectation of forbearance, payment holidays, and events such as unemployment, bankruptcy, divorce, or death.
Given that a significant increase in credit risk since initial recognition is a relative measure, a given change, in absolute terms, in the PD is more significant for a financial instrument with a lower initial PD than compared to a financial instrument with a higher PD.
As a back-stop when a financial asset becomes 30 days past due and overdue more than 1 calendar month, but not Stage 3; in addition to SICR accounts, the Corporation considers that a significant increase in credit risk has occurred and the asset is classified in stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL.
A financial asset is ''credit-impaired'' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events:
⢠significant financial difficulty of the borrower or issuer;
⢠a breach of contract such as a default or past due event;
⢠restructuring of loans due to financial difficulty of the borrowers;
⢠the disappearance of an active market for a security because of financial difficulties; or
⢠the purchase of a financial asset at a deep discount that reflects the incurred credit losses.
It may not be possible to identify a single discrete event. Instead the combined effect of several events may
have caused financial assets to become credit-impaired. The Corporation assesses whether debt instruments that are financial assets measured at amortised cost or FVOCI are credit-impaired at each reporting date. To assess if corporate debt instruments are credit impaired, the Corporation considers factors such as bond yields, credit ratings and the ability of the borrower to raise funds.
A loan is considered credit-impaired when a concession is granted to the borrower due to deterioration in the borrower''s financial condition. The definition of default includes unlikeliness to pay indicators and a back-stop if amounts are overdue for 90 days or more.
Borrowers forming part of schemes released under the regulatory packages like Moratorium, One-Time restructuring and Emergency credit linked guaranteed scheme were evaluated for credit impairment.
3.2.6 4 Definition of Default
The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL.
The Corporation considers the following as constituting an event of default:
⢠the borrower is past due more than 90 days Accounts Identified by HDFC as NPA as per regulatory guidelines Objective Evidence for impairment (Qualitative Overlay); or
⢠the borrower is unlikely to pay its credit obligations to the Corporation.
When assessing if the borrower is unlikely to pay its credit obligation, the Corporation takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset, for example in corporate lending a qualitative indicator used is the breach of covenants, which is not as relevant for individual lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis.
3.2.65 Write-off
Loans and debt securities are written off when the Corporation has no reasonable expectations of recovering the financial asset (either in its entirety or a portion of it). This is the case when the Corporation determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write-off constitutes a derecognition event. The Corporation may apply enforcement activities to financial assets written off/ may assign / sell loan exposure to ARC / Bank / a financial institution for a negotiated consideration. Recoveries resulting from the Corporation''s enforcement activities could result in impairment gains. The corporation has a Board approved policy on Write off and one time settlement of loans.
A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between the initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date. In addition, the introduction or adjustment of existing covenants of an existing loan would constitute a modification even if these new or adjusted covenants do not yet affect the cash flows immediately but may affect the cash flows depending on whether the covenant is or is not met (e.g. a change to the increase in the interest rate that arises when covenants are breached).
The Corporation renegotiates loans to customers in financial difficulty to maximise collection and minimise the risk of default. Loan forbearance is granted in cases where although the borrower made all reasonable efforts to pay under the original contractual terms, there is a high risk of default or default has already happened and the borrower is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to covenants.
When a financial asset is modified the Corporation assesses whether this modification results in derecognition. In accordance with the Corporation''s policy, a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms the Corporation considers the following:
Qualitative factors, such as contractual cash flows after modification, are no longer SPPI, change in currency or change of counterparty, the extent of change in interest rates, maturity, covenants, if these do not clearly indicate a substantial modification, then; a quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, both amounts discounted at the original EIR. If there is a significant difference in present value, the Corporation deems the arrangement substantially different, leading to derecognition.
In the case where the financial asset is derecognised the loss allowances for ECL is remeasured at the date of derecognition to determine the net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the revised terms may lead to a gain or loss on derecognition. The new financial asset may have a loss allowance measured based on 12-month ECL except where the new loan is considered to be originated-credit impaired. This applies only in the case where the fair value of the new loan is recognised at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modification. The Corporation monitors the credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the borrower is in past due status under the new terms.
When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Corporation determines if the financial asset''s credit risk has increased significantly since initial recognition by comparing:
⢠The remaining lifetime PD estimated based on data at initial recognition and the original contractual terms;
⢠The remaining lifetime PD at the reporting date based on the modified terms.
For financial assets modified, where modification does not result in derecognition, the estimate of PD reflects the Corporation''s ability to collect the modified cash flows taking into account the Corporation''s previous experience of similar forbearance action, as well as various behavioral indicators, including the borrower''s
payment performance against the modified contractual terms. If the credit risk remains significantly higher than what was expected at initial recognition, the loss allowance is continued to be measured at an amount equal to lifetime ECL. The loss allowance on forborne loans is generally measured based on 12-month ECL when there is evidence of the borrower''s improved repayment behavior following modification leading to a reversal of the previous significant increase in credit risk.
Where a modification does not lead to derecognition, the Corporation calculates the modification gain/loss comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Then the Corporation measures ECL for the modified asset, where the expected cash flows arising from the modified financial asset are included in calculating the expected cash shortfalls from the original asset.
The Corporation derecognises a financial asset only when the contractual rights to the asset''s cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Corporation neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Corporation recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Corporation retains substantially all the risks and rewards of ownership of a transferred financial asset, the Corporation continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
On derecognition of a financial asset in its entirety, the difference between the asset''s carrying amount and the sum of the consideration received and receivable and the cumulative gain/loss that had been recognised in OCI and accumulated in equity is recognised in the statement of profit and loss, with the exception of equity investment designated as measured at FVOCI, where the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to the statement of profit and loss.
On derecognition of a financial asset other than in its entirety (e.g. when the Corporation retains an option to repurchase part of a transferred asset), the Corporation allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain/loss allocated to it that had been recognised in OCI is recognised in the statement of profit and loss. A cumulative gain/loss that had been recognised in OCI is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. This does not apply for equity investments designated as measured at FVOCI, as the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to the statement of profit and loss.
The Corporation derecognises financial liabilities when, and only when, the Corporation''s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in the statement of profit and loss.
The Corporation provides fully secured, partially secured, and unsecured loans to individuals and Corporates to mitigate the credit risk on financial assets, the Corporation seeks to use collateral, where possible as per the powers conferred on the Housing Finance Companies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (âSARFAESIâ).
In its normal course of business, the Corporation does not physically repossess properties or other assets in its retail portfolio, but engages external agents to recover funds, generally at auction, to settle outstanding debt. Any surplus funds are returned to the customers/obligors. As a result of this practice, the residential properties under legal repossession processes are not recorded on the balance sheet and not treated as non-current assets held for sale.
Mar 31, 2019
A PRINCIPAL ACCOUNTING POLICIES
1 Investments Classification:
In accordance with the RBI guidelines on investment classification and valuation, investments are classified on the date of purchase into âHeld for Tradingâ (âHFTâ), âAvailable for Saleâ (âAFSâ) and âHeld to Maturityâ (âHTMâ) categories (hereinafter called âcategoriesâ). 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 âgroupsâ) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.
Purchase and sale transactions in securities are recorded under settlement date of accounting, except in the case of equity shares where trade date accounting is followed.
Basis of classification:
Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category. Investments which the Bank intends to hold till maturity are classified as HTM securities. Investments in the equity of subsidiaries / joint ventures are categorised as HTM in accordance with the RBI guidelines. Investments which are not classified in either of the above categories are classified under AFS category.
Acquisition cost:
Brokerage, commission, etc. and broken period interest on debt instruments are recognised in the Profit and Loss Account and are not included in the cost of acquisition.
Disposal of investments:
Profit / Loss on sale of investments under the aforesaid three categories is recognised in the Profit and Loss Account. Cost of investments is based on the weighted average cost method. The profit from sale of investment under HTM category, net of taxes and transfer to statutory reserve is appropriated from the Profit and Loss Account to âCapital Reserveâ in accordance with the RBI Guidelines.
Short sale:
The Bank undertakes short sale transactions in Central Government dated securities in accordance with RBI guidelines. The short position is categorised under HFT category and netted off from investments in the Balance Sheet. The short position is marked to market and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored. Profit / Loss on settlement of the short position is recognised in the Profit and Loss Account.
Valuation:
Investments classified under AFS and HFT categories are marked to market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the recognised stock exchanges, price list of RBI or prices declared by Primary Dealers Association of India (âPDAIâ) jointly with Fixed Income Money Market and Derivatives Association (âFIMMDAâ) / Financial Benchmarks India Pvt Ltd. (âFBILâ), periodically.
The market value of unquoted government securities which qualify for determining the Statutory Liquidity Ratio (âSLRâ) included in the AFS and HFT categories is computed as per the Yield-to-Maturity (âYTMâ) rates published by FIMMDA / FBIL.
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.
Special bonds such as oil bonds, fertilizer bonds etc. which are directly issued by Government of India (âGOIâ) that do not qualify for SLR are also valued by applying the mark-up above the corresponding yield on GOI securities published by FIMMDA / FBIL.
Unquoted equity shares are valued at the break-up value, if the latest Balance Sheet is available or at Rs. 1 as per the RBI guidelines.
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.
Security receipts are valued as per the net asset value provided by the issuing Asset Reconstruction Company from time to time.
Investment in unquoted venture capital fund are categorised under HTM category for the initial period of three years and valued at cost. Such investment is required to be transferred to AFS thereafter.
Pass Through Certificates (PTC) including Priority Sector-PTCs are valued by using FIMMDA credit spread as applicable for the NBFC category, based on the credit rating of the respective PTC over the YTM rates for government securities published by FIMMDA / FBIL.
Net depreciation in the value, if any, compared to the acquisition cost, in any of the six groups, is charged to the Profit and Loss Account. The net appreciation, if any, in any of the six groups is not recognised except to the extent of depreciation already provided. The valuation of investments includes securities under repo transactions. The book value of individual securities is not changed after the valuation of investments.
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortised over the remaining maturity period of the security on a constant yield-to-maturity basis. Such amortisation of premium is adjusted against interest income under the head income from investments as per the RBI guidelines. Any diminution, other than temporary, in the value of investments in subsidiaries / joint ventures is provided for.
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 Profit and Loss Account until received.
Repurchase and reverse repurchase transactions:
In accordance with the RBI guidelines, repurchase (Repo) and reverse repurchase (Reverse Repo) transactions in government securities and corporate debt securities are reflected 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.
2 Advances Classification:
Advances are classified as performing and non-performing based on the RBI guidelines and are stated net of bills rediscounted, inter-bank participation with risk, specific provisions, interest in suspense for non-performing advances, claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan classified as non-performing advances and provisions in lieu of diminution in the fair value of restructured assets. Interest on non-performing advances is transferred to an interest suspense account and not recognised in the Profit and Loss Account until received.
Provisioning:
Specific loan loss provisions in respect of non-performing advances are made based on managementâs assessment of the degree of impairment of wholesale and retail advances, subject to the minimum provisioning level prescribed by the RBI.
The specific provision levels for retail non-performing assets are also based on the nature of product and delinquency levels. Specific loan loss provisions in respect of non-performing advances are charged to the Profit and Loss Account and included under Provisions and Contingencies.
Non-performing advances are written-off in accordance with the Bankâs policies. Recoveries from bad debts written-off are recognised in the Profit and Loss Account and included under other income.
In relation to non-performing derivative contracts, as per the extant RBI guidelines, the Bank makes provision for the entire amount of overdue and future receivables relating to positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, and gold in accordance with the guidelines and at levels stipulated by RBI from time to time. In the case of overseas branches, general provision on standard advances is maintained at the higher of the levels stipulated by the respective overseas regulator or RBI. Provision for standard assets is included under other liabilities.
Provisions made in addition to the Bankâs policy for specific loan loss 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 Board of Directors. In accordance with the RBI guidelines, floating provisions are used up to a level approved by the Board only for contingencies under extraordinary circumstances and for making specific provisions for impaired accounts as per these guidelines or any regulatory guidance / instructions. Floating provisions are included under other liabilities.
Further to the provisions required to be held according to the asset classification status, provisions are held for individual country exposures (other than for home country exposure). Countries are categorised into risk categories as per Export Credit Guarantee Corporation of India Ltd. (âECGCâ) guidelines and provisioning is done in respect of that country where the net funded exposure is one percent or more of the Bankâs total assets. Provision for country risk is included under other liabilities.
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.
The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrowerâs financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made and classification thereof is as per the extant RBI guidelines. Restructuring of an account is done at a borrower level.
3 Securitisation and transfer of assets
The Bank securitises out its receivables to Special Purpose Vehicles (SPVs) in securitisation transactions. Such securitised-out receivables are de-recognised in the Balance Sheet when they are sold (true sale criteria being fully met with) and consideration is received by the Bank. Sales / transfers that do not meet these criteria for surrender of control are accounted for as secured borrowings. In respect of receivable pools securitised-out, the Bank provides liquidity and credit enhancements, as specified by the rating agencies, in the form of cash collaterals / guarantees and / or by subordination of cash flows in line with RBI guidelines. The Bank also acts as a servicing agent for receivable pools securitised-out.
The Bank enters into transactions for transfer of standard assets through the direct assignment of cash flows, which are similar to asset-backed securitisation transactions through the SPV route, except that such portfolios of receivables are assigned directly to the purchaser and are not represented by Pass Through Certificates (PTCs).
The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The Bank amortises any profit received for every individual securitisation or direct assignment transaction based on the method prescribed in these guidelines.
In relation to securitisation transactions undertaken prior to the aforementioned RBI guidelines, including those undertaken through the direct assignment route, the Bank continues to amortise the profit / premium that arose on account of sale of receivables over the life of the securities sold, in accordance with the RBI guidelines on securitisation of standard assets issued vide its circular dated February 1, 2006.
Any loss arising on account of sale of receivables is recognised in the Profit and Loss Account for the period in which the sale occurs in accordance with the said RBI guidelines.
The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. 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, the aggregate amount of participation is shown as due from banks under advances.
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. These are amortised over the period of the Certificate.
In accordance with RBI guidelines on sale of non-performing advances, if the sale is at a price below the net book value (i.e., book value less provisions held), the shortfall is charged to the Profit and Loss Account and if the sale is for a value higher than the net book value, the excess provision is credited to the Profit and Loss Account in the year the amounts are received.
The Bank invests in PTCs issued by other SPVs. These are accounted for at the deal value and are classified as investments. The Bank also buys loans through the direct assignment route which are classified as advances. These are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised over the tenor of the loans.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets.
Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. The management believes that the useful life of assets assessed by the Bank, pursuant to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets. The estimated useful lives of key fixed assets are given below:
- Improvements to lease hold premises are charged off over the remaining primary period of lease.
- Software and system development expenditure is depreciated over a period of 5 years.
- For assets purchased and sold during the year, depreciation is provided on pro-rata basis by the Bank.
- Whenever there is a revision of the estimated useful life of an asset, the unamortised depreciable amount is charged over the revised remaining useful life of the said asset.
- Profit on sale of immovable property net of taxes and transfer to statutory reserve, are transferred to capital reserve account.
- Assets costing less than Rs. 5,000 individually are fully depreciated in the year of purchase.
5 Impairment of assets
The Bank assesses at each Balance Sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided in the Profit and Loss Account to the extent the carrying amount of assets exceeds their estimated recoverable amount.
6 Translation of foreign currency items
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Income and expenditure items of integral foreign operations (representative offices) are translated at the weekly average closing rates and of non-integral foreign operations (foreign branches and offshore banking units) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign operations are translated at the closing exchange rates notified by Foreign Exchange Dealersâ Association of India (FEDAI) as at the Balance Sheet date and the resulting net valuation profit or loss arising due to a net open position in any foreign currency is recognised in the Profit and Loss Account.
Both monetary and non-monetary foreign currency assets and liabilities of non-integral foreign operations are translated at closing exchange rates notified by FEDAI at the Balance Sheet date and the resulting profit / loss arising from exchange differences are accumulated in the Foreign Currency Translation Account until disposal of the non-integral foreign operations in accordance with AS - 11, The Effects of Changes in Foreign Exchange Rates.
Foreign currency denominated contingent liabilities on account of foreign exchange and derivative contracts, guarantees, letters of credit, acceptances and endorsements are reported at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
7 Foreign exchange and derivative contracts
Foreign exchange spot and forward contracts outstanding as at the Balance Sheet date and held for trading, are revalued at the closing spot and forward rates respectively as notified by FEDAI and at interpolated rates for contracts of interim maturities. The USD-INR rate for valuation of contracts having longer maturities i.e. greater than one year, is implied from MIFOR and LIBOR curves. For other currency pairs, the forward points (for rates / tenors not published by FEDAI) are obtained from Reuters for valuation of the forex deals. As directed by FEDAI to consider P&L on present value basis, the forward profit or loss on the deals are discounted till the valuation date using the discounting yields. The resulting profit or loss on valuation is recognised in the Profit and Loss Account. Foreign exchange contracts are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.
The Bank recognises all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting dates. Derivatives are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value). Changes in the fair value of derivatives other than those designated as hedges are recognised in the Profit and Loss Account.
Derivative contracts designated as hedges are not marked to market unless their underlying transaction is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Profit and Loss Account in the relevant period. The Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. Hedge effectiveness is ascertained at the time of the inception of the hedge and periodically thereafter. Gains or losses arising from hedge ineffectiveness, if any, are recognised in the Profit and Loss Account.
8 Revenue recognition
Interest income is recognised in the Profit and Loss Account on an accrual basis, except in the case of non-performing assets. Also in case of domestic advances, where interest is collected on rear end basis, such interest is accounted on receipt basis in accordance with the RBI communication.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognised as income when due. Syndication / Arranger fee is recognised as income when a significant act / milestone is completed.
Gain / loss on sell down of loans is recognised in line with the extant RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units is recognised as income when the right to receive the dividend is established.
Guarantee commission, commission on letter of credit, annual locker rent fees and annual fees for credit cards are recognised on a straight-line basis over the period of contract. Other fees and commission income are recognised when due, where the Bank is reasonably certain of ultimate collection.
9 Employee Benefits Employee Stock Option Scheme (âESOSâ):
The Employee Stock Option Scheme (âthe Schemeâ) provides for the grant of options to acquire equity shares of the Bank to its employees. The options granted to employees vest in a graded manner and these may be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the market price of the underlying stock over the exercise price as determined under the option plan. The market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost, if any is amortised over the vesting period.
Gratuity:
The Bank provides for gratuity to all employees. The benefit vests upon completion of five years of service and is in the form of lump sum payment to employees on resignation, retirement, death while in employment or on termination of employment of an amount equivalent to 15 daysâ basic salary payable for each completed year of service. The Bank makes contributions to funds administered by trustees and managed by insurance companies for amounts notified by the said insurance companies. In respect of erstwhile Lord Krishna Bank (eLKB) employees, the Bank makes contribution to a fund set up by eLKB and administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. Under this method, the determination is based on actuarial calculations, which include assumptions about demographics, early retirement, salary increases and interest rates. Actuarial gain or loss is recognised in the Profit and Loss Account.
Superannuation:
Employees of the Bank, above a prescribed grade, are entitled to receive retirement benefits under the Bankâs Superannuation Fund. The Bank contributes a sum equivalent to 13% of the employeeâs eligible annual basic salary (15% for the whole time directors and for certain eligible erstwhile Centurion Bank of Punjab (eCBoP) staff) to insurance companies, which administer the fund. The Bank has no liability for future superannuation fund benefits other than its contribution, and recognises such contributions as an expense in the year incurred, as such contribution is in the nature of defined contribution.
Provident fund:
In accordance with law, all employees of the Bank are entitled to receive benefits under the provident fund. The Bank contributes an amount, on a monthly basis, at a determined rate (currently 12% of employeeâs basic salary). Of this, the Bank contributes an amount equal to 8.33% of employeeâs basic salary up to a maximum salary level of Rs. 15,000/- per month, to the Pension Scheme administered by the Regional Provident Fund Commissioner (RPFC). The balance amount is contributed to a fund set up by the Bank and administered by a Board of Trustees. In respect of eCBoP employees, employerâs and employeeâs share of contribution to Provident Fund till March 2009, was administered by RPFC and from April 2009 onwards, the same is transferred to the fund set up by the Bank and administered by the Board of Trustees. In respect of eLKB employees, the Bank contributes to a fund set up by eLKB and administered by a Board of Trustees. The Bank recognises such contributions as an expense in the year in which it is incurred. Interest payable to the members of the trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15, Employee Benefits, states that benefits involving employer established provident funds, which require interest shortfalls to be provided, are to be considered as defined benefit plans. Actuarial valuation of this Provident Fund interest shortfall is done as per the guidance note issued in this respect by The Institute of Actuaries of India (IAI) and provision towards this liability is made.
The overseas branches of the Bank make contribution to the respective relevant government scheme calculated as a percentage of the employeesâ salaries. The Bankâs obligations are limited to these contributions, which are expensed when due, as such contribution is in the nature of defined contribution.
Leave encashment / Compensated absences:
The Bank does not have a policy of encashing unavailed leave for its employees, except for certain eLKB employees under Indian Banksâ Association (IBA) structure. The Bank provides for leave encashment / compensated absences based on an independent actuarial valuation at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilisation.
Pension:
In respect of pension payable to certain eLKB employees under IBA structure, which is a defined benefit scheme, the Bank contributes 10% of basic salary to a pension fund set up by the Bank and administered by the Board of Trustees and the balance amount is provided based on an independent actuarial valuation as at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases and interest rates.
In respect of certain eLKB employees who had moved to a Cost to Company (CTC) driven compensation structure and had completed less than 15 years of service, the contribution which was made until then, is maintained as a fund and will be converted into annuity on separation after a lock-in-period of two years. For this category of employees, liability stands frozen and no additional provision is required except for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and had completed service of more than 15 years, pension would be paid on separation based on salary applicable as on the date of movement to CTC structure. Provision thereto is made based on an independent actuarial valuation as at the Balance Sheet date.
New Pension Scheme (NPS):
In respect of employees who opt for contribution to the NPS, the Bank contributes certain percentage of the basic salary of employees to the aforesaid scheme, a defined contribution plan, which is managed and administered by pension fund management companies. The Bank has no liability other than its contribution, and recognises such contributions as an expense in the year incurred.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card reward points and cost per point using an actuarial method by employing an independent actuary, which includes assumptions such as mortality, redemption and spends. Provisions for liabilities on the outstanding reward points are made based on an independent actuarial valuation as at the Balance Sheet date and included in other liabilities and provisions.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment basis. The imports are typically on a back-to-back basis and are priced to the customer based on the price quoted by the supplier. The difference between the price recovered from customers and cost of bullion is classified under Commission Income.
The Bank also deals in bullion on a borrowing and lending basis and the interest paid / received thereon is classified as interest expense / income respectively.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating lease are recognised in the Profit and Loss account over the lease term on a straight-line basis in accordance with the AS-19, Leases.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of tax for the period determined in accordance with the Income Tax Act, 1961, the rules framed there under and considering the material principles set out in Income Computation and Disclosure Standards) and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carried forward, if any. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates as at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off-set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off-set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realised in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reviewed at each Balance Sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realised.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in accordance with AS-20, Earnings per Share. Basic earnings per equity share has been computed by dividing net profit for the year attributable to equity shareholders by the weighted average number of equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.
15 Share issue expenses
Share issue expenses are adjusted from Share Premium Account in terms of Section 52 of the Companies Act, 2013.
16 Segment information
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per guidelines issued by RBI.
17 Accounting for provisions, contingent liabilities and contingent assets
In accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to settle the obligation at the Balance Sheet date, supplemented by experience of similar transactions. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
- a possible obligation arising from a past event, the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Bank; or
- a present obligation arising from a past event which is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets, if any, are not recognised in the financial statements since this may result in the recognition of income that may never be realised.
Onerous contracts
Provisions for onerous contracts are recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract.
18 Cash and cash equivalents
Cash and cash equivalents include cash and gold in hand, balances with RBI, balances with other banks and money at call and short notice.
19 Corporate social responsibility
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, are recognised in the Profit and Loss Account.
Mar 31, 2018
SCHEDULE 17 - Significant accounting policies appended to and forming part of the financial statements for the year ended March 31, 2018
A BACKGROUND
HDFC Bank Limited (âHDFC Bank'' or âthe Bank''), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949 and the Companies Act, 2013. The Bank has overseas branch operations in Bahrain, Hong Kong, Dubai and Offshore Banking Unit at International Financial Service Centre (IFSC), at GIFT City, Gandhinagar in Gujarat. The financial accounting systems of the Bank are centralized and, therefore, accounting returns are not required to be submitted by branches of the Bank.
B BASIS OF PREPARATION
The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (âGAAP''), statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (âRBI'') from time to time, Accounting Standards (âAS'') specified under Section 133 of the Companies Act, 2013, in so far as they apply to banks.
Use of estimates
The preparation of financial statements in conformity with GAAP requires the management to make estimates and necessary assumptions in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognized prospectively in the current and future periods.
C PRINCIPAL ACCOUNTING POLICIES 1 Investments Classification:
In accordance with the RBI guidelines on investment classification and valuation, investments are classified on the date of purchase into âHeld for Tradingâ (âHFT''), âAvailable for Saleâ (âAFS'') and âHeld to Maturityâ (âHTM'') categories (hereinafter called âcategoriesâ). 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 âgroupsâ) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.
Purchase and sale transactions in securities are recorded under âSettlement Date'' of accounting, except in the case of equity shares where âTrade Date'' accounting is followed.
Basis of classification:
Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category. Investments which the Bank intends to hold till maturity are classified as HTM securities. Investments in the equity of subsidiaries / joint ventures are categorized as HTM in accordance with the RBI guidelines. Investments which are not classified in either of the above categories are classified under AFS category.
Acquisition cost:
Brokerage, commission, etc. and broken period interest on debt instruments are recognized in the Statement of Profit and Loss and are not included in the cost of acquisition.
Disposal of investments:
Profit / Loss on sale of investments under the aforesaid three categories is recognized in the Statement of Profit and Loss. Cost of investments is based on the weighted average cost method. The profit from sale of investment under HTM category, net of taxes and transfer to statutory reserve is appropriated from the Statement of Profit and Loss to âCapital Reserveâ in accordance with the RBI Guidelines.
Short sale:
The Bank undertakes short sale transactions in Central Government dated securities in accordance with RBI guidelines. The short position is reflected as the amount received on sale and is classified under âOther Liabilities''. The short position is marked to market and loss, if any, is charged to the Statement of Profit and Loss while gain, if any, is ignored. Profit / Loss on settlement of the short position is recognized in the Statement of Profit and Loss.
Valuation:
Investments classified under AFS and HFT categories are marked to market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the recognized stock exchanges, price list of RBI or prices declared by Primary Dealers Association of India (âPDAI'') jointly with Fixed Income Money Market and Derivatives Association (âFIMMDA''), periodically.
The market value of unquoted government securities which qualify for determining the Statutory Liquidity Ratio (âSLR'') included in the AFS and HFT categories is computed as per the Yield-to-Maturity (âYTM'') rates published by FIMMDA.
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.
Special bonds such as oil bonds, fertilizer bonds etc. which are directly issued by Government of India (âGOI'') that do not qualify for SLR are also valued by applying the mark-up above the corresponding yield on GOI securities.
Unquoted equity shares are valued at the break-up value, if the latest Balance Sheet is available or at '' 1 as per the RBI guidelines.
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 and stated at acquisition cost.
Security receipts are valued as per the net asset value provided by the issuing Asset Reconstruction Company from time to time.
Investment in unquoted Venture Capital Fund (VCF) are categorized under HTM category for the initial period of three years and valued at cost. Such investment are required to be transferred to AFS thereafter.
Pass Through Certificates (PTC) including Priority Sector-PTCs are valued by using FIMMDA credit spread as applicable for the NBFC category, based on the credit rating of the respective PTC over the YTM rates for government securities published by FIMMDA.
Net depreciation in the value, if any, compared to the acquisition cost, in any of the six groups, is charged to the Statement of Profit and Loss. The net appreciation, if any, in any of the six groups is not recognized except to the extent of depreciation already provided. The valuation of investments includes securities under repo transactions. The book value of individual securities is not changed after the valuation of investments.
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortized over the remaining maturity period of the security on a constant yield-to-maturity basis. Such amortization of premium is adjusted against interest income under the head âIncome from investmentsâ as per the RBI guidelines. Any diminution, other than temporary, in the value of investments in subsidiaries / joint ventures is provided for.
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 recognized in the Statement of Profit and Loss until received.
Repo and reverse repo transactions:
In accordance with the RBI guidelines, repurchase and reverse repurchase transactions in government securities and corporate debt securities are reflected 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.
2 Advances Classification:
Advances are classified as performing and non-performing based on the RBI guidelines and are stated net of bills rediscounted, inter-bank participation with risk, specific provisions, interest in suspense for non-performing advances, claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan classified as non-performing advances and provisions in lieu of diminution in the fair value of restructured assets. Interest on non-performing advances is transferred to an interest suspense account and not recognized in the Statement of Profit and Loss until received.
Provisioning:
Specific loan loss provisions in respect of non-performing advances are made based on management''s assessment of the degree of impairment of wholesale and retail advances, subject to the minimum provisioning level prescribed by the RBI.
The specific provision levels for retail non-performing assets are also based on the nature of product and delinquency levels. Specific loan loss provisions in respect of non-performing advances are charged to the Statement of Profit and Loss and included under Provisions and Contingencies.
Non-performing advances are written-off in accordance with the Bank''s policies. Recoveries from bad debts written-off are recognized in the Statement of Profit and Loss and included under other income.
In relation to non-performing derivative contracts, as per the extant RBI guidelines, the Bank makes provision for the entire amount of overdue and future receivables relating to positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, and gold in accordance with the guidelines and at levels stipulated by RBI from time to time. In the case of overseas branches, general provision on standard advances is maintained at the higher of the levels stipulated by the respective overseas regulator or RBI. Provision for standard assets is included under other liabilities.
Provisions made in addition to the Bank''s policy for specific loan loss provisions for non-performing assets and regulatory general provisions are categorized as floating provisions. Creation of floating provisions is considered by the Bank up to a level approved by the Board of Directors. In accordance with the RBI guidelines, floating provisions are used up to a level approved by the Board only for contingencies under extraordinary circumstances and for making specific provisions for impaired accounts as per these guidelines or any regulatory guidance / instructions. Floating provisions are included under other liabilities.
Further to the provisions required to be held according to the asset classification status, provisions are held for individual country exposures (other than for home country exposure). Countries are categorized into risk categories as per Export Credit Guarantee Corporation of India Ltd. (âECGC'') guidelines and provisioning is done in respect of that country where the net funded exposure is one percent or more of the Bank''s total assets. Provision for country risk is included under other liabilities.
In addition to the above, the Bank on a prudential 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.
The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrower''s financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made and classification thereof is as per the extant RBI guidelines. Restructuring of an account is done at a borrower level.
3 Securitization and transfer of assets
The Bank securitizes out its receivables to Special Purpose Vehicles (âSPVs'') in securitization transactions. Such securitized-out receivables are de-recognized in the Balance Sheet when they are sold (true sale criteria being fully met with) and consideration is received by the Bank. Sales / Transfers that do not meet these criteria for surrender of control are accounted for as secured borrowings. In respect of receivable pools securitized-out, the Bank provides liquidity and credit enhancements, as specified by the rating agencies, in the form of cash collaterals / guarantees and / or by subordination of cash flows in line with RBI guidelines. The Bank also acts as a servicing agent for receivable pools securitized-out.
The Bank enters into transactions for transfer of standard assets through the direct assignment of cash flows, which are similar to asset-backed securitization transactions through the SPV route, except that such portfolios of receivables are assigned directly to the purchaser and are not represented by Pass Through Certificates (âPTCs'').
The RBI issued addendum guidelines on securitization of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The Bank amortizes any profit received for every individual securitization or direct assignment transaction based on the method prescribed in these guidelines.
In relation to securitization transactions undertaken prior to the aforementioned RBI guidelines, including those undertaken through the direct assignment route, the Bank continues to amortize the profit / premium that arose on account of sale of receivables over the life of the securities sold, in accordance with the RBI guidelines on securitization of standard assets issued vide its circular dated February 1, 2006.
Any loss arising on account of sale of receivables is recognized in the Statement of Profit and Loss for the period in which the sale occurs in accordance with the said RBI guidelines.
The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. 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, the aggregate amount of participation is shown as due from banks under advances.
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 fulfillment of priority sector obligation and in the case of a purchase transaction the Bank buys the fulfillment 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 âMiscellaneous Income'' and the fee paid for purchase of the PSLCs is recorded as âOther Expenditure'' in the Statement of Profit and Loss. These are amortized over the period of the Certificate.
In accordance with RBI guidelines on sale of non-performing advances, if the sale is at a price below the net book value (i.e., book value less provisions held), the shortfall is charged to the Statement of Profit and Loss and if the sale is for a value higher than the net book value, the excess provision is credited to the Statement of Profit and Loss in the year the amounts are received.
The Bank invests in PTCs issued by other SPVs. These are accounted for at the deal value and are classified as investments. The Bank also buys loans through the direct assignment route which are classified as advances. These are carried at acquisition cost unless it is more than the face value, in which case the premium is amortized over the tenor of the loans.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to use. Subsequent expenditure incurred on assets put to use is capitalized only when it increases the future benefit / functioning capability from / of such assets.
- Improvements to lease hold premises are charged off over the remaining primary period of lease.
- Software and system development expenditure is depreciated over a period of 5 years.
- Point of sale terminals are fully depreciated in the year of purchase.
- For assets purchased and sold during the year, depreciation is provided on pro-rata basis by the Bank.
- Whenever there is a revision of the estimated useful life of an asset, the unamortized depreciable amount is charged over the revised remaining useful life of the said asset.
- Profit on sale of immovable property net of taxes and transfer to statutory reserve, are transferred to capital reserve account.
5 Impairment of assets
The Bank assesses at each Balance Sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided in the Statement of Profit and Loss to the extent the carrying amount of assets exceeds their estimated recoverable amount.
6 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Income and expenditure items of integral foreign operations (representative offices) are translated at the weekly average closing rates and of non-integral foreign operations (foreign branches) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign operations are translated at the closing exchange rates notified by Foreign Exchange Dealers'' Association of India (âFEDAI'') as at the Balance Sheet date and the resulting net valuation profit or loss arising due to a net open position in any foreign currency is recognized in the Statement of Profit and Loss.
Both monetary and non-monetary foreign currency assets and liabilities of non-integral foreign operations are translated at closing exchange rates notified by FEDAI at the Balance Sheet date and the resulting profit / loss arising from exchange differences are accumulated in the Foreign Currency Translation Account until remittance or the disposal of the net investment in the non-integral foreign operations in accordance with AS - 11, The Effects of Changes in Foreign Exchange Rates.
Foreign exchange spot and forward contracts outstanding as at the Balance Sheet date and held for trading, are revalued at the closing spot and forward rates respectively as notified by FEDAI and at interpolated rates for contracts of interim maturities. The USD-INR rate for valuation of contracts having longer maturities i.e. greater than one year, is implied from MIFOR and LIBOR curves. For other currency pairs, the forward points (for rates / tenors not published by FEDAI) are obtained from Reuters for valuation of the FX deals. As directed by FEDAI to consider P&L on present value basis, the forward profit or loss on the deals are discounted till the valuation date using the discounting yields. The resulting profit or loss on valuation is recognized in the Statement of Profit and Loss. Foreign exchange contracts are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortized as expense or income over the life of the contract.
Currency future contracts are marked to market daily using settlement price on a trading day, which is the closing price of the respective future contracts on that day. While the daily settlement price is computed on the basis of the last half an hour weighted average price of such contract, the final settlement price is taken as the RBI reference rate on the last trading day of the future contract or as may be specified by the relevant authority from time to time. All open positions are marked to market based on the settlement price and the resultant marked to market profit / loss is daily settled with the exchange.
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.
7 Derivative contracts
The Bank recognizes all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting dates. Derivatives are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value). Changes in the fair value of derivatives other than those designated as hedges are recognized in the Statement of Profit and Loss.
Derivative contracts designated as hedges are not marked to market unless their underlying transaction is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognized in the Statement of Profit and Loss in the relevant period. The Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. Hedge effectiveness is ascertained at the time of the inception of the hedge and periodically thereafter. Gains or losses arising from hedge ineffectiveness, if any, are recognized in the Statement of Profit and Loss.
Contingent liabilities on account of derivative contracts denominated in foreign currencies are reported at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
8 Revenue recognition
Interest income is recognized in the Statement of Profit and Loss on an accrual basis, except in the case of non-performing assets. Also in case of domestic advances, where interest is collected on rear end basis, such interest is accounted on receipt basis in accordance with the RBI guidelines.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognized at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognized over the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognized as income when due. Syndication / Arranger fee is recognized as income when a significant act / milestone is completed.
Gain / loss on sell down of loans is recognized in line with the extant RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units is recognized as income when the right to receive the dividend is established.
Guarantee commission, commission on letter of credit, annual locker rent fees and annual fees for credit cards are recognized on a straight-line basis over the period of contract. Other fees and commission income are recognized when due, where the Bank is reasonably certain of ultimate collection.
9 Employee Benefits
Employee Stock Option Scheme (âESOSâ):
The Employee Stock Option Scheme (âthe Scheme'') provides for the grant of options to acquire equity shares of the Bank to its employees. The options granted to employees vest in a graded manner and these may be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the market price of the underlying stock over the exercise price as determined under the option plan. The market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost, if any is amortized over the vesting period.
Gratuity:
The Bank provides for gratuity to all employees. The benefit vests upon completion of five years of service and is in the form of lump sum payment to employees on resignation, retirement, death while in employment or on termination of employment of an amount equivalent to 15 days basic salary payable for each completed year of service. The Bank makes contributions to funds administered by trustees and managed by insurance companies for amounts notified by the said insurance companies. In respect of erstwhile Lord Krishna Bank (âeLKB'') employees, the Bank makes contribution to a fund set up by eLKB and administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. Under this method, the determination is based on actuarial calculations, which include assumptions about demographics, early retirement, salary increases and interest rates. Actuarial gain or loss is recognized in the Statement of Profit and Loss.
Superannuation:
Employees of the Bank, above a prescribed grade, are entitled to receive retirement benefits under the Bank''s Superannuation Fund. The Bank contributes a sum equivalent to 13% of the employee''s eligible annual basic salary (15% for the whole time directors and for certain eligible erstwhile Centurion Bank of Punjab (âeCBoP'') staff) to insurance companies, which administer the fund. The Bank has no liability for future superannuation fund benefits other than its contribution, and recognizes such contributions as an expense in the year incurred, as such contribution is in the nature of defined contribution.
Provident fund:
In accordance with law, all employees of the Bank are entitled to receive benefits under the provident fund. The Bank contributes an amount, on a monthly basis, at a determined rate (currently 12% of employee''s basic salary). Of this, the Bank contributes an amount equal to 8.33% of employee''s basic salary up to a maximum salary level of Rs, 15,000/- per month, to the Pension Scheme administered by the Regional Provident Fund Commissioner (âRPFC''). The balance amount is contributed to a fund set up by the Bank and administered by a Board of Trustees. In respect of eCBoP employees, employer''s and employee''s share of contribution to Provident Fund till March 2009, was administered by RPFC and from April 2009 onwards, the same is transferred to the fund set up by the Bank and administered by the Board of Trustees. In respect of eLKB employees, the Bank contributes to a fund set up by eLKB and administered by a Board of Trustees. The Bank recognizes such contributions as an expense in the year in which it is incurred. Interest payable to the members of the trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15, Employee Benefits, states that benefits involving employer established provident funds, which require interest shortfalls to be provided, are to be considered as defined benefit plans. Actuarial valuation of this Provident Fund interest shortfall is done as per the guidance note issued in this respect by The Institute of Actuaries of India (IAI) and provision towards this liability is made.
The overseas branches of the Bank make contribution to the respective relevant government scheme calculated as a percentage of the employees'' salaries. The Bank''s obligations are limited to these contributions, which are expensed when due, as such contribution is in the nature of defined contribution.
Leave encashment / Compensated absences:
The Bank does not have a policy of encashing unavailed leave for its employees, except for certain eLKB employees under Indian Banks'' Association (âIBA'') structure. The Bank provides for leave encashment / compensated absences based on an independent actuarial valuation at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilization.
Pension:
In respect of pension payable to certain eLKB employees under IBA structure, which is a defined benefit scheme, the Bank contributes 10% of basic salary to a pension fund set up by the Bank and administered by the Board of Trustees and the balance amount is provided based on actuarial valuation as at the Balance Sheet date conducted by an independent actuary.
In respect of certain eLKB employees who had moved to a Cost to Company (âCTC'') driven compensation structure and had completed less than 15 years of service, the contribution which was made until then, is maintained as a fund and will be converted into annuity on separation after a lock-in-period of two years. For this category of employees, liability stands frozen and no additional provision is required except for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and had completed service of more than 15 years, pension would be paid on separation based on salary applicable as on the date of movement to CTC structure. Provision thereto is made based on actuarial valuation as at the Balance Sheet date conducted by an independent actuary.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card reward points and cost per point using an actuarial method by employing an independent actuary, which includes assumptions such as mortality, redemption and spends. Provisions for liabilities on the outstanding reward points are made based on the actuarial valuation report as furnished by the said independent actuary and included in other liabilities.
1 1 Bullion
The Bank imports bullion including precious metal bars on a consignment basis. The imports are typically on a back-to-back basis and are priced to the customer based on the price quoted by the supplier. The difference between the price recovered from customers and cost of bullion is classified under âCommission Income''.
The Bank also deals in bullion on a borrowing and lending basis and the interest paid / received thereon is classified as interest expense / income respectively.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating lease are recognized in the Statement of Profit and Loss over the lease term on a straight-line basis in accordance with the AS-19, Leases.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of tax for the period determined in accordance with the Income Tax Act, 1961, the rules framed there under and considering the material principles set out in Income Computation and Disclosure Standards) and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognized for the future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carried forward, if any. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates as at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off-set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off-set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognized only to the extent there is reasonable certainty that the assets can be realized in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognized only if there is virtual certainty of realization of such assets. Deferred tax assets are reviewed at each Balance Sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realized.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in accordance with AS-20, Earnings per Share. Basic earnings per equity share has been computed by dividing net profit for the year attributable to equity shareholders by the weighted average number of equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.
15 Share issue expenses
Share issue expenses are adjusted from Share Premium Account in terms of Section 52 of the Companies Act, 2013.
16 Segment information
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per guidelines issued by RBI.
17 Accounting for provisions, contingent liabilities and contingent assets
In accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognizes provisions 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.
Provisions are determined based on management estimate required to settle the obligation at the Balance Sheet date, supplemented by experience of similar transactions. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
- a possible obligation arising from a past event, the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Bank; or
- a present obligation arising from a past event which is not recognized as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets, if any, are not recognized in the financial statements since this may result in the recognition of income that may never be realized.
Onerous contracts
Provisions for onerous contracts are recognized when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognizes any impairment loss on the assets associated with that contract.
18 Cash and cash equivalents
Cash and cash equivalents include cash and gold in hand, balances with RBI, balances with other banks and money at call and short notice.
19 Corporate social responsibility
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, are recognized in the Statement of Profit and Loss.
Amounts in notes forming part of the financial statements for the year ended March 31, 2018 are denominated in rupee crore to conform to extant RBI guidelines, except where stated otherwise
Mar 31, 2017
1 Investments Classification:
In accordance with the RBI guidelines on investment classification and valuation, investments are classified on the date of purchase into âHeld for Tradingâ (âHFTâ), âAvailable for Saleâ (âAFSâ) and âHeld to Maturityâ (âHTMâ) categories (hereinafter called âcategoriesâ). 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 âgroupsâ) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments.
Purchase and sale transactions in securities are recorded under âSettlement Dateâ of accounting, except in the case of equity shares where âTrade Dateâ accounting is followed.
Basis of classification:
Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category. Investments which the Bank intends to hold till maturity are classified as HTM securities. Investments in the equity of subsidiaries / joint ventures are categorised as HTM in accordance with the RBI guidelines. Investments which are not classified in either of the above categories are classified under AFS category.
Acquisition cost:
Brokerage, commission, etc. and broken period interest on debt instruments are recognised in the Statement of Profit and Loss and are not included in the cost of acquisition.
Disposal of investments:
Profit / Loss on sale of investments under the aforesaid three categories is recognised in the Statement of Profit and Loss. Cost of investments is based on the weighted average cost method. The profit from sale of investment under HTM category, net of taxes and transfer to statutory reserve is appropriated from the Statement of Profit and Loss to âCapital Reserveâ in accordance with the RBI Guidelines.
Short sale:
The Bank undertakes short sale transactions in Central Government dated securities in accordance with RBI guidelines. The short position is reflected as the amount received on sale and is classified under âOther Liabilitiesâ. The short position is marked to market and loss, if any, is charged to the Statement of Profit and Loss while gain, if any, is ignored. Profit / Loss on settlement of the short position is recognised in the Statement of Profit and Loss.
Valuation:
Investments classified under AFS and HFT categories are marked to market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the recognised stock exchanges, price list of RBI or prices declared by Primary Dealers Association of India (âPDAIâ) jointly with Fixed Income Money Market and Derivatives Association (âFIMMDAâ), periodically.
The market value of unquoted government securities which qualify for determining the Statutory Liquidity Ratio (âSLRâ) included in the AFS and HFT categories is computed as per the Yield-to-Maturity (âYTMâ) rates published by FIMMDA.
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.
Special bonds such as oil bonds, fertilizer bonds etc. which are directly issued by Government of India (âGOIâ) that do not qualify for SLR are also valued by applying the mark-up above the corresponding yield on GOI securities.
Unquoted equity shares are valued at the break-up value, if the latest balance sheet is available or at Rs.1 as per the RBI guidelines.
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 and stated at acquisition cost.
Security receipts are valued as per the net asset value provided by the issuing Asset Reconstruction Company from time to time.
Net depreciation in the value, if any, compared to the acquisition cost, in any of the six groups, is charged to the Statement of Profit and Loss. The net appreciation, if any, in any of the six groups is not recognised except to the extent of depreciation already provided. The valuation of investments includes securities under repo transactions. The book value of individual securities is not changed after the valuation of investments.
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortised over the remaining maturity period of the security on a constant yield-to-maturity basis. Such amortisation of premium is adjusted against interest income under the head âIncome from investmentsâ as per the RBI guidelines. Any diminution, other than temporary, in the value of investments in subsidiaries / joint ventures is provided for.
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.
Repo and reverse repo transactions:
In accordance with the RBI guidelines, repurchase and reverse repurchase transactions in government securities and corporate debt securities are reflected 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.
2 Advances
Classification:
Advances are classified as performing and non-performing based on the RBI guidelines and are stated net of bills rediscounted, inter-bank participation with risk, specific provisions, interest in suspense for non-performing advances, claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan classified as non-performing advances and provisions in lieu of diminution in the fair value of restructured assets. Interest on non-performing advances is transferred to an interest suspense account and not recognised in the Statement of Profit and Loss until received.
Provisioning:
Specific loan loss provisions in respect of non-performing advances are made based on managementâs assessment of the degree of impairment of wholesale and retail advances, subject to the minimum provisioning level prescribed by the RBI.
The specific provision levels for retail non-performing assets are also based on the nature of product and delinquency levels. Specific loan loss provisions in respect of non-performing advances are charged to the Statement of Profit and Loss and included under Provisions and Contingencies.
In accordance with RBI guidelines, accelerated provision is made on non-performing advances which were not earlier reported by the Bank as Special Mention Account under âSMA-2â category to Central Repository of Information on Large Credits (CRILC). Accelerated provision is also made on non-performing advances which are erstwhile SMA-2 accounts with Aggregate Exposure (AE) Rs.1,000 million or above and Joint Lendersâ Forum (JLF) is not formed or they fail to agree upon a common Corrective Action Plan (CAP) within the stipulated time frame.
Non-performing advances are written-off in accordance with the Bankâs policies. Recoveries from bad debts written-off are recognised in the Statement of Profit and Loss and included under other income.
In relation to non-performing derivative contracts, as per the extant RBI guidelines, the Bank makes provision for the entire amount of overdue and future receivables relating to positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, and gold in accordance with the guidelines and at levels stipulated by RBI from time to time. In the case of overseas branches, general provision on standard advances is maintained at the higher of the levels stipulated by the respective overseas regulator or RBI. Provision for standard assets is included under other liabilities.
Provisions made in excess of the Bankâs policy for specific loan loss 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 Board of Directors. In accordance with the RBI guidelines, floating provisions are used up to a level approved by the Board only for contingencies under extraordinary circumstances and for making specific provisions for impaired accounts as per these guidelines or any regulatory guidance / instructions. Floating provisions are included under other liabilities.
Further to the provisions required to be held according to the asset classification status, provisions are held for individual country exposures (other than for home country exposure). Countries are categorised into risk categories as per Export Credit Guarantee Corporation of India Ltd. (âECGCâ) guidelines and provisioning is done in respect of that country where the net funded exposure is one percent or more of the Bankâs total assets. Provision for country risk is included under other liabilities.
In addition to the above, the Bank on a prudential 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.
The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrowerâs financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made and classification thereof is as per the extant RBI guidelines. Restructuring of an account is done at a borrower level.
3 Securitisation and transfer of assets
The Bank securitises out its receivables to Special Purpose Vehicles (âSPVsâ) in securitisation transactions. Such securitised-out receivables are de-recognised in the balance sheet when they are sold (true sale criteria being fully met with) and consideration is received by the Bank. Sales / Transfers that do not meet these criteria for surrender of control are accounted for as secured borrowings. In respect of receivable pools securitised-out, the Bank provides liquidity and credit enhancements, as specified by the rating agencies, in the form of cash collaterals / guarantees and / or by subordination of cash flows in line with RBI guidelines. The Bank also acts as a servicing agent for receivable pools securitised-out.
The Bank also enters into transactions for transfer of standard assets through the direct assignment of cash flows, which are similar to asset-backed securitisation transactions through the SPV route, except that such portfolios of receivables are assigned directly to the purchaser and are not represented by Pass Through Certificates (âPTCsâ).
The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The Bank amortises any profit received for every individual securitisation or direct assignment transaction based on the method prescribed in these guidelines.
In relation to securitisation transactions undertaken prior to the aforementioned RBI guidelines, including those undertaken through the direct assignment route, the Bank continues to amortise the profit / premium that arose on account of sale of receivables over the life of the securities sold, in accordance with the RBI guidelines on securitisation of standard assets issued vide its circular dated February 1, 2006.
Any loss arising on account of sale of receivables is recognised in the Statement of Profit and Loss for the period in which the sale occurs in accordance with the said RBI guidelines.
The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. 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, the aggregate amount of participation is shown as due from banks under advances.
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 fulfillment of priority sector obligation and in the case of a purchase transaction the Bank buys the fulfillment 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 âMiscellaneous Incomeâ and the fee paid for purchase of the PSLCs is recorded as âOther Expenditureâ in Statement of Profit and Loss.
In accordance with RBI guidelines on sale of non-performing advances, if the sale is at a price below the net book value (i.e., book value less provisions held), the shortfall is charged to the Statement of Profit and Loss and if the sale is for a value higher than the net book value, the excess provision is credited to the Statement of Profit and Loss in the year the amounts are received.
The Bank invests in PTCs issued by other SPVs. These are accounted for at the deal value and are classified as investments. The Bank also buys loans through the direct assignment route which are classified as advances. These are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised over the tenor of the loans.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets.
Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. The management believes that the useful life of assets assessed by the Bank, pursuant to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets. The estimated useful lives of key fixed assets are given below:
- Improvements to lease hold premises are charged off over the remaining primary period of lease.
- Software and system development expenditure is depreciated over a period of 5 years.
- Point of sale terminals are fully depreciated in the year of purchase.
- For assets purchased and sold during the year, depreciation is provided on pro-rata basis by the Bank.
- Whenever there is a revision of the estimated useful life of an asset, the unamortised depreciable amount is charged over the revised remaining useful life of the said asset.
- Profit on sale of immovable property net of taxes and transfer to statutory reserve, are transferred to capital reserve account.
5 Impairment of assets
The Bank assesses at each balance sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided in the Statement of Profit and Loss to the extent the carrying amount of assets exceeds their estimated recoverable amount.
6 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Income and expenditure items of integral foreign operations (representative offices) are translated at the weekly average closing rates and of non-integral foreign operations (foreign branches) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign operations are translated at the closing exchange rates notified by Foreign Exchange Dealersâ Association of India (âFEDAIâ) as at the Balance Sheet date and the resulting net valuation profit or loss arising due to a net open position in any foreign currency is recognised in the Statement of Profit and Loss.
Both monetary and non-monetary foreign currency assets and liabilities of non-integral foreign operations are translated at closing exchange rates notified by FEDAI at the Balance Sheet date and the resulting profit / loss arising from exchange differences are accumulated in the Foreign Currency Translation Account until remittance or the disposal of the net investment in the non-integral foreign operations in accordance with AS - 11, The Effects of Changes in Foreign Exchange Rates.
Foreign exchange spot and forward contracts outstanding as at the Balance Sheet date and held for trading, are revalued at the closing spot and forward rates respectively as notified by FEDAI and at interpolated rates for contracts of interim maturities. The USD-INR rate for valuation of contracts having longer maturities i.e. greater than one year, is implied from MIFOR and LIBOR curves. For other currency pairs, the forward points (for rates / tenors not published by FEDAI) are obtained from Reuters for valuation of the FX deals. As directed by FEDAI to consider P&L on present value basis, the forward profit or loss on the deals are discounted till the valuation date using the discounting yields. The resulting profit or loss on valuation is recognised in the Statement of Profit and Loss. Foreign exchange contracts are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.
Currency future contracts are marked to market daily using settlement price on a trading day, which is the closing price of the respective future contracts on that day. While the daily settlement price is computed on the basis of the last half an hour weighted average price of such contract, the final settlement price is taken as the RBI reference rate on the last trading day of the future contract or as may be specified by the relevant authority from time to time. All open positions are marked to market based on the settlement price and the resultant marked to market profit / loss is daily settled with the exchange.
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.
7 Derivative contracts
The Bank recognises all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting dates. Derivatives are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value). Changes in the fair value of derivatives other than those designated as hedges are recognised in the Statement of Profit and Loss.
Derivative contracts designated as hedges are not marked to market unless their underlying transaction is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Statement of Profit and Loss in the relevant period. The Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. Hedge effectiveness is ascertained at the time of the inception of the hedge and periodically thereafter. Gains or losses arising from hedge ineffectiveness, if any, are recognised in the Statement of Profit and Loss.
Contingent liabilities on account of derivative contracts denominated in foreign currencies are reported at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
8 Revenue recognition
Interest income is recognised in the Statement of Profit and Loss on an accrual basis, except in the case of non-performing assets and loan accounts where restructuring has been approved by the RBI under Strategic Debt Restructuring (SDR) scheme where it is recognised upon realisation as per RBI norms.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognised as income when due. Syndication / Arranger fee is recognised as income when a significant act / milestone is completed.
Gain / loss on sell down of loans is recognised in line with the extant RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units is recognised as income when the right to receive the dividend is established.
Guarantee commission, commission on letter of credit, annual locker rent fees and annual fees for credit cards are recognised on a straight-line basis over the period of contract. Other fees and commission income are recognised when due, where the Bank is reasonably certain of ultimate collection.
9 Employee benefits
Employee Stock Option Scheme (âESOSâ):
The Employee Stock Option Scheme (âthe Schemeâ) provides for the grant of options to acquire equity shares of the Bank to its employees. The options granted to employees vest in a graded manner and these may be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the market price of the underlying stock over the exercise price as determined under the option plan. The market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost, if any is amortised over the vesting period.
Gratuity:
The Bank provides for gratuity to all employees. The benefit vests upon completion of five years of service and is in the form of lump sum payment to employees on resignation, retirement, death while in employment or on termination of employment of an amount equivalent to 15 days basic salary payable for each completed year of service. The Bank makes contributions to funds administered by trustees and managed by insurance companies for amounts notified by the said insurance companies. In respect of erstwhile Lord Krishna Bank (âeLKBâ) employees, the Bank makes contribution to a fund set up by eLKB and administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. Under this method, the determination is based on actuarial calculations, which include assumptions about demographics, early retirement, salary increases and interest rates. Actuarial gain or loss is recognised in the Statement of Profit and Loss.
Superannuation:
Employees of the Bank, above a prescribed grade, are entitled to receive retirement benefits under the Bankâs Superannuation Fund. The Bank contributes a sum equivalent to 13% of the employeeâs eligible annual basic salary (15% for the whole time directors and for certain eligible erstwhile Centurion Bank of Punjab (âeCBoPâ) staff) to insurance companies, which administer the fund. The Bank has no liability for future superannuation fund benefits other than its contribution, and recognises such contributions as an expense in the year incurred, as such contribution is in the nature of defined contribution.
Provident fund:
In accordance with law, all employees of the Bank are entitled to receive benefits under the provident fund. The Bank contributes an amount, on a monthly basis, at a determined rate (currently 12% of employeeâs basic salary). Of this, the Bank contributes an amount equal to 8.33% of employeeâs basic salary up to a maximum salary level of Rs.15,000/- per month, to the Pension Scheme administered by the Regional Provident Fund Commissioner (âRPFCâ). The balance amount is contributed to a fund set up by the Bank and administered by a Board of Trustees. In respect of eCBoP employees, employerâs and employeeâs share of contribution to Provident Fund till March 2009, was administered by RPFC and from April 2009 onwards, the same is transferred to the fund set up by the Bank and administered by the Board of Trustees. In respect of eLKB employees, the Bank contributes to a fund set up by eLKB and administered by a Board of Trustees. The Bank recognises such contributions as an expense in the year in which it is incurred. Interest payable to the members of the trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15, Employee Benefits, states that benefits involving employer established provident funds, which require interest shortfalls to be provided, are to be considered as defined benefit plans. Actuarial valuation of this Provident Fund interest shortfall is done as per the guidance note issued in this respect by The Institute of Actuaries of India (IAI) and provision towards this liability is made.
The overseas branches of the Bank make contribution to the respective relevant government scheme calculated as a percentage of the employeesâ salaries. The Bankâs obligations are limited to these contributions, which are expensed when due, as such contribution is in the nature of defined contribution.
Leave encashment / Compensated absences:
The Bank does not have a policy of encashing unavailed leave for its employees, except for certain eLKB employees under Indian Banksâ Association (âIBAâ) structure. The Bank provides for leave encashment / compensated absences based on an independent actuarial valuation at the Balance Sheet date, which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilisation.
Pension:
In respect of pension payable to certain eLKB employees under IBA structure, which is a defined benefit scheme, the Bank contributes 10% of basic salary to a pension fund set up by the Bank and administered by the Board of Trustees and the balance amount is provided based on actuarial valuation as at the Balance Sheet date conducted by an independent actuary.
In respect of certain eLKB employees who had moved to a Cost to Company (âCTCâ) driven compensation structure and had completed less than 15 years of service, the contribution which was made until then, is maintained as a fund and will be converted into annuity on separation after a lock-in-period of two years. For this category of employees, liability stands frozen and no additional provision is required except for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and had completed service of more than 15 years, pension would be paid on separation based on salary applicable as on the date of movement to CTC structure. Provision thereto is made based on actuarial valuation as at the Balance Sheet date conducted by an independent actuary.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card reward points and cost per point using an actuarial method by employing an independent actuary, which includes assumptions such as mortality, redemption and spends. Provisions for liabilities on the outstanding reward points are made based on the actuarial valuation report as furnished by the said independent actuary and included in other liabilities.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment basis for selling to its wholesale and retail customers. The imports are typically on a back-to-back basis and are priced to the customer based on an estimated price quoted by the supplier. The Bank earns a fee on such wholesale bullion transactions. The fee is classified under commission income.
The Bank also deals in bullion on a borrowing and lending basis and the interest paid / received thereon is classified as interest expense / income respectively.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating lease are recognised in the Statement of Profit and Loss over the lease term on a straight-line basis in accordance with the AS-19, Leases.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of tax for the period determined in accordance with the Income Tax Act, 1961, the rules framed there under and considering the material principles set out in Income Computation and Disclosure Standards) and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences between the carrying values of assets and liabilities and their respective tax bases, and operating loss carried forward, if any. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates as at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off-set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off-set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realised in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reviewed at each Balance Sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realised.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in accordance with AS-20, Earnings per Share. Basic earnings per equity share has been computed by dividing net profit for the year attributable to equity shareholders by the weighted average number of equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.
15 Share issue expenses
Share issue expenses are adjusted from Share Premium Account in terms of Section 52 of the Companies Act, 2013.
16 Segment information
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per guidelines issued by RBI.
17 Accounting for provisions, contingent liabilities and contingent assets
In accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to settle the obligation at the Balance Sheet date, supplemented by experience of similar transactions. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
- a possible obligation arising from a past event, the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Bank; or
- a present obligation arising from a past event which is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets, if any, are not recognised in the financial statements since this may result in the recognition of income that may never be realised.
Onerous contracts
Provisions for onerous contracts are recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract.
18 Cash and cash equivalents
Cash and cash equivalents include cash and gold in hand, balances with RBI, balances with other banks and money at call and short notice.
19 Corporate social responsibility
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, are recognised in the Statement of Profit and Loss.
Mar 31, 2015
A BACKGROUND
HDFC Bank Limited (''HDFC Bank'' or ''the Bank''), incorporated in Mumbai,
India is a publicly held banking company engaged in providing a range
of banking and financial services including commercial banking and
treasury operations. The Bank is governed by the Banking Regulation
Act, 1949. The Bank has overseas branch operations in Bahrain, Hong
Kong and Dubai.
B BASIS OF PREPARATION
The financial statements have been prepared and presented under the
historical cost convention and accrual basis of accounting, unless
otherwise stated and are in accordance with Generally Accepted
Accounting Principles in India (''GAAP''), statutory requirements
prescribed under the Banking Regulation Act, 1949, circulars and
guidelines issued by the Reserve Bank of India (''RBI'') from time to
time, Accounting Standards (''AS'') specified under the Companies Act,
1956 (which are deemed to be applicable as per section 133 of the
Companies Act, 2013, read with Companies (Accounts) Rules, 2014) and
current practices prevailing within the banking industry in India.
Use of estimates
The preparation of financial statements in conformity with GAAP
requires the management to make estimates and assumptions considered in
the reported amounts of assets and liabilities (including contingent
liabilities) as of the date of the financial statements and the
reported income and expenses for the reporting period. Management
believes that the estimates used in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from
these estimates. Any revision in the accounting estimates is recognised
prospectively in the current and future periods.
C PRINCIPAL ACCOUNTING POLICIES
1 Investments
Classification:
In accordance with the RBI guidelines on investment classification and
valuation, investments are classified on the date of purchase into
"Held for Trading" (''HFT''), "Available for Sale" (''AFS'') 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.
Recording purchase and sale transactions in securities is done
following ''Settlement Date'' accounting, except in the case of equity
shares where ''Trade Date'' accounting is followed.
Basis of classification:
Investments that are held principally for resale within 90 days from
the date of purchase are classified under HFT category. Investments
which the Bank intends to hold till maturity are classified as HTM
securities. Investments in the equity of subsidiaries / joint ventures
are categorised as HTM in accordance with the RBI guidelines.
Investments which are not classified in the above categories are
classified under AFS category.
Acquisition cost:
In determining acquisition cost of an investment:
- Brokerage, commission, etc. paid at the time of acquisition are
recognised in the Statement of Profit and Loss.
- Broken period interest on debt instruments is recognised in the
Statement of Profit and Loss.
- Cost of investments is based on the weighted average cost method.
Disposal of investments:
Profit / Loss on sale of investments under the aforesaid three
categories is recognised in the Statement of Profit and 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.
Short sale:
The Bank undertakes short sale transactions in Central Government dated
securities in accordance with RBI guidelines. The short position is
reflected as the amount received on sale and is classified under ''Other
Liabilities''. The short position is marked to market and loss, if any,
is charged to the Statement of Profit and Loss while gain, if any, is
ignored. Profit / Loss on settlement of the short position is
recognised in the Statement of Profit and Loss.
Valuation:
Investments classified under AFS and HFT categories are marked to
market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the
recognised stock exchanges, price list of RBI or prices declared by
Primary Dealers Association of India (''PDAI'') jointly with Fixed Income
Money Market and Derivatives Association (''FIMMDA''), periodically.
The market value of unquoted government securities which qualify for
determining the Statutory Liquidity Ratio (''SLR'') included in the AFS
and HFT categories is computed as per the Yield-to-Maturity (''YTM'')
rates published by FIMMDA.
The valuation of other unquoted fixed income securities (viz. state
government securities, other approved securities, bonds and debentures)
and preference shares, wherever linked to the YTM rates, is done with a
mark-up (reflecting associated credit and liquidity risk) over the YTM
rates for government securities published by FIMMDA.
Special bonds such as oil bonds, fertilizer bonds etc. which are
directly issued by Government of India (''GOI'') that do not qualify for
SLR are also valued by applying the mark up above the corresponding
yield on GOI securities.
Unquoted equity shares are valued at the break-up value, if the latest
balance sheet is available or at Rs. 1 as per the RBI guidelines.
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 and stated at
acquisition cost.
Security receipts are valued as per the net asset value provided by the
issuing Asset Reconstruction Company from time to time.
Net depreciation in the value, if any, compared to the acquisition
cost, in any of the six groups, is charged to the Statement of Profit
and Loss. The net appreciation, if any, in any of the six groups is not
recognised except to the extent of depreciation already provided. The
valuation of investments includes securities under repo transactions.
The book value of individual securities is not changed after the
valuation of investments.
Investments classified under HTM category are carried at their
acquisition cost and not marked to market. Any premium on acquisition
is amortised over the remaining maturity period of the security on a
constant yield to maturity basis. Such amortisation of premium is
adjusted against interest income under the head "Income from
investments" as per the RBI guidelines. Any diminution, other than
temporary, in the value of investments in subsidiaries / joint ventures
is provided for.
Non-performing investments are identified and depreciation / provision
is made thereon based on the RBI guidelines. The depreciation /
provision is 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.
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 for as interest expense and revenue on
reverse repo transactions is accounted for 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 for as
interest income.
2 Advances
Classification:
Advances are classified as performing and non-performing based on the
RBI guidelines and are stated net of bills rediscounted, specific
provisions, interest in suspense for non-performing advances, claims
received from Export Credit Guarantee Corporation, provisions for
funded interest term loan classified as non-performing advances and
provisions in lieu of diminution in the fair value of restructured
assets. Interest on non-performing advances is transferred to an
interest suspense account and not recognised in the Statement of Profit
and Loss until received.
Provisioning:
Specific loan loss provisions in respect of non-performing advances are
made based on management''s assessment of the degree of impairment of
wholesale and retail advances, subject to the minimum provisioning
level prescribed by the RBI.
The specific provision levels for retail non-performing assets are also
based on the nature of product and delinquency levels. Specific loan
loss provisions in respect of non-performing advances are charged to
the Statement of Profit and Loss and included under Provisions and
Contingencies. In accordance with RBI guidelines, accelerated provision
is made on non-performing advances which were not earlier reported by
the Bank as Special Mention Account under "SMA-2" category to Central
Repository of Information on Large Credits (CRILC). Accelerated
provision is also made on non-performing advances which are erstwhile
SMA-2 accounts with Aggregate Exposure (AE) Rs.1,000 million or above and
Joint Lenders'' Forum (JLF) is not formed or they fail to agree upon a
common Corrective Action Plan (CAP) within the stipulated time frame.
Recoveries from bad debts written-off are recognised in the Statement
of Profit and Loss and included under other income.
In relation to non-performing derivative contracts, as per the extant
RBI guidelines, the Bank makes provision for the entire amount of
overdue and future receivables relating to positive marked to market
value of the said derivative contracts.
The Bank maintains general provision for standard assets including
credit exposures computed as per the current marked to market values of
interest rate and foreign exchange derivative contracts, and gold in
accordance with the guidelines and at levels stipulated by RBI from
time to time. In the case of overseas branches, general provision on
standard advances is maintained at the higher of the levels stipulated
by the respective overseas regulator or RBI. Provision for standard
assets is included under other liabilities.
Provisions made in excess of the Bank''s policy for specific loan loss
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 Board of
Directors. In accordance with the RBI guidelines floating provisions
are used up to a level approved by the Board only for contingencies
under extraordinary circumstances for making specific provisions for
impaired accounts. Floating provisions have been included under other
liabilities.
Further to the provisions required to be held according to the asset
classification status, provisions are held for individual country
exposures (other than for home country exposure). Countries are
categorised into risk categories as per Export Credit Guarantee
Corporation of India Ltd. (''ECGC'') guidelines and provisioning is done
in respect of that country where the net funded exposure is one percent
or more of the Bank''s total assets.
In addition to the above, the Bank on a prudential 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, the 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.
The Bank considers a restructured account as one where the Bank, for
economic or legal reasons relating to the borrower''s financial
difficulty, grants to the borrower concessions that the Bank would not
otherwise consider. Restructuring would normally involve modification
of terms of the advance / securities, which would generally include,
among others, alteration of repayment period / repayable amount / the
amount of installments / rate of interest (due to reasons other than
competitive reasons). Restructured accounts are classified as such by
the Bank only upon approval and implementation of the restructuring
package. Necessary provision for diminution in the fair value of a
restructured account is made. Restructuring of an account is done at a
borrower level.
3 Securitisation and transfer of assets
The Bank securitises out its receivables, subject to the Minimum
Holding Period (''MHP'') criteria and the Minimum Retention Requirements
(''MRR'') of RBI, to Special Purpose Vehicles (''SPVs'') in securitisation
transactions. Such securitised-out receivables are de-recognised in the
balance sheet when they are sold (true sale criteria being fully met
with) and consideration is received by the Bank. Sales / Transfers that
do not meet these criteria for surrender of control are accounted for
as secured borrowings. In respect of receivable pools securitised-out,
the Bank provides liquidity and credit enhancements, as specified by
the rating agencies, in the form of cash collaterals / guarantees and /
or by subordination of cash flows, not exceeding 20% of the total
securitised instruments, in line with RBI guidelines. The Bank also
acts as a servicing agent for receivable pools securitised-out.
The Bank also enters into transactions for transfer of standard assets
through the direct assignment of cash flows, which are similar to
asset-backed securitisation transactions through the SPV route, except
that such portfolios of receivables are assigned directly to the
purchaser and are not represented by Pass Through Certificates
(''PTCs''), subject to the RBI prescribed MHP criteria and the MRR. The
RBI issued addendum guidelines on securitisation of standard assets
vide its circular dated May 7, 2012. Accordingly, the Bank does not
provide liquidity or credit enhancements on the direct assignment
transactions undertaken subsequent to these guidelines.
Pursuant to these guidelines, the Bank amortises any profit received in
cash for every individual securitisation or direct assignment
transaction at the end of every financial year. This amortisation is
calculated as the maximum of either of the three parameters stated
below:
- the losses incurred on the portfolio, including marked to market
losses in case of securitisation transactions, specific provisions, if
any, and direct write-offs made on the MRR and any other exposures to
the securitisation transaction (other than credit enhancing interest
only strip); or
- the amount of unamortised cash profit at the beginning of the year
multiplied by the amount of principal amortised during the year as a
proportion to the amount of unamortised principal at the beginning of
the year; or
- the amount of unamortised cash profit at the beginning of the year
divided by residual maturity of the securitisation or the direct
assignment transaction.
In relation to securitisation transactions undertaken prior to the
aforementioned RBI guidelines, including those undertaken through the
direct assignment route, the Bank continues to amortise the profit /
premium that arose on account of sale of receivables over the life of
the securities sold, in accordance with the RBI guidelines on
securitisation of standard assets issued vide its circular dated
February 1, 2006.
Any loss arising on account of sale of receivables is recognised in the
Statement of Profit and Loss for the period in which the sale occurs in
accordance with the said RBI guidelines.
The Bank transfers advances through inter-bank participation with and
without risk. In accordance with the RBI guidelines, in the case of
participation with risk, the aggregate amount of the participation
issued by the Bank is reduced from advances and where the Bank is
participating, the aggregate amount of the participation is classified
under advances. 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, the aggregate
amount of participation is shown as due from banks under advances.
In accordance with RBI guidelines on sale of non-performing advances,
if the sale is at a price below the net book value (i.e., book value
less provisions held), the shortfall is charged to the Statement of
Profit and Loss. If the sale is for a value higher than the net book
value, the excess provision is not reversed but is utilised to meet the
shortfall / loss on account of sale of other non-performing advances.
The RBI issued new guidelines on sale of non-performing advances on
February 26, 2014. In accordance with these guidelines, if the sale of
non-performing advances is at a price below the net book value, the
shortfall is charged to the Statement of Profit and Loss spread over a
period of two years. If the sale is for a value higher than the net
book value, the excess provision is credited to the Statement of Profit
and Loss in the year the amounts are received.
The Bank invests in PTCs issued by other SPVs. These are accounted for
at the deal value and are classified as investments. The Bank also
buys loans through the direct assignment route which are classified as
advances. These are carried at acquisition cost unless it is more than
the face value, in which case the premium is amortised based on
Effective Interest Rate (EIR) method.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as
adjusted for impairment, if any. Cost includes cost of purchase and all
expenditure like site preparation, installation costs and professional
fees incurred on the asset before it is ready to use. Subsequent
expenditure incurred on assets put to use is capitalised only when it
increases the future benefit / functioning capability from / of such
assets.
Depreciation is charged over the estimated useful life of the fixed
asset on a straight-line basis. The Bank, pursuant to the Companies Act
2013, has carried out a technical assessment of the useful life of its
assets taking into account changes in environment, changes in
technology, the utility and efficacy of the asset in use. The estimated
useful lives of key fixed assets are given below:
- Improvements to lease hold premises are charged off over the
remaining primary period of lease.
- Software and system development expenditure is depreciated over a
period of 5 years.
- Point of sale terminals are fully depreciated in the year of
purchase.
- For assets purchased and sold during the year, depreciation is
provided on pro-rata basis by the Bank.
- Whenever there is a revision of the estimated useful life of an
asset, the unamortised depreciable amount is charged over the revised
remaining useful life of the said asset.
5 Impairment of assets
The Bank assesses at each Balance Sheet date whether there is any
indication that an asset may be impaired. Impairment loss, if any, is
provided in the Statement of Profit and Loss to the extent the carrying
amount of assets exceeds their estimated recoverable amount.
6 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations
are translated at the exchange rates prevailing on the date of the
transaction. Income and expenditure items of integral foreign
operations (representative offices) are translated at the weekly
average closing rates and of non-integral foreign operations (foreign
branches) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign
operations are translated at the closing exchange rates notified by
Foreign Exchange Dealers'' Association of India (''FEDAI'') as at the
Balance Sheet date and the resulting net valuation profit or loss
arising due to a net open position in any foreign currency is
recognised in the Statement of Profit and Loss.
Both monetary and non-monetary foreign currency assets and liabilities
of non-integral foreign operations are translated at closing exchange
rates notified by FEDAI at the Balance Sheet date and the resulting
profit / loss arising from exchange differences are accumulated in the
Foreign Currency Translation Account until remittance or the disposal
of the net investment in the non-integral foreign operations in
accordance with AS - 11.
Foreign exchange spot and forward contracts outstanding as at the
Balance Sheet date and held for trading, are revalued at the closing
spot and forward rates respectively as notified by FEDAI and at
interpolated rates for contracts of interim maturities. The USD-INR
rate for valuation of contracts having longer maturities i.e. greater
than one year, is implied from MIFOR and LIBOR curves. For other
currency pairs, the forward points (for rates / tenors not published by
FEDAI) are obtained from Reuters for valuation of the FX deals. As
directed by FEDAI to consider P&L on present value basis, the forward
profit or loss on the deals are discounted till the valuation date
using the discounting yields. The resulting profit or loss on valuation
is recognised in the Statement of Profit and Loss. Foreign exchange
contracts are classified as assets when the fair value is positive
(positive marked to market value) or as liabilities when the fair value
is negative (negative marked to market value).
Foreign exchange forward contracts not intended for trading, that are
entered into to establish the amount of reporting currency required or
available at the settlement date of a transaction, and are outstanding
at the Balance Sheet date, are effectively valued at the closing spot
rate. The premia or discount arising at the inception of such forward
exchange contract is amortised as expense or income over the life of
the contract.
Currency future contracts are marked to market daily using settlement
price on a trading day, which is the closing price of the respective
future contracts on that day. While the daily settlement price is
computed on the basis of the last half an hour weighted average price
of such contract, the final settlement price is taken as the RBI
reference rate on the last trading day of the future contracts or as
may be specified by the relevant authority from time to time. All open
positions are marked to market based on the settlement price and the
resultant marked to market profit / loss is daily settled with the
exchange.
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.
7 Derivative contracts
The Bank recognises all derivative contracts (other than those
designated as hedges) at fair value, on the date on which the
derivative contracts are entered into and are re-measured at fair value
as at the Balance Sheet or reporting dates. Derivatives are classified
as assets when the fair value is positive (positive marked to market
value) or as liabilities when the fair value is negative (negative
marked to market value). Changes in the fair value of derivatives other
than those designated as hedges are recognised in the Statement of
Profit and Loss.
Derivative contracts designated as hedges are not marked to market
unless their underlying transaction is marked to market. In respect of
derivative contracts that are marked to market, changes in the market
value are recognised in the Statement of Profit and Loss in the
relevant period. The Bank identifies the hedged item (asset or
liability) at the inception of the transaction itself. Hedge
effectiveness is ascertained at the time of the inception of the hedge
and periodically thereafter. Gains or losses arising from hedge
ineffectiveness, if any, are recognised in the Statement of Profit and
Loss.
Contingent liabilities on account of derivative contracts denominated
in foreign currencies are reported at closing rates of exchange
notified by FEDAI as at the Balance Sheet date.
8 Revenue recognition
Interest income is recognised in the Statement of Profit and Loss on an
accrual basis, except in the case of non-performing assets where it is
recognised upon realisation as per RBI norms.
Interest income on investments in PTCs and loans bought out through the
direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over
the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognised as income when due. Syndication /
arranger fee is recognised as income when a significant act / milestone
is completed.
Gain / loss on sell down of loans is recognised in line with the extant
RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units
is recognised as income when the right to receive the dividend is
established.
Guarantee commission, commission on letter of credit, annual locker
rent fees and annual fees for credit cards are recognised on a straight
line basis over the period of contract. Other fees and commission
income are recognised when due, except in cases where the Bank is
uncertain of ultimate collection.
9 Employee benefits
Employee Stock Option Scheme (''ESOS'')
The Employee Stock Option Scheme (''the Scheme'') provides for the grant
of options to acquire equity shares of the Bank to its employees. The
options granted to employees vest in a graded manner and these may be
exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its
stock-based employee compensation plans. Compensation cost is measured
by the excess, if any, of the market price of the underlying stock over
the exercise price as determined under the option plan. The market
price is the closing price on the stock exchange where there is highest
trading volume on the working day immediately preceding the date of
grant. Compensation cost, if any is amortised over the vesting period.
Gratuity
The Bank provides for gratuity to all employees. The benefit vests upon
completion of five years of service and is in the form of lump sum
payment to employees on resignation, retirement, death while in
employment or on termination of employment of an amount equivalent to
15 days basic salary payable for each completed year of service. The
Bank makes contributions to funds administered by trustees and managed
by insurance companies for amounts notified by the said insurance
companies. In respect of erstwhile Lord Krishna Bank (''eLKB'')
employees, the Bank makes contribution to a fund set up by eLKB and
administered by the Board of Trustees.
The defined gratuity benefit plans are valued by an independent actuary
as at the Balance Sheet date using the projected unit credit method as
per the requirement of AS-15 (Revised 2005), Employee Benefits, to
determine the present value of the defined benefit obligation and the
related service costs. Under this method, the determination is based on
actuarial calculations, which include assumptions about demographics,
early retirement, salary increases and interest rates. Actuarial gain
or loss is recognised in the Statement of Profit and Loss.
Superannuation
Employees of the Bank, above a prescribed grade, are entitled to
receive retirement benefits under the Bank''s Superannuation Fund. The
Bank contributes a sum equivalent to 13% of the employee''s eligible
annual basic salary (15% for the whole time directors and for certain
eligible erstwhile Centurion Bank of Punjab (''eCBoP'') staff) to
insurance companies, which administer the fund. The Bank has no
liability for future superannuation fund benefits other than its
contribution and recognises such contributions as an expense in the
year incurred, as such contribution is in the nature of defined
contribution.
Provident fund
In accordance with law, all employees of the Bank are entitled to
receive benefits under the provident fund. The Bank contributes an
amount, on a monthly basis, at a determined rate (currently 12% of
employee''s basic salary). Of this, the Bank contributes an amount equal
to 8.33% of employee''s basic salary up to a maximum salary level of Rs.
6,500/- per month, to the Pension Scheme administered by the Regional
Provident Fund Commissioner (''RPFC''). The balance amount is contributed
to a fund set up by the Bank and administered by a Board of Trustees.
In respect of eCBoP employees, employer''s and employee''s share of
contribution to Provident Fund till March 2009, was administered by
RPFC and from April 2009 onwards, the same is transferred to the fund
set up by the Bank and administered by the Board of Trustees. In
respect of eLKB employees, the Bank contributes to a fund set up by
eLKB and administered by a Board of Trustees. The Bank recognises such
contributions as an expense in the year in which it is incurred.
Interest payable to the members of the trust shall not be lower than
the statutory rate of interest declared by the Central Government under
the Employees Provident Funds and Miscellaneous Provisions Act 1952 and
shortfall, if any, shall be made good by the Bank.
The guidance note on implementing AS-15 (Revised 2005), Employee
Benefits, states that benefits involving employer established provident
funds, which require interest shortfalls to be provided, are to be
considered as defined benefit plans. Actuarial valuation of this
Provident Fund interest shortfall is done as per the guidance note
issued in this respect by the Actuary Society of India and provision
towards this liability is made.
The overseas branches of the Bank makes contribution to the respective
relevant government scheme calculated as a percentage of the employees''
salaries. The Bank''s obligations are limited to these contributions,
which are expensed when due, as such contribution is in the nature of
defined contribution.
Leave encashment / Compensated absences
The Bank does not have a policy of encashing unavailed leave for its
employees, except for certain eLKB employees under Indian Banks''
Association (''IBA'') structure. The Bank provides for leave encashment /
compensated absences based on an independent actuarial valuation at the
Balance Sheet date, which includes assumptions about demographics,
early retirement, salary increases, interest rates and leave
utilisation.
Pension
In respect of pension payable to certain eLKB employees under IBA
structure, which is a defined benefit scheme, the Bank contributes 10%
of basic salary to a pension fund set up by the Bank and administered
by the board of trustees and the balance amount is provided based on
actuarial valuation as at the Balance Sheet date conducted by an
independent actuary.
In respect of certain eLKB employees who had moved to a Cost to Company
(''CTC'') driven compensation structure and had completed less than 15
years of service, the contribution which was made until then, is
maintained as a fund and will be converted into annuity on separation
after a lock-in-period of two years. For this category of employees,
liability stands frozen and no additional provision is required except
for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and
had completed service of more than 15 years, pension would be paid on
separation based on salary applicable as on the date of movement to CTC
structure. Provision thereto is made based on actuarial valuation as at
the Balance Sheet date conducted by an independent actuary.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card
reward points and cost per point using an actuarial method by employing
an independent actuary, which includes assumptions such as mortality,
redemption and spends. Provisions for the said reward points are made
based on the actuarial valuation report as furnished by the said
independent actuary and included in other liabilities.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment
basis for selling to its wholesale and retail customers. The imports
are typically on a back-to-back basis and are priced to the customer
based on an estimated price quoted by the supplier. The Bank earns a
fee on such wholesale bullion transactions. The fee is classified under
commission income.
The Bank also sells bullion to its retail customers. The difference
between the sale price to customers and actual price quoted by supplier
is recorded under commission income.
The Bank also deals in bullion on a borrowing and lending basis and the
interest paid / received thereon is classified as interest expense /
income respectively.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating
lease are recognised in the Statement of Profit and Loss over the lease
term on a straight-line basis in accordance with the AS-19, Leases.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of
tax for the period determined in accordance with the Income Tax Act,
1961 and the rules framed there under) and the net change in the
deferred tax asset or liability during the year. Deferred tax assets
and liabilities are recognised for the future tax consequences of
timing differences between the carrying values of assets and
liabilities and their respective tax bases and operating loss carried
forward, if any. Deferred tax assets and liabilities are measured using
the enacted or substantively enacted tax rates as at the Balance Sheet
date.
Current tax assets and liabilities and deferred tax assets and
liabilities are off-set when they relate to income taxes levied by the
same taxation authority, when the Bank has a legal right to off-set and
when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is
reasonable certainty that the assets can be realised in future. In
case of unabsorbed depreciation or carried forward loss under taxation
laws, deferred tax assets are recognised only if there is virtual
certainty of realisation of such assets. Deferred tax assets are
reviewed at each Balance Sheet date and appropriately adjusted to
reflect the amount that is reasonably / virtually certain to be
realised.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in
accordance with AS-20, Earnings Per Share. Basic earnings per equity
share has been computed by dividing net profit for the year
attributable to equity shareholders by the weighted average number of
equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential
equity shares outstanding during the period except where the results
are anti-dilutive.
15 Share issue expenses
Share issue expenses are adjusted from Share Premium Account in terms
of Section 52 of the Companies Act, 2013.
16 Segment information
The disclosure relating to segment information is in accordance with
the guidelines issued by RBI.
17 Accounting for provisions, contingent liabilities and contingent
assets
In accordance with AS-29, Provisions, Contingent Liabilities and
Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to
settle the obligation at the Balance Sheet date, supplemented by
experience of similar transactions. These are reviewed at each Balance
Sheet date and adjusted to reflect the current management estimates.
A disclosure of contingent liability is made when there is:
- a possible obligation arising from a past event, the existence of
which will be confirmed by the occurrence or non-occurrence of one or
more uncertain future events not within the control of the Bank; or
- a present obligation arising from a past event which is not
recognised as it is not probable that an outflow of resources will be
required to settle the obligation or a reliable estimate of the amount
of the obligation cannot be made.
When there is a possible obligation or a present obligation in respect
of which the likelihood of outflow of resources is remote, no provision
or disclosure is made.
Contingent assets, if any, are not recognised in the financial
statements since this may result in the recognition of income that may
never be realised.
Onerous contracts
Provisions for onerous contracts are recognised when the expected
benefits to be derived by the Bank from a contract are lower than the
unavoidable costs of meeting the future obligations under the contract.
The provision is measured at the present value of the lower of the
expected cost of terminating the contract and the expected net cost of
continuing with the contract. Before a provision is established, the
Bank recognises any impairment loss on the assets associated with that
contract.
18 Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with RBI,
balances with other banks and money at call and short notice.
19 Corporate social responsibility
Spends towards corporate social responsibility, in accordance with
Companies Act, 2013 are recognised in the Statement of Profit and Loss.
Amounts in notes forming part of the financial statements for the year
ended March 31, 2015 are denominated in rupees crore to conform to
extant RBI guidelines.
1 Capital adequacy
The Bank''s capital to risk-weighted asset ratio (''Capital Adequacy
Ratio'') as on March 31, 2015 is calculated in accordance with the RBI''s
guidelines on Basel III capital regulations (''Basel III'') which were
effective April 1, 2013. The phasing in of the minimum capital
requirement under Basel III is as follows:
The Bank has not raised any additional tier I and tier II capital
during the years ended March 31, 2015 and March 31, 2014.
Subordinated debt (lower tier II capital), upper tier II capital and
innovative perpetual debt instruments outstanding as at March 31, 2015
are Rs. 12,014.00 crore (previous year: Rs. 12,428.00 crore), Rs. 4,040.90
crore (previous year: Rs. 4,015.05 crore) and Rs. 200.00 crore (previous
year: Rs. 200.00 crore) respectively.
In accordance with RBI guidelines, banks are required to make Pillar 3
disclosures under Basel III capital regulations. The Bank has made
these disclosures which are available on its website at the following
link: http://www.hdfcbank.com/ aboutus/basel_disclosures/default.htm.
These Pillar 3 disclosures have not been subjected to audit.
Capital Infusion
Pursuant to the shareholder and regulatory approvals, the Bank on
February 10, 2015, concluded a Qualified Institutions Placement (QIP)
of 1,87,44,142 equity shares at a price of Rs. 1,067 per equity share
aggregating Rs. 2,000 crore and an American Depository Receipt (ADR)
offering of 2,20,00,000 ADRs (representing 6,60,00,000 equity shares)
at a price of USD 57.76 per ADR, aggregating USD 1,271 million.
Pursuant to these issuances, the Bank allotted 8,47,44,142 additional
equity shares. Accordingly, share capital increased by Rs. 16.95 crore
and share premium increased by Rs. 9,705.84 crore, net of share issue
expenses of Rs. 151.03 crore.
During the year ended March 31, 2015, the Bank allotted 2,27,00,740
equity shares (previous year: 1,96,31,405 equity shares) aggregating to
face value Rs. 4.54 crore (previous year: Rs. 3.93 crore) in respect of
stock options exercised. Accordingly, share capital increased by Rs. 4.54
crore (previous year: Rs. 3.93 crore) and share premium increased by Rs.
990.88 crore (previous year: Rs. 741.51 crore).
Mar 31, 2013
1 Investments
Classification :
In accordance with the RBI guidelines on investment classification and
valuation, Investments are classified on the date of purchase into
"Held for Trading" (''HFT''), "Available for Sale" (''AFS'')
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.
Recording purchase and sale transactions in securities is done
following ''Settlement Date'' accounting, except in the case of equity
shares where ''Trade Date'' accounting is followed.
Basis of classification :
Investments that are held principally for resale within 90 days from
the date of purchase are classified under HFT category.
Investments which the Bank intends to hold till maturity are classified
as HTM securities. Investments in the equity of subsidiaries / joint
ventures are categorised as HTM in accordance with the RBI guidelines.
Investments which are not classified in the above categories are
classified under AFS category.
Acquisition cost :
In determining acquisition cost of an investment :
- Brokerage, Commission, etc. paid at the time of acquisition, are
charged to revenue.
- Broken period interest on debt instruments is treated as a revenue
item.
- Cost of investments is based on the weighted average cost method.
Disposal of investments :
Profit / Loss on sale of investments under the aforesaid three
categories is recognised in the Statement of Profit and 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.
Short sale :
The Bank undertakes short sale transactions in Central Government dated
securities in accordance with RBI guidelines. The short position is
reflected as the amount received on sale and is classified under
''Other Liabilities''. The short position is marked to market and loss,
if any, is charged to the Statement of Profit and Loss while gain, if
any, is not recognised. Profit / Loss on settlement of the short
position is recognised in the Statement of Profit and Loss.
Valuation :
Investments classified under AFS and HFT categories are marked to
market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the
recognised stock exchanges, price list of RBI or prices declared by
Primary Dealers Association of India (''PDAI'') jointly with Fixed
Income Money Market and Derivatives Association (''FIMMDA''),
periodically.
The market value of unquoted government securities which qualify for
determining the Statutory Liquidity Ratio (''SLR'') included in the AFS
and HFT categories is computed as per the Yield-to-Maturity (''YTM'')
rates published by FIMMDA.
The valuation of other unquoted fixed income securities (viz. State
Government securities, Other approved securities, Bonds and Debentures)
and preference shares, wherever linked to the YTM rates, is done with a
mark-up (reflecting associated credit and liquidity risk) over the YTM
rates for government securities published by FIMMDA. Special Bonds such
as Oil Bonds, Fertilizer Bonds etc. which are directly issued by
Government of India (''GOI'') that do not qualify for SLR are also
valued by applying the mark up above the corresponding yield on GOI
securities. Unquoted equity shares are valued at the break-up value, if
the latest balance sheet is available or at Rs. 1 as per the RBI
guidelines. 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. Security receipts are valued
as per the Net Asset Value provided by the issuing Asset Reconstruction
Company from time to time.
Net depreciation in the value, if any, compared to the acquisition
cost, in any of the six groups, is charged to the Statement of Profit
and Loss. The net appreciation, if any, in any of the six groups is not
recognised except to the extent of depreciation already provided. The
valuation of investments includes securities under repo transactions.
The book value of individual securities is not changed after the
valuation of investments.
Investments classified under HTM category are carried at their
acquisition cost and not marked to market. Any premium on acquisition
is amortised over the remaining maturity period of the security on a
constant yield to maturity basis. Such amortisation of premium is
adjusted against interest income under the head "Income from
investments" as per the RBI guidelines. Any diminution, other than
temporary, in the value of investments in subsidiaries / joint ventures
is provided for.
Non-performing investments are identified and depreciation / provision
is made thereon based on the RBI guidelines. The depreciation /
provision is not set off against the appreciation in respect of other
performing securities. Interest on non- performing investments is not
recognised in the Profit or Loss Account until received.
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.
2 Advances
Classification :
Advances are classified as performing and non-performing based on the
RBI guidelines and are stated net of bills rediscounted, specific
provisions, interest in suspense for non-performing advances, claims
received from Export Credit Guarantee Corporation, provisions for
funded interest term loan classified as non-performing advances and
provisions in lieu of diminution in the fair value of restructured
assets. Interest on non-performing advances is transferred to an
interest suspense account and not recognised in the Statement of Profit
and Loss until received.
Provisioning :
Specific loan loss provisions in respect of non-performing advances are
made based on management''s assessment of the degree of impairment of
wholesale and retail advances, subject to the minimum provisioning
level prescribed by the RBI. The specific provision levels for retail
non-performing assets are also based on the nature of product and
delinquency levels. Specific loan loss provisions in respect of
non-performing advances are charged to profit and loss and included
under Provisions and Contingencies. Recoveries from bad debts
written-off are recognised in the Statement of Profit and Loss and
included under Other Income. In relation to non-performing derivative
contracts, as per the extant RBI guidelines, the Bank makes provision
for the entire amount of overdue and future receivables relating to
positive marked to market value of the said derivative contracts.
The Bank maintains general provision for standard assets including
credit exposures computed as per the current marked to market values of
interest rate and foreign exchange derivative contracts, and gold at
levels stipulated by RBI from time to time. Provision for standard
assets held by the Bank is not reversed. In the case of overseas
branches, general provision on standard advances is maintained at the
higher of the levels stipulated by the respective overseas regulator or
RBI. Provision for standard assets is included under Other Liabilities.
Provisions made in excess of these regulatory requirements or
provisions which are not made with respect to specific non- performing
assets are categorised as floating provisions. Creation of further
floating provisions is considered by the Bank up to a level approved by
the Board of Directors. Floating provisions are not reversed by credit
to Statement of Profit and Loss and can be used only for contingencies
under extraordinary circumstances for making specific provisions
towards impaired accounts after obtaining Board approval and with prior
permission of RBI. Floating provisions have been included under Other
Liabilities.
Further to the provisions required to be held according to the asset
classification status, provisions are held for individual country
exposures (other than for home country exposure). Countries are
categorised into risk categories as per Export Credit Guarantee
Corporation of India Ltd. (''ECGC'') guidelines and provisioning is
done in respect of that country where the net funded exposure is one
percent or more of the Bank''s total assets.
In addition to the above, the Bank on a prudential 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, the 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.
The Bank considers a restructured account as one where the Bank, for
economic or legal reasons relating to the borrower''s financial
difficulty, grants to the borrower concessions that the Bank would not
otherwise consider. Restructuring would normally involve modification
of terms of the advance / securities, which would generally include,
among others, alteration of repayment period / repayable amount / the
amount of installments / rate of interest (due to reasons other than
competitive reasons). Restructured accounts are classified as such by
the Bank only upon approval and implementation of the restructuring
package. Necessary provision for diminution in the fair value of a
restructured account is made. Restructuring of an account is done at a
borrower level.
3 Securitisation and transfer of assets
The Bank securitises out its receivables, subject to the minimum
holding period criteria and the minimum retention requirements of RBI,
to Special Purpose Vehicles (''SPVs'') in securitisation transactions.
Such securitised-out receivables are de-recognised in the balance sheet
when they are sold (true sale criteria being fully met with) and
consideration is received by the Bank. Sales / transfers that do not
meet these criteria for surrender of control are accounted for as
secured borrowings. In respect of receivable pools securitised-out, the
Bank provides liquidity and credit enhancements, as specified by the
rating agencies, in the form of cash collaterals / guarantees and / or
by subordination of cash flows, not exceeding 20% of the total
securitised instruments, in line with RBI guidelines. The Bank also
acts as a servicing agent for receivable pools securitised-out.
The Bank also enters into transactions for transfer of standard assets
through the direct assignment of cash flows, which are similar to
asset-backed securitisation transactions through the SPV route, except
that such portfolios of receivables are assigned directly to the
purchaser and are not represented by Pass through Certificates
(''PTCs''), subject to the RBI prescribed minimum holding period
criteria and the minimum retention requirements (''MRR''). The RBI
issued addendum guidelines on securitisation of standard assets vide
its circular dated May 7, 2012. Accordingly, the Bank does not provide
liquidity or credit enhancements on the direct assignment transactions
undertaken subsequent to these guidelines. Pursuant to these
guidelines, the Bank amortises any profit received in cash for every
individual securitisation or direct assignment transaction at the end
of every financial year. This amortisation is calculated as the maximum
of either of the three parameters stated below :
- the losses incurred on the portfolio, including marked-to-market
losses in case of securitisation transactions, specific provisions, if
any, and direct write-offs made on the MRR and any other exposures to
the securitisation transaction (other than credit enhancing interest
only strip); or
- the amount of unamortised cash profit at the beginning of the year
multiplied by the amount of principal amortised during the year as a
proportion to the amount of unamortised principal at the beginning of
the year; or
- the amount of unamortised cash profit at the beginning of the year
divided by residual maturity of the securitisation or the direct
assignment transaction.
In relation to securitisation transactions undertaken prior to the
aforementioned RBI guidelines, including those undertaken through the
direct assignment route, the Bank continues to amortise the profit /
premium that arose on account of sale of receivables over the life of
the securities sold, in accordance with the RBI guidelines on
securitisation of standard assets issued vide its circular dated
February 1, 2006.
Any loss arising on account of sale of receivables is recognised in the
Statement of Profit and Loss for the period in which the sale occurs in
accordance with the said RBI guidelines.
The Bank transfers advances through inter-bank participation with and
without risk. In accordance with the RBI guidelines, in the case of
participation with risk, the aggregate amount of the participation
issued by the Bank is reduced from advances and where the Bank is
participating, the aggregate amount of the participation is classified
under advances. 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, the aggregate
amount of participation is shown as due from banks under advances.
In accordance with RBI guidelines on sale of non-performing advances,
if the sale is at a price below the net book value (i.e., book value
less provisions held), the shortfall is charged to the Statement of
Profit and Loss. If the sale is for a value higher than the net book
value, the excess provision is not reversed but is utilised to meet the
shortfall / loss on account of sale of other non-performing advances.
The Bank invests in PTCs issued by other SPVs. These are accounted for
at the deal value and are classified as investments. The Bank also buys
loans through the direct assignment route which are classified as
advances. These are carried at acquisition cost unless it is more than
the face value, in which case the premium is amortised based on
effective interest rate (EIR) method.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as
adjusted for impairment, if any. Cost includes cost of purchase and all
expenditure like site preparation, installation costs and professional
fees incurred on the asset before it is ready to use. Subsequent
expenditure incurred on assets put to use is capitalised only when it
increases the future benefit / functioning capability from / of such
assets.
Depreciation is charged over the estimated useful life of the fixed
asset on a straight-line basis. The rates of depreciation are not lower
than the rates prescribed in Schedule XIV of the Companies Act, 1956.
Depreciation rates for certain key fixed assets are given below :
- Improvements to lease hold premises are charged off over the
remaining primary period of lease.
- Items (excluding staff assets) costing less than Rs. 5,000 and
point of sale terminals are fully depreciated in the year of purchase.
- All other assets are depreciated as per the rates specified in
Schedule XIV of the Companies Act, 1956.
- For assets purchased and sold during the year, depreciation is
provided on pro rata basis by the Bank.
- The Bank undertakes assessment of the useful life of an asset at
periodic intervals taking into account changes in environment, changes
in technology, the utility and efficacy of the asset in use, etc.
Whenever there is a revision of the estimated useful life of an asset,
the unamortised depreciable amount is charged over the revised
remaining useful life of the said asset.
5 Impairment of assets
The Bank assesses at each balance sheet date whether there is any
indication that an asset may be impaired. Impairment loss, if any, is
provided in the Statement of Profit and Loss to the extent the carrying
amount of assets exceeds their estimated recoverable amount.
6 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations
are translated at the exchange rates prevailing on the date of the
transaction. Income and expenditure items of integral foreign
operations (representative offices) are translated at the weekly
average closing rates and of non-integral foreign operations (foreign
branches) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign
operations are translated at the closing exchange rates notified by
Foreign Exchange Dealers'' Association of India (''FEDAI'') as at the
balance sheet date and the resulting net valuation profit or loss
arising due to a net open position in any foreign currency is
recognised in the Statement of Profit and Loss.
Both monetary and non-monetary foreign currency assets and liabilities
of non-integral foreign operations are translated at closing exchange
rates notified by FEDAI at the balance sheet date and the resulting
profit / loss arising from exchange differences are accumulated in the
Foreign Currency Translation Account until the disposal of the net
investment in the non-integral foreign operations.
Foreign exchange spot and forward contracts outstanding as at the
balance sheet date and held for trading, are revalued at the closing
spot and forward rates respectively as notified by FEDAI and at
interpolated rates for contracts of interim maturities. The contracts
for longer maturities i.e. greater than one year are revalued using
MIFOR (Mumbai Interbank Forward Offer Rate) and contracts with USD-INR
currency pair are valued using USD LIBOR (London Interbank Offered
Rate) rates. For other currency pairs, the forward points (as published
by FEDAI) are extrapolated. The resulting profit or loss on valuation
is recognised in the Statement of Profit and Loss.
Foreign exchange forward contracts not intended for trading, that are
entered into to establish the amount of reporting currency required or
available at the settlement date of a transaction, and are outstanding
at the balance sheet date, are effectively valued at the closing spot
rate. The premia or discount arising at the inception of such forward
exchange contract is amortised as expense or income over the life of
the contract.
Currency futures contracts are marked to market daily using settlement
price on a trading day, which is the closing price of the respective
futures contracts on that day. While the daily settlement price is
computed on the basis of the last half an hour weighted average price
of such contract, the final settlement price is taken as the RBI
reference rate on the last trading day of the futures contract or as
may be specified by the relevant authority from time to time. All open
positions are marked to market based on the settlement price and the
resultant marked to market profit / loss is daily settled with the
exchange.
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.
7 Derivative contracts
The Bank recognises all derivative contracts (other than those
designated as hedges) at fair value, on the date on which the
derivative contracts are entered into and are re-measured at fair value
as at the balance sheet or reporting dates. Derivatives are classified
as assets when the fair value is positive (positive marked to market
value) or as liabilities when the fair value is negative (negative
marked to market value). Changes in the fair value of derivatives other
than those designated as hedges are recognised in the Statement of
Profit and Loss.
Derivative contracts designated as hedges are not marked to market
unless their underlying transaction is marked to market. In respect of
derivative contracts that are marked to market, changes in the market
value are recognised in the Statement of Profit and Loss in the
relevant period. The Bank identifies the hedged item (asset or
liability) at the inception of the transaction itself. Hedge
effectiveness is ascertained at the time of the inception of the hedge
and periodically thereafter. Gains or losses arising from hedge
ineffectiveness, if any, are recognised in the Statement of Profit and
Loss.
Contingent Liabilities on account of derivative contracts denominated
in foreign currencies are reported at closing rates of exchange
notified by FEDAI as at the Balance Sheet date.
8 Revenue recognition
Interest income is recognised in the Statement of Profit and Loss on an
accrual basis, except in the case of non-performing assets where it is
recognised upon realisation as per RBI norms.
Interest income on investments in Pass Through Certificates (''PTCs'')
and loans bought out through the direct assignment route is recognised
at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over
the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognised as income when due. Syndication /
arranger fee is recognised as income when a significant act / milestone
is completed.
Gain / loss on sell down of loans is recognised in line with the extant
RBI guidelines.
Dividend on equity shares, preference shares and on mutual fund units
is recognised as income when the right to receive the dividend is
established.
Guarantee commission, commission on Letter of Credit, annual locker
rent fees and annual fees for credit cards are recognised on a straight
line basis over the period of contract. Other fees and commission
income are recognised when due, except in cases where the Bank is
uncertain of ultimate collection.
9 Employee benefits
Employee Stock Option Scheme (''ESOS'')
The Employee Stock Option Scheme (''the Scheme'') provides for the
grant of options to acquire equity shares of the Bank to its employees.
The options granted to employees vest in a graded manner and these may
be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its
stock-based employee compensation plans. Compensation cost is measured
by the excess, if any, of the fair market price of the underlying stock
over the exercise price as determined under the option plan. The fair
market price is the closing price on the stock exchange where there is
highest trading volume on the working day immediately preceding the
date of grant. Compensation cost, if any is amortised over the vesting
period.
Gratuity
The Bank provides for gratuity to all employees. The benefit is in the
form of lump sum payment to vested employees on resignation,
retirement, death while in employment or on termination of employment
of an amount equivalent to 15 days basic salary payable for each
completed year of service. Vesting occurs upon completion of five years
of service. The Bank makes contributions to funds administered by
trustees and managed by insurance companies for amounts notified by the
said insurance companies. In respect of erstwhile Lord Krishna Bank
(''eLKB'') employees, the Bank makes contribution to a fund set up by
eLKB and administered by the board of trustees.
The defined gratuity benefit plans are valued by an independent actuary
as at the balance sheet date using the projected unit credit method as
per the requirement of AS-15 (Revised 2005), Employee Benefits, to
determine the present value of the defined benefit obligation and the
related service costs. Under this method, the determination is based on
actuarial calculations, which include assumptions about demographics,
early retirement, salary increases and interest rates. Actuarial gain
or loss is recognised in the Statement of Profit and Loss.
Superannuation
Employees of the Bank, above a prescribed grade, are entitled to
receive retirement benefits under the Bank''s Superannuation Fund. The
Bank contributes a sum equivalent to 13% of the employee''s eligible
annual basic salary (15% for the Managing Director, Executive Directors
and for certain eligible erstwhile Centurion Bank of Punjab (''eCBoP'')
staff) to insurance companies, which administer the fund. The Bank has
no liability for future superannuation fund benefits other than its
contribution, and recognises such contributions as an expense in the
year incurred, as such contribution is in the nature of defined
contribution.
Provident fund
In accordance with law, all employees of the Bank are entitled to
receive benefits under the provident fund. The Bank contributes an
amount, on a monthly basis, at a determined rate (currently 12% of
employee''s basic salary). Of this, the Bank contributes an amount equal
to 8.33% of employee''s basic salary up to a maximum salary level of Rs.
6,500/- per month, to the Pension Scheme administered by the Regional
Provident Fund Commissioner (''RPFC''). The balance amount is
contributed to a fund set up by the Bank and administered by a board of
trustees. In respect of eCBoP employees, employer''s and employee''s
share of contribution to Provident Fund till March 2009, was
administered by RPFC and from April 2009 onwards, the same is
transferred to the fund set up by the Bank and administered by the
board of trustees. In respect of eLKB employees, the Bank contributes
to a fund set up by eLKB and administered by a board of trustees. The
Bank recognises such contributions as an expense in the year in which
it is incurred. Interest payable to the members of the trust shall not
be lower than the statutory rate of interest declared by the Central
Government under the Employees Provident Funds and Miscellaneous
Provisions Act 1952 and shortfall, if any, shall be made good by the
Bank. The guidance note on implementing AS-15 (revised 2005), Employee
Benefits, states that benefits involving employer established provident
funds, which require interest shortfalls to be provided, are to be
considered as defined benefit plans. Actuarial valuation of this
Provident Fund interest shortfall is done as per the guidance note
issued in this respect by the Actuary Society of India and provision
towards this liability is made.
The overseas branches of the Bank make contributions to the respective
relevant government scheme calculated as a percentage of the employees''
salaries. The Bank''s obligations are limited to these contributions,
which are expensed when due, as such contribution is in the nature of
defined contribution.
Leave encashment / compensated absences
The Bank does not have a policy of encashing unavailed leave for its
employees, except for certain eLKB employees under Indian Banks''
Association (''IBA'') structure. The Bank provides for leave encashment
/ compensated absences based on an independent actuarial valuation at
the balance sheet date, which includes assumptions about demographics,
early retirement, salary increases, interest rates and leave
utilisation.
Pension
In respect of pension payable to certain eLKB employees under IBA
structure, which is a defined benefit scheme, the Bank contributes 10%
of basic salary to a pension fund set up by the Bank and administered
by the board of trustees and the balance amount is provided based on
actuarial valuation as at the balance sheet date conducted by an
independent actuary.
In respect of certain eLKB employees who had moved to a Cost to Company
(''CTC'') driven compensation structure and have completed less than 15
years of service, the contribution which was made until then, is
maintained as a fund and will be converted into annuity on separation
after a lock-in-period of two years. For this category of employees,
liability stands frozen and no additional provision is required except
for interest as applicable to Provident Fund, which is provided for.
In respect of certain eLKB employees who moved to a CTC structure and
had completed service of more than 15 years, pension would be paid on
separation based on salary applicable as on the date of movement to CTC
structure. Provision thereto is made based on actuarial valuation as at
the balance sheet date conducted by an independent actuary.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card
reward points and cost per point using an actuarial method by employing
an independent actuary, which includes assumptions such as mortality,
redemption and spends. Provisions for the said reward points are made
based on the actuarial valuation report as furnished by the said
independent actuary.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment
basis for selling to its wholesale and retail customers. The imports
are typically on a back-to-back basis and are priced to the customer
based on an estimated price quoted by the supplier. The Bank earns a
fee on such wholesale bullion transactions. The fee is classified under
commission income.
The Bank also sells bullion to its retail customers. The difference
between the sale price to customers and actual price quoted by supplier
is also reflected under commission income.
The Bank also borrows and lends gold, which is treated as borrowing /
lending as the case may be with the interest paid / received classified
as interest expense / income.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating
lease are recognised in the Statement of Profit and Loss over the lease
term in accordance with the AS-19, Leases.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of
tax for the period determined in accordance with the Income Tax Act,
1961 and the rules framed there under) and the net change in the
deferred tax asset or liability in the year. Deferred tax assets and
liabilities are recognised for the future tax consequences of timing
differences between the carrying values of assets and liabilities and
their respective tax bases, and operating loss carried forward, if any.
Deferred tax assets and liabilities are measured using the enacted or
substantively enacted tax rates as at the balance sheet date.
Current tax assets and liabilities and deferred tax assets and
liabilities are off-set when they relate to income taxes levied by the
same taxation authority, when the Bank has a legal right to off-set and
when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is
reasonable certainty that the assets can be realized in future. In
case of unabsorbed depreciation or carried forward loss under taxation
laws, deferred tax assets are recognised only if there is virtual
certainty of realisation of such assets. Deferred tax assets are
reviewed at each balance sheet date and appropriately adjusted to
reflect the amount that is reasonably / virtually certain to be
realized.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in
accordance with AS-20, Earnings per Share. Basic earnings per equity
share has been computed by dividing net profit for the year
attributable to equity shareholders by the weighted average number of
equity shares outstanding for the period. Diluted earnings per 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 the dilutive potential
equity shares outstanding during the period except where the results
are anti-dilutive.
15 Segment information - basis of preparation
The disclosure relating to segmental classification conforms to the
guidelines issued by RBI. Business Segments have been identified and
reported taking into account, the target customer profile, the nature
of products and services, the differing risks and returns, the
organisation structure, the internal business reporting system and the
guidelines prescribed by RBI. The Bank operates in the following
segments :
(a) Treasury
The treasury segment primarily consists of net interest earnings from
the Bank''s investment portfolio, money market borrowing and lending,
gains or losses on investment operations and on account of trading in
foreign exchange and derivative contracts.
(b) Retail Banking
The retail banking segment serves retail customers through a branch
network and other delivery channels. This segment raises deposits from
customers and provides loans and other services with the help of
specialist product groups to such customers. Exposures are classified
under retail banking taking into account the status of the borrower
(orientation criterion), the nature of product, granularity of the
exposure and the quantum thereof.
Revenues of the retail banking segment are derived from interest earned
on retail loans, interest earned from other segments for surplus funds
placed with those segments, subvention received from dealers and
manufacturers, fees from services rendered, foreign exchange earnings
on retail products etc. Expenses of this segment primarily comprise
interest expense on deposits, commission paid to retail assets sales
agents, infrastructure and premises expenses for operating the branch
network and other delivery channels, personnel costs, other direct
overheads and allocated expenses of specialist product groups,
processing units and support groups.
(c) Wholesale banking
The wholesale banking segment provides loans, non-fund facilities and
transaction services to large corporates, emerging corporates, public
sector units, government bodies, financial institutions and medium
scale enterprises. Revenues of the wholesale banking segment consist
of interest earned on loans made to customers, interest / fees earned
on the cash float arising from transaction services, earnings from
trade services and other non-fund facilities and also earnings from
foreign exchange and derivative transactions on behalf of customers.
The principal expenses of the segment consist of interest expense on
funds borrowed from external sources and other internal segments,
premises expenses, personnel costs, other direct overheads and
allocated expenses of delivery channels, specialist product groups,
processing units and support groups.
(d) Other banking business
This segment includes income from para banking activities such as
credit cards, debit cards, third party product distribution, primary
dealership business and the associated costs.
(e) Unallocated
All items which are reckoned at an enterprise level are classified
under this segment. This includes capital and reserves, debt classified
as Tier I or Tier II capital and other unallocable assets and
liabilities such as deferred tax, prepaid expenses, etc.
Segment revenue includes earnings from external customers plus earnings
from funds transferred to other segments. Segment result includes
revenue less interest expense less operating expense and provisions, if
any, for that segment. Segment-wise income and expenses include certain
allocations. Interest income is charged by a segment that provides
funding to another segment, based on yields benchmarked to an
internally approved yield curve or at a certain agreed transfer price
rate. Transaction charges are levied by the retail-banking segment to
the wholesale banking segment for the use by its customers of the
retail banking segment''s branch network or other delivery channels.
Such transaction costs are determined on a cost plus basis. Segment
capital employed represents the net assets in that segment.
Geographic segments
The geographic segments of the Bank are categorized as Domestic
Operations and Foreign Operations. Domestic Operations comprise
branches in India and Foreign Operations comprise branches outside
India.
16 Accounting for provisions, contingent liabilities and contingent
assets
In accordance with AS-29, Provisions, Contingent Liabilities and
Contingent Assets, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to
settle the obligation at the balance sheet date, supplemented by
experience of similar transactions. These are reviewed at each balance
sheet date and adjusted to reflect the current management estimates. In
cases where the available information indicates that the loss on the
contingency is reasonably possible but the amount of loss cannot be
reasonably estimated, a disclosure is made in the financial statements.
Contingent Assets, if any, are not recognised in the financial
statements since this may result in the recognition of income that may
never be realized.
17 Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with RBI,
balances with other banks and money at call and short notice.
Mar 31, 2012
A BACKGROUND
HDFC Bank Limited ('HDFC Bank' or 'the Bank'), incorporated in
Mumbai, India is a publicly held banking company engaged in providing a
wide range of banking and financial services including commercial
banking and treasury operations. HDFC Bank is a banking company
governed by the Banking Regulation Act, 1949. The Bank has overseas
branch operations in Bahrain and Hong Kong.
B BASIS OF PREPARATION
The financial statements have been prepared and presented under the
historical cost convention and accrual basis of accounting, unless
otherwise stated and are in accordance with Generally Accepted
Accounting Principles in India ('GAAP'), statutory requirements
prescribed under the Banking Regulation Act 1949, circulars and
guidelines issued by the Reserve Bank of India ('RBI') from time to
time, Accounting Standards ('AS') issued by the Institute of
Chartered Accountants of India ('ICAI') and notified by the Companies
Accounting Standard Rules, 2006 to the extent applicable and current
practices prevailing within the banking industry in India.
Use of estimates :
The preparation of financial statements in conformity with GAAP
requires the management to make estimates and assumptions considered in
the reported amounts of assets and liabilities (including contingent
liabilities) as of the date of the financial statements and the
reported income and expenses for the reporting period. Management
believes that the estimates used in the preparation of the financial
statements are prudent and reasonable. Future results could differ from
these estimates. Any revision in the accounting estimates is recognised
prospectively in the current and future periods.
C PRINCIPAL ACCOUNTING POLICIES
1 Investments
Classification :
In accordance with the RBI guidelines on investment classification and
valuation, Investments are classified on the date of purchase into
"Held for Trading" ('HFT'), "Available for Sale" ('AFS')
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.
The Bank follows 'Settlement Date' accounting for recording purchase
and sale of transactions in securities except in case of equity shares
where 'Trade Date' accounting is followed.
Basis of classification :
Investments that are held principally for resale within 90 days from
the date of purchase are classified under "Held for Trading"
category.
Investments which the Bank intends to hold till maturity are classified
as HTM securities. Investments in the equity of subsidiaries / joint
ventures are categorised as HTM in accordance with the RBI guidelines.
Investments which are not classified in the above categories are
classified under AFS category.
Acquisition cost :
In determining acquisition cost of an investment :
- Brokerage, commission, etc. paid at the time of acquisition, are
charged to revenue.
- Broken period interest on debt instruments is treated as a revenue
item.
- Cost of investments is based on the weighted average cost method.
Disposal of investments :
Profit / loss on sale of investments under the aforesaid three
categories is taken to the Statement of Profit and Loss. The profit
from sale of investment under HTM category, net of taxes and transfers
to statutory reserve is appropriated from Statement of Profit and Loss
to "Capital Reserve" in accordance with the RBI Guidelines.
Short sale :
In accordance with RBI guidelines, the Bank undertakes short sale
transactions in central government dated securities. The short position
is reflected as the amount received on sale and is classified under
'Other Liabilities'. The short position is marked to market and
loss, if any, is charged to the Statement of Profit and Loss while
gain, if any, is not recognised. Profit / loss on settlement of the
short position is taken to Statement of Profit and Loss.
Valuation :
Investments classified under AFS category and HFT category are marked
to market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the
recognised stock exchanges, price list of RBI or prices declared by
Primary Dealers Association of India ('PDAI') jointly with Fixed
Income Money Market and Derivatives Association ('FIMMDA'),
periodically.
The market value of unquoted government securities which qualify for
determining the Statutory Liquidity Ratio ('SLR') included in the AFS
and HFT categories is computed as per the Yield-to-Maturity ('YTM')
rates published by FIMMDA.
The valuation of other unquoted fixed income securities (viz. State
government securities, Other approved securities, Bonds and debentures)
wherever linked to the YTM rates, is computed with a mark-up
(reflecting associated credit and liquidity risk) over the YTM rates
for government securities published by FIMMDA. Special bonds such as
Oil bonds, Fertiliser bonds etc. which are directly issued by
Government of India ('GOI') that do not qualify for SLR are also
valued by applying the mark up above the corresponding yield on GOI
securities. Unquoted equity shares are valued at the break-up value, if
the latest Balance Sheet is available or at Rs 1 as per the RBI
guidelines. 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.
Net depreciation, if any, in any of the six groups, is charged to the
Statement of Profit and Loss. The net appreciation, if any, in any of
the six groups is not recognised except to the extent of depreciation
already provided. The book value of individual securities is not
changed after the valuation of investments.
Investments classified under HTM category are carried at their
acquisition cost and not marked to market. Any premium on acquisition
is amortized over the remaining maturity period of the security on a
constant yield to maturity basis. Such amortisation of premium is
adjusted against interest income under the head "Income from
investments" as per the RBI guidelines. Any diminution, other than
temporary, in the value of investments in subsidiaries / joint ventures
is provided for.
Non-performing investments are identified and depreciation / provision
is made thereon based on the RBI guidelines. The depreciation /
provision is 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.
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.
2 Advances
Classification :
Advances are classified as performing and non-performing based on the
RBI guidelines and are stated net of bills rediscounted, specific
provisions, interest in suspense for non-performing advances, claims
received from Export Credit Guarantee Corporation, provisions for
funded interest term loan classified as NPA and provisions in lieu of
diminution in the fair value of restructured assets. Interest on
non-performing advances is transferred to an interest suspense account
and not recognised in the Statement of Profit and Loss until received.
Provisioning :
Specific loan loss provisions in respect of non-performing advances are
made based on management's assessment of the degree of impairment of
wholesale and retail advances, subject to the minimum provisioning
level prescribed by the RBI. The specific provision levels for retail
non-performing assets are also based on the nature of product and
delinquency levels.
The Bank maintains general provision for standard assets including
credit exposures computed as per the current marked to market value of
interest rate and foreign exchange derivative contracts and gold at
levels stipulated by RBI from time to time. Provision for standard
assets held by the Bank is not reversed. In the case of overseas
branches, general provision on standard advances is maintained at the
higher of the levels stipulated by the respective overseas regulator or
RBI. Provision for standard assets is included under Schedule 5 -
"Other Liabilities". Provisions made in excess of these regulatory
requirements or provisions which are not made with respect to specific
non-performing assets are categorised as floating provisions. Creation
of further floating provisions is considered by the Bank up to a level
approved by the Board of Directors. Floating provisions are not
reversed by credit to Statement of Profit and Loss and can be used only
for contingencies under extraordinary circumstances for making specific
provisions towards impaired accounts after obtaining Board approval and
with prior permission of RBI. Floating provisions have been included
under Schedule 5 - "Other Liabilities"
In accordance with the RBI guidelines, the Bank makes provision for the
entire amount of overdue and future receivables relating to positive
marked to market value of non-performing derivative contracts.
Further to the provisions required to be held according to the asset
classification status, provisions are held for individual country
exposures (other than for home country exposure). Countries are
categorised into risk categories as per Export Credit Guarantee
Corporation of India Ltd. ('ECGC') guidelines and provisioning is
done in respect of that country where the net funded exposure is one
percent or more of the Bank's total assets.
In addition to the above, the Bank on a prudential 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, the 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 Schedule 5 - "Other
Liabilities".
The Bank considers a restructured account as one where the Bank, for
economic or legal reasons relating to the borrower's financial
difficulty, grants to the borrower concessions that the Bank would not
otherwise consider. Restructuring would normally involve modification
of terms of the advance / securities, which would generally include,
among others, alteration of repayment period / repayable amount / the
amount of installments / rate of interest (due to reasons other than
competitive reasons). Restructured accounts are classified as such by
the Bank only upon approval and implementation of the restructuring
package. Necessary provision for diminution in the fair value of a
restructured account is made. Restructuring of an account is done at a
borrower level.
3 Securitisation and transfer of assets
The Bank securitises out its receivables to Special Purpose Vehicles
('SPVs') in securitisation transactions. Such securitised-out
receivables are de-recognised in the Balance Sheet when they are sold
(true sale criteria being fully met with) and consideration is received
by the Bank. Sales / transfers that do not meet these criteria for
surrender of control are accounted for as secured borrowings.
In respect of receivable pools securitised-out, the Bank provides
liquidity and credit enhancements, as specified by the rating agencies,
in the form of cash collaterals / guarantees and / or by subordination
of cash flows. The Bank also acts as a servicing agent for receivable
pools securitised-out.
The RBI issued guidelines on securitisation of standard assets vide its
circular dated February 1, 2006. Pursuant to these guidelines, the Bank
amortises any profit / premium arising on account of sale of
receivables over the life of the securities sold out while any loss
arising on account of sale of receivables is recognised in the
Statement of Profit and Loss for the period in which the sale occurs.
The Bank also enters into securitised-out transactions through the
direct assignment route, which are similar to asset-backed
securitisation transactions through the SPV route, except that such
portfolios of receivables are assigned directly to the purchaser and
are not represented by Pass through Certificates ('PTCs'). The Bank
amortises any profit / premium arising on account of sale of
receivables through the direct assignment route over the tenure of the
loans sold out while any loss arising on account of sale of receivables
is recognised in the Statement of Profit and Loss for the period in
which the sale occurs.
The Bank transfers advances through inter-bank participation with and
without risk. In accordance with the RBI guidelines, in the case of
participation with risk, the aggregate amount of the participation
issued by the Bank is reduced from advances and where the Bank is
participating, the aggregate amount of the participation is classified
under advances. 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, the aggregate
amount of participation is shown as due from banks under advances.
In accordance with RBI guidelines on sale of non-performing advances,
if the sale is at a price below the net book value (i.e., book value
less provisions held), the shortfall is debited to the Statement of
Profit and Loss. If the sale is for a value higher than the net book
value, the excess provision is not reversed but is utilised to meet the
shortfall / loss on account of sale of other non-performing advances.
The Bank also invests in PTCs and buys loans through the direct
assignment route. These are accounted for at the deal value. The PTCs
are classified as investments and loan assignments are classified as
advances.
4 Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation as
adjusted for impairment, if any. Cost includes cost of purchase and all
expenditure like site preparation, installation costs and professional
fees incurred on the asset before it is ready to use. Subsequent
expenditure incurred on assets put to use is capitalised only when it
increases the future benefit / functioning capability from / of such
assets.
Improvements to lease hold premises are charged off over the remaining
primary period of lease.
Items (excluding staff assets) costing less than Rs 5,000 and point of
sale terminals are fully depreciated in the year of purchase.
All other assets are depreciated as per the rates specified in Schedule
XIV of the Companies Act, 1956.
For assets purchased and sold during the year, depreciation is provided
on pro-rata basis by the Bank.
The Bank undertakes assessment of the useful life of an asset at
periodic intervals taking into account changes in environment, changes
in technology, the utility and efficacy of the asset in use, etc.
Whenever there is a revision of the estimated useful life of an asset,
the unamortized depreciable amount is charged over the revised
remaining useful life of the said asset.
5 Impairment of assets
The Bank assesses at each Balance Sheet date whether there is any
indication that an asset may be impaired. Impairment loss, if any, is
provided in the Statement of Profit and Loss to the extent the carrying
amount of assets exceeds their estimated recoverable amount.
6 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations
are translated at the exchange rates prevailing on the date of the
transaction. Income and expenditure items of integral foreign
operations (representative offices) are translated at the weekly
average closing rates and of non-integral foreign operations (foreign
branches) at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign
operations are translated at the closing exchange rates notified by
Foreign Exchange Dealers' Association of India ('FEDAI') at the
Balance Sheet date and the resulting net valuation profit or loss
arising due to a net open position in any foreign currency is
recognised in the Statement of Profit and Loss.
Both monetary and non-monetary foreign currency assets and liabilities
of non-integral foreign operations are translated at closing exchange
rates notified by FEDAI at the balance sheet date and the resulting
profit / loss arising from exchange differences are accumulated in the
Foreign Currency Translation Account until the disposal of the net
investment in the non-integral foreign operations.
Foreign exchange spot and forward contracts outstanding as at the
balance sheet date and held for trading, are revalued at the closing
spot and forward rates respectively as notified by FEDAI and at
interpolated rates for contracts of interim maturities. The contracts
for longer maturities i.e. greater than one year are revalued using
Mumbai Interbank Forward Offer Rate ('MIFOR') and USD LIBOR (London
Interbank Offered Rate) rates for USD-INR currency pair. For other
currency pairs, the forward points (as published by FEDAI) are
extrapolated. The resulting profit or loss on valuation is recognised
in the Statement of Profit and Loss.
Foreign exchange forward contracts not intended for trading, that are
entered into to establish the amount of reporting currency required or
available at the settlement date of a transaction, and are outstanding
at the Balance Sheet date, are effectively valued at the closing spot
rate. The premia or discount arising at the inception of such forward
exchange contract is amortized as expense or income over the life of
the contract.
Currency futures contracts are marked to market daily using settlement
price on a trading day, which is the closing price of the respective
futures contracts on that day. While the daily settlement price is
computed on the basis of the last half an hour weighted average price
of such contract, the final settlement price is taken as the RBI
reference rate on the last trading day of the futures contract or as
may be specified by the relevant authority from time to time. All open
positions are marked to market based on the settlement price and the
resultant marked to market profit / loss is daily settled with the
exchange.
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 at the Balance Sheet date.
7 Derivative contracts
The Bank recognises all derivative contracts (other than those
designated as hedges) at the fair value, on the date on which the
derivative contracts are entered into and are re-measured at fair value
as at the Balance Sheet or reporting dates. Derivatives are classified
as assets when the fair value is positive (positive marked to market
value) or as liabilities when the fair value is negative (negative
marked to market value). Changes in the fair value of derivatives
other than those designated as hedges are recognised in the Statement
of Profit and Loss.
Derivative contracts designated as hedges are not marked to market
unless their underlying transaction is marked to market. In respect of
derivative contracts that are marked to market, changes in the market
value are recognised in the Statement of Profit and Loss in the
relevant period. Gains or losses arising from hedge ineffectiveness, if
any, are recognised in the Statement of Profit and Loss.
Contingent liabilities on account of derivative contracts denominated
in foreign currencies are reported at closing rates of exchange
notified by FEDAI at the Balance Sheet date.
8 Revenue and expense recognition
Interest income is recognised in the Statement of Profit and Loss on an
accrual basis, except in the case of non-performing assets where it is
recognised upon realisation as per RBI norms.
Interest income is recognised net of commission paid to sales agents
(net of non-volume based subvented income from dealers, agents and
manufacturers) - (hereafter called "net commission") for
originating fixed tenor retail loans. Net commission paid to sales
agents for originating other retail loans is expensed in the year in
which it is incurred.
Interest income on investments in PTCs and loans bought out through the
direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments is recognised over
the tenor of the instrument on a constant effective yield basis.
Loan processing fee is recognised as income when due. Syndication /
arranger fee is recognised as income when a significant act / milestone
is completed.
Dividend on equity shares, preference shares and on mutual fund units
is recognised as income when the right to receive the dividend is
established.
Guarantee commission, commission on letter of credit, annual locker
rent fees and annual fees for credit cards are recognised on a straight
line basis over the period of contract. Other fees and commission
income are recognised when due, except in cases where the Bank is
uncertain of ultimate collection.
9 Employee benefits
Employee Stock Option Scheme ('ESOS')
The Employee Stock Option Scheme ('the Scheme') provides for the
grant of equity shares of the Bank to its employees. The Scheme
provides that employees are granted an option to acquire equity shares
of the Bank that vests in a graded manner. The options may be exercised
within a specified period. The Bank follows the intrinsic value method
to account for its stock-based employee compensation plans.
Compensation cost is measured by the excess, if any, of the fair market
price of the underlying stock over the exercise price on the grant date
as determined under the option plan. The fair market price is the
latest available closing price, prior to the date of grant, on the
stock exchange on which the shares of the Bank are listed. Compensation
cost, if any is amortised over the vesting period.
Gratuity
The Bank provides for gratuity to all employees. The benefit is in the
form of lump sum payments to vested employees on resignation,
retirement, death while in employment or on termination of employment
of an amount equivalent to 15 days basic salary payable for each
completed year of service. Vesting occurs upon completion of five years
of service. The Bank makes contributions to funds administered by
trustees and managed by insurance companies for amounts notified by the
said insurance companies. In respect of erstwhile Lord Krishna Bank
('eLKB') employees, the Bank makes contribution to a fund set up by
eLKB and administered by the board of trustees. The defined gratuity
benefit plans are valued by an independent actuary as at the Balance
Sheet date using the projected unit credit method as per the
requirement of AS-15 (Revised 2005), Employee benefits, to determine
the present value of the defined benefit obligation and the related
service costs. Under this method, the determination is based on
actuarial calculations, which include assumptions about demographics,
early retirement, salary increases and interest rates. Actuarial gain
or loss is recognised in the Statement of Profit and Loss.
Superannuation
Employees of the Bank, above a prescribed grade, are entitled to
receive retirement benefits under the Bank's Superannuation Fund. The
Bank contributes a sum equivalent to 13% of the employee's eligible
annual basic salary (15% for the Managing Director, Executive Directors
and for certain eligible erstwhile Centurion Bank of Punjab ('eCBoP')
staff) to insurance companies, which administer the fund. The Bank has
no liability for future superannuation fund benefits other than its
contribution, and recognises such contributions as an expense in the
year incurred, as such contribution is in the nature of defined
contribution.
Provident fund
In accordance with law, all employees of the Bank are entitled to
receive benefits under the provident fund. The Bank contributes an
amount, on a monthly basis, at a determined rate (currently 12% of
employee's basic salary). Of this, the Bank contributes an amount of
8.33% of employee's basic salary upto a maximum salary level of Rs
6,500/- per month to the Pension Scheme administered by the Regional
Provident Fund Commissioner ('RPFC'). The balance amount is
contributed to a fund set up by the Bank and administered by a board of
trustees. In respect of eCBoP employees, employer's and employee's
share of contribution to Provident Fund till March 2009, was
administered by RPFC and from April 2009 onwards, the same is
transferred to the fund set up by the Bank and administered by a board
of trustees. In respect of eLKB employees, the Bank contributes to a
fund set up by eLKB and administered by the board of trustees. The Bank
recognises such contributions as an expense in the year in which it is
incurred. Interest payable to the members of the trust shall not be
lower than the statutory rate of interest declared by the central
government under the Employees Provident Funds and Miscellaneous
Provisions Act 1952 and shortfall, if any, shall be made good by the
Bank. The guidance note on implementing AS-15 (revised 2005), Employee
Benefits, states that benefits involving employer established provident
funds, which requires interest shortfalls to be provided, are to be
considered as defined benefit plans. Actuarial valuation of this
Provident Fund interest shortfall has been done as per the guidance
note issued during the year in this respect by the Actuary Society of
India and provision towards this liability has been made.
The overseas branches make contributions to the respective relevant
government scheme calculated as a percentage of the employees'
salaries. The Bank's obligations are limited to these contributions,
which are expensed when due, as such contribution is in the nature of
defined contribution.
Leave encashment / compensated absences
The Bank does not have a policy of encashing unavailed leave for its
employees, except for certain eLKB employees under Indian Banks'
Association ('IBA') structure. The Bank provides for leave encashment
/ compensated absences based on an independent actuarial valuation at
the Balance Sheet date, which includes assumptions about demographics,
early retirement, salary increases, interest rates and leave
utilisation.
Pension
In respect of pension payable to certain eLKB employees under IBA
structure, which is a defined benefit scheme, the Bank contributes 10%
of basic salary to a pension fund set up by the Bank and administered
by the board of trustees and balance amount is provided based on
actuarial valuation at the Balance Sheet date conducted by an
independent actuary.
In respect of certain eLKB employees who had moved to a Cost to Company
('CTC') driven compensation structure and have completed less than 15
years of service, the contribution which was made uptill then, is
maintained as a fund and will be converted into annuity on separation
after a lock-in-period of two years. For this category of employees,
liability stands frozen and no additional provision would be required
except for interest as applicable to Provident Fund, which has been
provided for.
In respect of the employees who moved to a CTC structure and had
completed service of more than 15 years, pension would be paid on
separation based on salary applicable as on date of movement to CTC
structure and provision is made based on actuarial valuation at the
Balance Sheet date conducted by an independent actuary.
10 Debit and credit cards reward points
The Bank estimates the probable redemption of debit and credit card
reward points and cost per point using an actuarial method by employing
an independent actuary. Provision for the said reward points is then
made based on the actuarial valuation report as furnished by the said
independent actuary.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment
basis for selling to its wholesale and retail customers. The imports
are typically on a back-to-back basis and are priced to the customer
based on an estimated price quoted by the supplier. The Bank earns a
fee on such wholesale bullion transactions. The fee is classified under
commission income.
The Bank also sells bullion to its retail customers. The difference
between the sale price to customers and actual price quoted by supplier
is also reflected under commission income.
The Bank also borrows and lends gold, which is treated as borrowing /
lending as the case may be with the interest paid / received classified
as interest expense / income.
12 Lease accounting
Lease payments including cost escalation for assets taken on operating
lease are recognised in the Statement of Profit and Loss over the lease
term in accordance with the AS-19, Leases, issued by the ICAI.
13 Income tax
Income tax expense comprises current tax provision (i.e. the amount of
tax for the period determined in accordance with the Income Tax Act,
1961 and the rules framed there under) and the net change in the
deferred tax asset or liability in the year. Deferred tax assets and
liabilities are recognised for the future tax consequences of timing
differences between the carrying values of assets and liabilities and
their respective tax bases, and operating loss carried forward, if any.
Deferred tax assets and liabilities are measured using the enacted or
substantively enacted tax rates at the Balance Sheet date.
Deferred tax assets are recognised only to the extent there is
reasonable certainty that the assets can be realised in future. In case
of unabsorbed depreciation or carried forward loss under taxation laws,
deferred tax assets are recognised only if there is virtual certainty
of realisation of such assets. Deferred tax assets are reviewed at each
Balance Sheet date and appropriately adjusted to reflect the amount
that is reasonably / virtually certain to be realised.
14 Earnings per share
The Bank reports basic and diluted earnings per equity share in
accordance with AS-20, Earnings Per Share, issued by the ICAI. Basic
earnings per equity share has been computed by dividing net profit for
the year attributable to equity shareholders by the weighted average
number of equity shares outstanding for the period. 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 year. Diluted earnings per equity share are computed using
the weighted average number of equity shares and dilutive potential
equity shares outstanding during the period except where the results
are anti-dilutive.
15 Segment information - basis of preparation
The disclosure relating to segmental classification conforms to the
guidelines issued by RBI. Business segments have been identified and
reported taking into account, the target customer profile, the nature
of products and services, the differing risks and returns, the
organisation structure, the internal business reporting system and the
guidelines prescribed by RBI. The Bank operates in the following
segments :
(a) Treasury
The treasury segment primarily consists of net interest earnings from
the Bank's investment portfolio, money market borrowing and lending,
gains or losses on investment operations and on account of trading in
foreign exchange and derivative contracts.
(b) Retail banking
The retail banking segment serves retail customers through a branch
network and other delivery channels.
This segment raises deposits from customers and provides loans and
other services with the help of specialist product groups to such
customers. Exposures are classified under retail banking taking into
account the status of the borrower (orientation criterion), the nature
of product, granularity of the exposure and the quantum thereof.
Revenues of the retail banking segment are derived from interest earned
on retail loans, net of commission (net of subvention received) paid to
sales agents and interest earned from other segments for surplus funds
placed with those segments, fees from services rendered, foreign
exchange earnings on retail products etc. Expenses of this segment
primarily comprise interest expense on deposits, infrastructure and
premises expenses for operating the branch network and other delivery
channels, personnel costs, other direct overheads and allocated
expenses of specialist product groups, processing units and support
groups.
(c) Wholesale banking
The wholesale banking segment provides loans, non-fund facilities and
transaction services to large corporates, emerging corporates, public
sector units, government bodies, financial institutions and medium
scale enterprises. Revenues of the wholesale banking segment consist
of interest earned on loans made to customers, interest / fees earned
on the cash float arising from transaction services, earnings from
trade services and other non-fund facilities and also earnings from
foreign exchange and derivatives transactions on behalf of customers.
The principal expenses of the segment consist of interest expense on
funds borrowed from external sources and other internal segments,
premises expenses, personnel costs, other direct overheads and
allocated expenses of delivery channels, specialist product groups,
processing units and support groups.
(d) Other banking business
This segment includes income from para banking activities such as
credit cards, debit cards, third party product distribution, primary
dealership business and the associated costs.
(e) Unallocated
All items which are reckoned at an enterprise level are classified
under this segment. This includes capital and reserves, debt classified
as Tier I or Tier II capital and other unallocable assets and
liabilities such as deferred tax, prepaid expenses, etc.
Segment revenue includes earnings from external customers plus earnings
from funds transferred to other segments. Segment result includes
revenue less interest expense less operating expense and provisions, if
any, for that segment. Segment-wise income and expenses include certain
allocations. Interest income is charged by a segment that provides
funding to another segment, based on yields benchmarked to an
internally approved yield curve or at a certain agreed transfer price
rate. Transaction charges are levied by the retail-banking segment to
the wholesale banking segment for the use by its customers of the
retail banking segment's branch network or other delivery channels.
Such transaction costs are determined on a cost plus basis. Segment
capital employed represents the net assets in that segment.
Geographic segments
Since the Bank does not have material earnings emanating outside India,
the Bank is considered to operate in only the domestic segment.
16 Accounting for provisions, contingent liabilities and contingent
assets
In accordance with AS-29, Provisions, Contingent Liabilities and
Contingent Assets, issued by the ICAI, the Bank recognises provisions
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.
Provisions are determined based on management estimate required to
settle the obligation at the Balance Sheet date, supplemented by
experience of similar transactions. These are reviewed at each Balance
Sheet date and adjusted to reflect the current management estimates. In
cases where the available information indicates that the loss on the
contingency is reasonably possible but the amount of loss cannot be
reasonably estimated, a disclosure is made in the financial statements.
Contingent assets, if any, are not recognised in the financial
statements since this may result in the recognition of income that may
never be realised.
17 Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with RBI,
balances with other banks and money at call and short notice.
Mar 31, 2011
A BACKGROUND
HDFC Bank Limited (ÃHDFC Bankà or Ãthe BankÃ), incorporated in Mumbai,
India is a publicly held banking company engaged in providing a wide
range of banking and financial services including commercial banking
and treasury operations. HDFC Bank is a banking company governed by the
Banking Regulation Act, 1949. The Bank has overseas branch operations
in Bahrain and Hong Kong.
B BASIS OF PREPARATION
The financial statements have been prepared and presented under the
historical cost convention and accrual basis of accounting, unless
otherwise stated and are in accordance with Generally Accepted
Accounting Principles in India (ÃGAAPÃ), statutory requirements
prescribed under the Banking Regulation Act 1949, circulars and
guidelines issued by the Reserve Bank of India (ÃRBIÃ) from time to
time, Accounting Standards (ÃASÃ) issued by the Institute of Chartered
Accountants of India (ÃICAIÃ) and notified by the Companies Accounting
Standard Rules, 2006 to the extent applicable and current practices
prevailing within the banking industry in India.
Use of Estimates :
The preparation of financial statements in conformity with GAAP
requires the management to make estimates and assumptions considered in
the reported amounts of assets and liabilities (including contingent
liabilities) as of the date of the financial statements and the
reported income and expenses for the reporting period. Management
believes that the estimates used in the preparation of the financial
statements are prudent and reasonable. Future results could differ from
these estimates. Any revision in the accounting estimates is recognized
prospectively in the current and future periods.
C PRINCIPAL ACCOUNTING POLICIES
1 Investments
Classification :
In accordance with the RBI guidelines on investment classification and
valuation, Investments are classified on the date of purchase into
ÃHeld for Tradingà (HFT), ÃAvailable for Saleà (AFS) and ÃHeld to
Maturityà (HTM) categories (hereinafter called ÃcategoriesÃ).
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 ÃgroupsÃ) -
Government Securities, Other Approved Securities, Shares, Debentures
and Bonds, Investments in Subsidiaries / Joint ventures and Other
Investments.
The Bank follows ÃSettlement Dateà accounting for recording purchase
and sale of transactions in securities except in case of equity shares
where ÃTrade Dateà accounting is followed.
Basis of Classification :
Investments that are held principally for resale within 90 days from
the date of purchase are classified under ÃHeld for Tradingà category.
Investments which the Bank intends to hold till maturity are classified
as HTM securities. Investments in the equity of subsidiaries are
categorized as ÃHeld to Maturityà in accordance with the RBI
guidelines.
Investments which are not classified in the above categories are
classified under ÃAvailable for Saleà category.
Acquisition Cost :
In determining acquisition cost of an investment :
- Brokerage, Commission, etc. paid at the time of acquisition, are
charged to revenue.
- Broken period interest on debt instruments is treated as a revenue
item.
- Cost of investments is based on the weighted average cost method.
Disposal of Investments :
Profit / Loss on sale of investments under the aforesaid three
categories are taken to the Profit and Loss Account. The profit from
sale of investment under Held to Maturity category, net of taxes and
transfers to statutory reserve is appropriated from Profit and Loss
Account to ÃCapital ReserveÃ.
Valuation :
Investments classified under Available for Sale category and Held for
Trading category are marked to market as per the RBI guidelines.
Traded investments are valued based on the trades / quotes on the
recognized stock exchanges, price list of RBI or prices declared by
Primary Dealers Association of India (ÃPDAIÃ) jointly with Fixed Income
Money Market and Derivatives Association (ÃFIMMDAÃ), periodically.
The market value of unquoted government securities which are in the
nature of Statutory Liquidity Ratio (ÃSLRÃ) securities included in the
AFS and HFT categories is as per the Yield-to-Maturity (ÃYTMÃ) rates
published by FIMMDA. The valuation of other unquoted fixed income
securities (viz. State Government securities, Other approved
securities, Bonds and Debentures) wherever linked to the YTM rates, is
computed with a mark-up (reflecting associated credit and liquidity
risk) over the YTM rates for government securities published by FIMMDA.
Special Bonds such as Oil Bonds, Fertiliser Bonds etc. which are
directly issued by Government of India (ÃGOIÃ) that do not carry SLR
status are also valued by applying the mark up above the corresponding
yield on GOI securities. Unquoted equity shares are valued at the
break-up value, if the latest balance sheet is available or at Rs. 1 as
per the RBI guidelines. 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, except for
Treasury Bills classified under Held for Trading category.
Net depreciation, if any, in any of the six groups, is charged to the
Profit and Loss Account. The net appreciation, if any, in any of the
six groups is not recognised except to the extent of depreciation
already provided. The book value of individual securities is not
changed after the valuation of investments.
Investments classified under Held to Maturity category are carried at
their acquisition cost and not marked to market. Any premium on
acquisition is amortized over the remaining maturity period of the
security on a constant yield to maturity basis. Such amortization of
premium is adjusted against interest income under the head ÃIncome from
investmentsà as per the RBI guidelines. Any diminution, other than
temporary, in the value of investments in subsidiaries / joint ventures
is provided for.
Non-performing investments are identified and depreciation / provision
is made thereon based on the RBI guidelines. The depreciation /
provision is not set off against the appreciation in respect of other
performing securities. Interest on non-performing investments is not
recognised in the Profit or Loss Account until received.
Repo and Reverse Repo Transactions :
In accordance with the RBI guidelines under reference RBI/2009-2010/356
IDMD/4135/11.08.43/2009-10 dated March 23, 2010, effective April 1,
2010 Repo and Reverse Repo transactions in government securities and
corporate debt securities (excluding transactions conducted under
Liquidity Adjustment Facility (ÃLAFÃ) with RBI) are reflected as
borrowing and lending transactions respectively. These transactions
were hitherto recorded under investments as sales and purchases
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 with RBI, monies borrowed
from RBI are 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, monies lent to RBI
are debited to investment account and reversed on maturity of the
transaction. Revenues thereon are accounted as interest income.
2 Advances
Classification :
Advances are classified as performing and non-performing based on the
RBI guidelines and are stated net of bills rediscounted, specific
provisions, interest in suspense for non-performing advances, claims
received from Export Credit Guarantee Corporation, provisions for
funded interest term loan classified as NPA and provisions in lieu of
diminution in the fair value of restructured assets. Floating
provisions have been included under Schedule 5 - ÃOther LiabilitiesÃ
which were hitherto netted from Advances. Interest on non-performing
advances is transferred to an interest suspense account and not
recognised in the Profit and Loss Account until received.
Provisioning :
Specific loan loss provisions in respect of non-performing advances are
made based on managementÃs assessment of the degree of impairment of
wholesale and retail advances, subject to the minimum provisioning
level prescribed in the RBI guidelines. The specific provision levels
for retail non-performing assets are also based on the nature of
product and delinquency levels.
The Bank maintains general provision for standard assets including
credit exposures computed as per the current marked to market value of
interest rate and foreign exchange derivative contracts and gold at
levels stipulated by RBI from time to time. Provision for standard
assets is included under Schedule 5 - ÃOther LiabilitiesÃ.
Provisions made in excess of these regulatory levels or provisions
which are not made with respect to specific non - performing assets are
categorised as floating provisions. Creation of further floating
provisions are considered by the Bank up to a level approved by the
Board of Directors of the Bank. Floating provisions are not reversed by
credit to Profit and Loss Account and can be used only for
contingencies under extraordinary circumstances for making specific
provisions in impaired accounts after obtaining Board approval and with
prior permission of RBI.
The Bank considers a restructured account as one where the Bank, for
economic or legal reasons relating to the borrowerÃs financial
difficulty, grants to the borrower concessions that the Bank would not
otherwise consider. Restructuring would normally involve modification
of terms of the advance / securities, which would generally include,
among others, alteration of repayment period / repayable amount / the
amount of installments / rate of interest (due to reasons other than
competitive reasons). Restructured accounts are reported as such by the
Bank only upon approval and implementation of the restructuring
package. Necessary provision for diminution in the fair value of a
restructured account is made. Restructuring of an account is done at a
borrower level.
Further to the provisions required to be held according to the asset
classification status, provisions are held for individual country
exposures (other than for home country exposure). Countries are
categorised into risk categories as per Export Credit Guarantee
Corporation of India Ltd. (ÃECGCÃ) guidelines and provisioning is done
in respect of that country where the net funded exposure is one percent
or more of the BankÃs total assets.
In addition to the above, the Bank on prudential basis makes provisions
on advances or exposures which are not NPAs, but have reasons to
believe on the basis of the extant environment or specific information,
the 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 Schedule 5 - ÃOther LiabilitiesÃ.
3 Securitisation and Transfer of Assets
The Bank securitises out its receivables to Special Purpose Vehicles
(ÃSPVsÃ) in securitisation transactions. Such securitised-out
receivables are de-recognised in the balance sheet when they are sold
(true sale criteria being fully met with) and consideration is received
by the Bank. Sales / transfers that do not meet these criteria for
surrender of control are accounted for as secured borrowings.
In respect of receivable pools securitised-out, the Bank provides
liquidity and credit enhancements, as specified by the rating agencies,
in the form of cash collaterals / guarantees and / or by subordination
of cash flows etc., to senior Pass Through Certificates (ÃPTCsÃ). The
Bank also acts as a servicing agent for receivable pools
securitised-out.
The RBI issued guidelines on securitization of standard assets vide its
circular dated February 1, 2006 under reference no. DBOD No.
BP.BC.60/21.04.048/2005-06. Pursuant to these guidelines, the Bank
amortizes any profit / premium arising on account of sale of
receivables over the life of the securities sold out while any loss
arising on account of sale of receivables is recognized in the Profit
and Loss Account for the period in which the sale occurs.
The Bank also enters into securitised-out transactions through the
direct assignment route, which are similar to asset-backed
securitisation transactions through the SPV route, except that such
portfolios of receivables are assigned directly to the purchaser and
are not represented by PTCs. The Bank amortizes any profit / premium
arising on account of sale of receivables through the direct assignment
route over the tenure of the loans sold out while any loss arising on
account of sale of receivables is recognized in the Profit and Loss
Account for the period in which the sale occurs.
In accordance with RBI guidelines on sale of non performing advances if
the sale is at a price below the net book value (i.e., book value less
provisions held), the shortfall is debited to the Profit and Loss
Account. If the sale is for a value higher than the net book value, the
excess provision is not reversed but is utilised to meet the shortfall
/ loss on account of sale of other non performing advances.
The Bank also invests in PTCs and buys loans through the direct
assignment route. These are accounted for at the deal value.
4 Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation as
adjusted for impairment, if any. Cost includes cost of purchase and all
expenditure like site preparation, installation costs and professional
fees incurred on the asset before it is ready to use. Subsequent
expenditure incurred on assets put to use is capitalized only when it
increases the future benefit / functioning capability from / of such
assets.
Depreciation is charged over the estimated useful life of the fixed
asset on a straight-line basis. The rates of depreciation for certain
key fixed assets, which are not lower than the rates prescribed in
Schedule XIV of the Companies Act, 1956 are given below :
æ Owned Premises at 1.63% per annum
æ Improvements to lease hold premises are charged off over the
remaining primary period of lease
æ VSATs at 10% per annum
æ ATMs at 10% per annum
æ Office equipments at 16.21% per annum
æ Computers at 33.33% per annum
æ Motor cars at 25% per annum
æ Software and System development expenditure at 20% per annum
æ Assets at residences of executives of the Bank at 25% per annum
æ Items (excluding staff assets) costing less than - 5,000 and point of
sale terminals are fully depreciated in the year of purchase
æ All other assets are depreciated as per the rates specified in
Schedule XIV of the Companies Act, 1956.
For assets purchased and sold during the year, depreciation is provided
on pro rata basis by the Bank.
The Bank undertakes assessment of the useful life of an asset at
periodic intervals taking into account changes in environment, changes
in technology, the utility and efficacy of the asset in use, etc.
Whenever there is a revision of the estimated useful life of an asset,
the unamortized depreciable amount is charged over the revised
remaining useful life of the said asset.
5 Impairment of Assets
The Bank assesses at each balance sheet date whether there is any
indication that an asset may be impaired. Impairment loss, if any, is
provided in the Profit and Loss Account to the extent the carrying
amount of assets exceeds their estimated recoverable amount.
6 Transactions involving Foreign Exchange
Foreign currency income and expenditure items of domestic operations
are translated at the exchange rates prevailing on the date of the
transaction, and income and expenditure items of integral foreign
operations (representative offices) are translated at the weekly
average closing rates and non-integral foreign operations (foreign
branches) are translated at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign
operations are translated at the closing exchange rates notified by
Foreign Exchange Dealersà Association of India (ÃFEDAIÃ) at the balance
sheet date and the resulting net valuation profit or loss arising due
to a net open position in any foreign currency is included in the
Profit and Loss Account.
Both monetary and non-monetary foreign currency assets and liabilities
of non integral foreign operations are translated at closing exchange
rates notified by FEDAI at the balance sheet date and the resulting
profit / loss from exchange differences are accumulated in the foreign
currency translation account until the disposal of the net investment
in the non-integral foreign operations.
Foreign exchange spot and forward contracts outstanding as at the
balance sheet date and held for trading, are revalued at the closing
spot and forward rates respectively as notified by FEDAI and at
interpolated rates for contracts of interim maturities. The contracts
for longer maturities i.e. greater than one year are revalued using
MIFOR and USD LIBOR rates for USD-INR currency pair. For other currency
pairs, the forward points (as published by FEDAI) are extrapolated. The
resulting forward valuation profit or loss is included in the Profit
and Loss Account.
Foreign exchange forward contracts, which are not intended for trading
and are outstanding at the balance sheet date, are effectively valued
at the closing spot rate. The premia or discount arising at the
inception of such forward exchange contract is amortized as expense or
income over the life of the contract.
Currency futures contracts are daily marked to market using daily
settlement price on a trading day, which is the closing price of the
respective futures contracts on that day. While the daily settlement
price is computed on the basis of the last half an hour weighted
average price of such contract, the final settlement price is taken as
the RBI reference rate on the last trading day of the futures contract
or as may be specified by the relevant authority from time to time. All
open positions are marked to market based on the settlement price and
the resultant marked to market profit / loss is daily settled with the
exchange.
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 at the Balance Sheet date.
7 Derivative Contracts
The Bank recognizes all derivative contracts (other than those
designated as hedges) at the fair value, on the date on which the
derivative contracts are entered into and are re-measured at fair value
as at the balance sheet or reporting dates. Derivatives are classified
as assets when the net fair value is positive (positive marked to
market value) or as liabilities when the net fair value is negative
(negative marked to market value). Changes in the fair value of
derivatives other than those designated as hedges are included in the
Profit and Loss Account.
Derivative contracts designated as hedges are not marked to market
unless their underlying is marked to market. In respect of derivative
contracts that are marked to market, changes in the market value are
recognized in the Profit and Loss Account in the relevant period. Gains
or losses arising from hedge ineffectiveness, if any, are recognised in
the Profit and Loss Account.
Contingent Liabilities on account of derivative contracts denominated
in foreign currencies are reported at closing rates of exchange
notified by FEDAI at the Balance Sheet date.
8 Revenue and Expense Recognition
Interest income is recognised in the Profit and Loss Account on an
accrual basis, except in the case of non-performing assets where it is
recognized upon realization as per RBI norms.
Interest income is net of commission paid to sales agents (net of non
volume based subvented income from dealers, agents and manufacturers) Ã
(hereafter called Ãnet commissionÃ) for originating fixed tenor retail
loans. Net commission paid to sales agents for originating other retail
loans is expensed in the year in which it is incurred.
Interest income on investments in PTCs and loans bought out through the
direct assignment route is recognised at their effective interest rate.
Income on non-coupon bearing discounted instruments and instruments
which carry a premia on redemption is recognised over the tenor of the
instrument on a constant effective yield basis.
Dividend on equity shares, preference shares and on mutual fund units
is recognised as income when the right to receive the dividend is
established.
Guarantee commission, commission on Letter of Credit, annual locker
rent fees and annual fees for credit cards are recognised on a straight
line basis over the period of contract. Other fees and commission
income is recognised when due, except in cases where the Bank is
uncertain of ultimate collection.
9 Employee Benefits
Employee Stock Option Scheme (ESOS)
The Employee Stock Option Scheme (Ãthe SchemeÃ) provides for the grant
of equity shares of the Bank to its employees. The Scheme provides that
employees are granted an option to acquire equity shares of the Bank
that vests in a graded manner. The options may be exercised within a
specified period. The Bank follows the intrinsic value method to
account for its stock-based employee compensation plans. Compensation
cost is measured by the excess, if any, of the fair market price of the
underlying stock over the exercise price on the grant date as
determined under the option plan. Compensation cost, if any is
amortised over the vesting period.
Gratuity
The Bank provides for gratuity to all employees. The benefit is in the
form of lump sum payments to vested employees on resignation,
retirement, death while in employment or on termination of employment
of an amount equivalent to 15 days basic salary payable for each
completed year of service. Vesting occurs upon completion of five years
of service. The Bank makes contributions to funds administered by
trustees and managed by insurance companies for amounts notified by the
said insurance companies. In respect of erstwhile Lord Krishna Bank
(ÃeLKBÃ) employees, the Bank makes contribution to a fund set up by
eLKB and administered by the board of trustees. The defined gratuity
benefit plans are valued by an independent actuary as at the balance
sheet date using the projected unit credit method as per the
requirement of AS-15 (Revised 2005), Employee Benefits, to determine
the present value of the defined benefit obligation and the related
service costs. Under this method, the determination is based on
actuarial calculations, which include assumptions about demographics,
early retirement, salary increases and interest rates. Actuarial gain
or loss is recognized in the Profit and Loss Account.
Superannuation
Employees of the Bank, above a prescribed grade, are entitled to
receive retirement benefits under the BankÃs Superannuation Fund. The
Bank contributes a sum equivalent to 13% of the employeeÃs eligible
annual basic salary (15% for the Managing Director, Executive Directors
and for certain eligible erstwhile Centurion Bank of Punjab (ÃeCBoPÃ)
staff) to insurance companies, which administer the fund. The Bank has
no liability for future superannuation fund benefits other than its
contribution, and recognizes such contributions as an expense in the
year incurred, as such contribution is in the nature of defined
contribution.
Provident fund
In accordance with law, all employees of the Bank are entitled to
receive benefits under the provident fund. The Bank contributes an
amount, on a monthly basis, at a determined rate (currently 12% of
employeeÃs basic salary). Of this, the Bank contributes an amount of
8.33% of employeeÃs basic salary upto a maximum salary level of Rs.
6,500/- per month to the Pension Scheme administered by the Regional
Provident Fund Commissioner (ÃRPFCÃ) The balance amount is contributed
to a fund set up by the Bank and administered by a board of trustees.
The Bank has no liability for future provident fund benefits other than
its contribution. In respect of eCBoP employees, employerÃs and
employeeÃs share of contribution to Provident Fund till March 2009, was
administered by RPFC and from April 2009 onwards, the same is
transferred to fund set up by the Bank and administered by a board of
trustees. In respect of eLKB employees, the Bank contributes to a fund
set up by eLKB and administered by the board of trustees. The Bank
recognizes such contributions as an expense in the year incurred.
Interest payable to the members of the trust shall not be lower than
the statutory rate of interest declared by the Central government under
the Employees Provident Funds and Miscellaneous Provisions Act 1952 and
shortfall, if any, shall be made good by the Bank. The guidance note on
implementing AS-15 (revised 2005), Employee Benefits, states that
benefits involving employer established provident funds, which requires
interest shortfalls to be provided, are to be considered as defined
benefit plans. Pending the issuance of the guidance note in this
respect by the Actuary Society of India, the BankÃs consulting actuary
has expressed an inability to reliably measure the provident fund
liabilities. Accordingly the Bank is unable to exhibit the related
information.
The overseas branches makes contributions to the relevant government
scheme calculated as a percentage of the employeesà salaries. The
BankÃs obligations are limited to these contributions, which are
expensed when due, as such contribution is in the nature of defined
contribution.
Leave Encashment / Compensated Absences
The Bank does not have a policy of encashing unavailed leave for its
employees, except for certain eLKB employees under Indian BanksÃ
Association (ÃIBAÃ) structure. The Bank provides for leave encashment /
compensated absences based on an independent actuarial valuation at the
balance sheet date, which includes assumptions about demographics,
early retirement, salary increases, interest rates and leave
utilisation.
Pension
In respect of pension payable to certain eLKB employees under IBA
structure, which is a defined benefit scheme, the Bank contributes 10%
of basic salary to a pension fund set up by the Bank and administered
by the board of trustees and balance amount is provided based on
actuarial valuation at the balance sheet date conducted by an
independent actuary.
In respect of employees who have moved to a Cost to Company (ÃCTCÃ)
driven compensation structure and have completed services up to 15
years as on the date of movement to CTC structure, contribution made
till the date of movement to CTC structure and with additional one-time
contribution of 10% of Bank contribution accumulation as on the date of
movement to CTC, made for employees (who have completed more than 10
years but less than 15 years) will be maintained as a fund and will be
converted into annuity on separation after a lock-in-period of two
years. Hence for this category of employees, liability stands frozen
and no additional provision would be required except for interest at
par as applicable to Provident Fund, which has been provided for. In
respect of the employees who accepted the offer and have completed
services for more than 15 years, pension would be paid on separation
based on salary applicable as on date of movement to CTC and provision
is made based on actuarial valuation at the balance sheet date
conducted by an independent actuary.
10 Debit and Credit Cards Reward Points
The Bank estimates the probable redemption of debit and credit card
reward points and cost per point using an actuarial method by employing
an independent actuary. Provision for the said reward points is then
made based on the actuarial valuation report as furnished by the said
independent actuary.
11 Bullion
The Bank imports bullion including precious metal bars on a consignment
basis for selling to its wholesale and retail customers. The imports
are typically on a back-to-back basis and are priced to the customer
based on an estimated price quoted by the supplier. The Bank earns a
fee on such wholesale bullion transactions. The fee is classified under
commission income.
The Bank also sells bullion to its retail customers. The difference
between the sale price to customers and actual price quoted by supplier
is also reflected under commission income.
The Bank also borrows and lends gold, which is treated as borrowing /
lending as the case may be with the interest paid / received classified
as interest expense / income.
12 Lease Accounting
Lease payments including cost escalation for assets taken on operating
lease are recognized in the Profit and Loss Account over the lease term
in accordance with the AS-19, Leases, issued by the ICAI.
13 Income Tax
Income tax expense comprises current tax provision (i.e. the amount of
tax for the period determined in accordance with the Income Tax Act,
1961 and the rules framed there under) and the net change in the
deferred tax asset or liability in the year. Deferred tax assets and
liabilities are recognised for the future tax consequences of timing
differences between the carrying values of assets and liabilities and
their respective tax bases, and operating loss carry forwards. Deferred
tax assets and liabilities are measured using the enacted or
substantively enacted tax rates at the balance sheet date.
Deferred tax assets are recognized only to the extent there is
reasonable certainty that the assets can be realized in future. In case
of unabsorbed depreciation or carried forward loss under taxation laws,
deferred tax assets are recognized only if there is virtual certainty
of realization of such assets. Deferred tax assets are reviewed at each
balance sheet date and appropriately adjusted to reflect the amount
that is reasonably / virtually certain to be realized.
14 Earnings Per Share
The Bank reports basic and diluted earnings per equity share in
accordance with AS-20, Earnings Per Share, issued by the ICAI. Basic
earnings per equity share has been computed by dividing net profit for
the year attributable to equity shareholders by the weighted average
number of equity shares outstanding for the period. 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 year. Diluted earnings per equity share is computed using
the weighted average number of equity shares and dilutive potential
equity shares outstanding during the period except where the results
are anti-dilutive.
15 Segment Information - Basis of preparation
The segmental classification to the respective segments conforms to the
guidelines issued by RBI vide DBOD. No. BP.BC.81/21.01.018/2006-07
dated April 18, 2007. Business Segments have been identified and
reported taking into account, the target customer profile, the nature
of products and services, the differing risks and returns, the
organization structure, the internal business reporting system and the
guidelines prescribed by RBI. The Bank operates in the following
segments :
(a) Treasury
The treasury segment primarily consists of net interest earnings from
the BankÃs investments portfolio, money market borrowing and lending,
gains or losses on investment operations and on account of trading in
foreign exchange and derivative contracts.
(b) Retail Banking
The retail banking segment serves retail customers through a branch
network and other delivery channels.
This segment raises deposits from customers and makes loans and
provides other services with the help of specialist product groups to
such customers. Exposures are classified under retail banking taking
into account the status of the borrower (orientation criterion), the
nature of product, granularity of the exposure and the quantum thereof.
Revenues of the retail banking segment are derived from interest earned
on retail loans, net of commission (net of subvention received) paid to
sales agents and interest earned from other segments for surplus funds
placed with those segments, fees from services rendered, foreign
exchange earnings on retail products etc. Expenses of this segment
primarily comprise interest expense on deposits, infrastructure and
premises expenses for operating the branch network and other delivery
channels, personnel costs, other direct overheads and allocated
expenses of specialist product groups, processing units and support
groups.
(c) Wholesale Banking
The wholesale banking segment provides loans, non-fund facilities and
transaction services to large corporates, emerging corporates, public
sector units, government bodies, financial institutions and medium
scale enterprises. Revenues of the wholesale banking segment consist
of interest earned on loans made to customers, interest earned on the
cash float arising from transaction services, fees from such
transaction services, earnings from trade services and other non-fund
facilities and also earnings from foreign exchange and derivatives
transactions on behalf of customers. The principal expenses of the
segment consist of interest expense on funds borrowed from external
sources and other internal segments, premises expenses, personnel
costs, other direct overheads and allocated expenses of delivery
channels, specialist product groups, processing units and support
groups.
(d) Other Banking Business
This segment includes income from para banking activities such as
credit cards, debit cards, third party product distribution, primary
dealership business and the associated costs.
(e) Unallocated
All items which are reckoned at an enterprise level are classified
under this segment. This includes capital and reserves, debt classified
as Tier I or Tier II capital, Employee Stock Options (Grants)
Outstanding and other unallocable assets and liabilities.
Segment revenue includes earnings from external customers plus earnings
from funds transferred to other segments. Segment result includes
revenue less interest expense less operating expense and provisions, if
any, for that segment. Segment-wise income and expenses include certain
allocations. Interest income is charged by a segment that provides
funding to another segment, based on yields benchmarked to an
internally approved yield curve or at a certain agreed transfer price
rate. Transaction charges are levied by the retail-banking segment to
the wholesale banking segment for the use by its customers of the
retail banking segmentÃs branch network or other delivery channels.
Such transaction costs are determined on a cost plus basis. Segment
capital employed represents the net assets in that segment.
Geographic Segments
Since the Bank does not have material earnings emanating outside India,
the Bank is considered to operate in only the domestic segment.
16 Accounting for Provisions, Contingent Liabilities and Contingent
Assets
In accordance with AS-29, Provisions, Contingent Liabilities and
Contingent Assets, issued by the ICAI, the Bank recognises provisions
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.
Provisions are determined based on management estimate required to
settle the obligation at the balance sheet date, supplemented by
experience of similar transactions. These are reviewed at each balance
sheet date and adjusted to reflect the current management estimates. In
cases where the available information indicates that the loss on the
contingency is reasonably possible but the amount of loss cannot be
reasonably estimated, a disclosure is made in the financial statements.
Contingent Assets, if any, are not recognised in the financial
statements since this may result in the recognition of income that may
never be realized.
17 Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with RBI,
balances with other banks and money at call and short notice.
Mar 31, 2010
A BASIS OF PREPARATION
The financial statements have been prepared and presented under the
historical cost convention and accrual basis of accounting, unless
otherwise stated and are in accordance with Generally Accepted
Accounting Principles, statutory requirements prescribed under the
Banking Regulation Act 1949, circulars and guidelines issued by the
Reserve Bank of India (RBI) from time to time, Accounting Standards
(AS) issued by the Institute of Chartered Accountants of India
(ICAI) and notified by the Companies Accounting Standard Rules, 2006
to the extent applicable and current practices prevailing within the
banking industry in India.
Use of Estimates :
The preparation of financial statements requires the management to make
estimates and assumptions considered in the reported amounts of assets
and liabilities (including contingent liabilities) as of the date of
the financial statements and the reported income and expense for the
reporting period. Management believes that the estimates used in the
preparation of the financial statements are prudent and reasonable.
Future results could differ from these estimates. Any revision in the
accounting estimates is recognized prospectively in the current and
future period.
C PRINCIPAL ACCOUNTING POLICIES
1 Investments
Classification
In accordance with the Reserve Bank of India guidelines, Investments
are classified on the date of purchase into ÃHeld for Tradingà (HFT),
ÃAvailable for Saleà (AFS) and ÃHeld to Maturityà (HTM) categories
(hereinafter called ÃcategoriesÃ). 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 ÃgroupsÃ) - Government Securities, Other Approved
Securities, Shares, Debentures and Bonds, Investments in Subsidiaries /
Joint ventures and Other Investments.
Basis of Classification :
Investments that are held principally for resale within 90 days from
the date of purchase are classified under ÃHeld for Tradingà category.
Investments which the Bank intends to hold till maturity, are
classified as HTM securities. Investments in the equity of subsidiaries
are categorized as ÃHeld to Maturityà in accordance with RBI
guidelines.
Investments which are not classified in the above categories, are
classified under ÃAvailable for Saleà category.
Acquisition Cost :
In determining acquisition cost of an investment :
- Brokerage, Commission, etc. paid at the time of acquisition, are
charged to revenue.
- Broken period interest on debt instruments is treated as a revenue
item.
- Cost of investments is based on the weighted average cost method.
Disposal of Investments :
Profit / Loss on sale of investments under the aforesaid three
categories are taken to the Profit and Loss account. The profit from
sale of investment under Held to Maturity category, net of taxes and
transfers to statutory reserve is appropriated to ÃCapital ReserveÃ.
Valuation :
Investments classified under Available for Sale category and Held for
Trading category are marked to market as per the RBI guidelines. Net
depreciation, if any, in any of the six groups, is charged to the
Profit and Loss account. The net appreciation, if any, in any of the
six groups is not recognised except to the extent of depreciation
already provided. The book value of individual securities is not
changed after the valuation of investments.
Investments classified under Held to Maturity category are carried at
their acquisition cost and not marked to market. Any premium on
acquisition is amortized over the remaining maturity period of the
security on a constant yield to maturity basis. Such amortization of
premium is adjusted against interest income under the head ÃIncome from
investmentsà as per RBI guidelines. Any diminution, other than
temporary, in the value of investments in subsidiaries / joint ventures
is provided for.
Non-performing investments are identified and depreciation/provision is
made thereon based on the RBI guidelines. The depreciation / provision
is not set off against the appreciation in respect of other performing
securities. Interest on non-performing investments is not recognised in
the Profit or Loss Account until received.
Repo and Reverse Repo Transactions :
In a repo transaction, the bank borrows monies against pledge of
securities. The book value of the securities pledged is credited to the
investment account. Borrowing costs on repo transactions are accounted
for as interest expense. In respect of repo transactions outstanding at
the balance sheet date, the difference between the sale price and book
value, if the former is lower than the latter, is provided as a loss in
the income statement.
In a reverse repo transaction, the bank lends monies against incoming
pledge of securities. The securities purchased are debited to the
investment account at the market price on the date of the transaction.
Revenues thereon are accounted as interest income.
In respect of repo transactions under Liquidity Adjustment Facility
with RBI (LAF), monies borrowed from RBI are 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, monies paid to RBI are debited to investment
account and reversed on maturity of the transaction. Revenues thereon
are accounted as interest income.
2 Advances
Advances are classified as performing and non-performing based on the
Reserve Bank of India guidelines and are stated net of bills
rediscounted, specific provisions, floating provisions, interest in
suspense for non-performing advances and claims received from Export
Credit Guarantee Corporation. Provisions in lieu of diminution in the
fair value of restructured assets which was hitherto included under
Other Liabilities is netted from Advances as on March 31, 2010 in
accordance with revised RBI guidelines. Interest on non-performing
advances is transferred to an interest suspense account and not
recognised in the Profit and Loss Account until received.
Specific loan loss provisions in respect of non-performing advances
(NPAs) are made based on managementÃs assessment of the degree of
impairment of wholesale and retail advances, subject to the minimum
provisioning level prescribed in the RBI guidelines. The specific
provision levels for retail non-performing assets are also based on the
nature of product and delinquency levels.
The Bank maintains general provision for standard assets including
credit exposures computed as per the current marked to market value of
interest rate and foreign exchange derivative contracts and gold at
levels stipulated by RBI from time to time. Provision for standard
assets is included under Other Liabilities. Provisions made in excess
of these regulatory levels or provisions which are not made with
respect to specific non-performing assets are categorised as floating
provisions. Creation of further floating provisions are considered by
the Bank up to a level approved by the Board of Directors of the Bank.
Floating provisions are not reversed by credit to Profit and Loss
account and can be used only for contingencies under extraordinary
circumstances for making specific provisions in impaired accounts after
obtaining Board approval and with prior permission of RBI.
The Bank considers a restructured account as one where the Bank, for
economic or legal reasons relating to the borrowerÃs financial
difficulty, grants to the borrower concessions that the Bank would not
otherwise consider. Restructuring would normally involve modification
of terms of the advance / securities , which would generally include,
among others, alteration of repayment period / repayable amount / the
amount of installments / rate of interest (due to reasons other than
competitive reasons). Restructured accounts are reported as such by the
Bank only upon approval and implementation of the restructuring
package. Necessary provision for diminution in the fair value of a
restructured account is made. Restructuring is done at a borrower
level.
In addition to the provisions required according to the asset
classification status, provisioning is done for individual country
exposures (other than for home country exposure). Countries are
categorised into risk categories as per Export Credit Guarantee
Corporation of India Ltd. (ECGC) guidelines and provisioning is done in
respect of that country where the net funded exposure is one percent or
more of the BankÃs total assets.
3 Securitisation and Transfer of Assets
The Bank securitises out its receivables to Special Purpose Vehicles
(SPVs) in securitisation transactions. Such securitised-out receivables
are de-recognised in the balance sheet when they are sold (true sale
criteria being fully met with) and consideration is received by the
Bank. Sales/transfers that do not meet these criteria for surrender of
control are accounted for as secured borrowings.
In respect of receivable pools securitised-out, the Bank provides
liquidity and credit enhancements, as specified by the rating agencies,
in the form of cash collaterals / guarantees and / or by subordination
of cash flows etc., to senior Pass Through Certificates (PTCs).
The Bank also enters into securitised-out transactions through the
direct assignment route, which are similar to asset-backed
securitisation transactions through the SPV route, except that such
portfolios of receivables are assigned directly to the purchaser and
are not represented by pass-through certificates.
The RBI issued guidelines on securitization of standard assets vide its
circular dated February 1, 2006 under reference no. DBOD
No.BP.BC.60/21.04.048/2005-06. Pursuant to these guidelines, the Bank
amortizes any profit / premium arising on account of sale of
receivables over the life of the securities sold out while any loss
arising on account of sale of receivables is recognized in the Profit
and Loss Account for the period in which the sale occurs. Any credit
enhancement on assets sold are reduced from tier I & tier II capital as
prescribed in the guidelines. Prior to the issuance of the said
guidelines (i.e. in respect of sell-off transactions undertaken until
January 31, 2006), any gain or loss from the sale of receivables was
recognised in the period in which the sale occurred.
In accordance with RBI guidelines on sale of non performing advances if
the sale is at a price below the net book value (i.e., book value less
provisions held), the shortfall is debited to the Profit and Loss
Account. If the sale is for a value higher than the net book value, the
excess provision is not reversed but is utilised to meet the shortfall
/ loss on account of sale of other non performing advances.
The Bank also invests in Pass Through Certificates (PTCs) and buys
loans through the direct assignment route. These are accounted for at
the deal value.
4 Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation as
adjusted for impairment, if any. Cost includes cost of purchase and all
expenditure like site preparation, installation costs and professional
fees incurred on the asset before it is ready to use. Subsequent
expenditure incurred on assets put to use is capitalized only when it
increases the future benefit / functioning capability from / of such
assets.
Depreciation is charged over the estimated useful life of the fixed
asset on a straight-line basis. The rates of depreciation for certain
key fixed assets, which are not lower than the rates prescribed in
Schedule XIV of the Companies Act, 1956 are given below :
æ Owned Premises at 1.63% per annum.
æ Improvements to lease hold premises are charged off over the
remaining primary period of lease.
æ VSATs at 10% per annum
æ ATMs at 10% per annum
æ Office equipment at 16.21% per annum
æ Computers at 33.33% per annum
æ Motor cars at 25% per annum
æ Software and System development expenditure at 20% per annum
æ Point of sale terminals at 20% per annum
æ Assets at residences of executives of the Bank at 25% per annum
æ Items (excluding staff assets) costing less than Rs. 5,000/- are
fully depreciated in the year of purchase
æ All other assets are depreciated as per the rates specified in
Schedule XIV of the Companies Act, 1956.
For assets purchased and sold during the year, depreciation is provided
on pro rata basis by the Bank.
The Bank undertakes assessment of the useful life of an asset at
periodic intervals taking into account changes in environment, changes
in technology, the utility and efficacy of the asset in use etc.
Whenever there is a revision of the estimated useful life of an asset,
the unamortised depreciable amount will be charged over the revised
remaining useful life of the said asset.
5 Impairment of Assets
The Bank assesses at each balance sheet date whether there is any
indication that an asset may be impaired. Impairment loss, if any, is
provided in the Profit and Loss Account to the extent the carrying
amount of assets exceeds their estimated recoverable amount.
6 Transactions involving Foreign Exchange
Foreign currency income and expenditure items of domestic operations
are translated at the exchange rates prevailing on the date of the
transaction, and income and expenditure items of integral foreign
operations (representative offices) and non-integral foreign operations
(foreign branch) are translated at the monthly average closing rates.
Foreign currency monetary items of domestic and integral foreign
operations are translated at the closing exchange rates notified by
Foreign Exchange Dealersà Association of India (FEDAI) at the balance
sheet date and the resulting net valuation profit or loss arising due
to a net open position in any foreign currency is included in the
Profit and Loss Account.
Both monetary and non-monetary foreign currency assets and liabilities
of non integral foreign operations are translated at closing exchange
rates notified by FEDAI at the balance sheet date and the resulting
profit / loss from exchange differences are accumulated in the foreign
currency translation account until the disposal of the net investment
in the non-integral foreign operations.
Foreign exchange spot and forward contracts outstanding as at the
balance sheet date and held for trading, are revalued at the closing
spot and forward rates respectively notified by FEDAI and at
interpolated rates for contracts of interim maturities. The resulting
forward valuation profit or loss is included in the Profit and Loss
Account.
Foreign exchange forward contracts, which are not intended for trading
and are outstanding at the balance sheet date, are effectively valued
at the closing spot rate. The premia or discount arising at the
inception of such a forward exchange contract is amortized as expense
or income over the life of the contract.
Contingent Liabilities on account of foreign exchange contracts,
guarantees, letters of credit, acceptances and endorsements are
reported at closing rates of exchange notified by FEDAI at the Balance
Sheet date.
7 Lease Accounting
Lease payments including cost escalation for assets taken on operating
lease are recognized in the Profit and Loss Account over the lease term
in accordance with the AS-19, Leases, issued by the Institute of
Chartered Accountants of India.
8 Employee Benefits
Employee Stock Option Scheme (ESOS)
The Employee Stock Option Scheme (the Scheme) provides for the grant of
equity shares of the Bank to its employees. The Scheme provides that
employees are granted an option to acquire equity shares of the Bank
that vests in a graded manner. The options may be exercised within a
specified period. The Bank follows the intrinsic value method to
account for its stock-based employees compensation plans. Compensation
cost is measured by the excess, if any, of the fair market price of the
underlying stock over the exercise price on the grant date as
determined under the option plan.
Gratuity
The Bank provides for gratuity to all employees. The benefit is in the
form of lumpsum payments to vested employees on resignation,
retirement, death while in employment or on termination of employment
of an amount equivalent to 15 days basic salary payable for each
completed year of service. Vesting occurs upon completion of five years
of service. The Bank makes contributions to funds administered by
trustees and managed by insurance companies for amounts notified by the
said insurance companies and in respect of erstwhile Lord Krishna Bank
(eLKB) employees, the Bank makes contribution to a fund set up by eLKB
and administered by the board of trustees. The defined gratuity benefit
plans are valued by an independent actuary as at the balance sheet date
using the projected unit credit method to determine the present value
of the defined benefit obligation and the related service costs. Under
this method, the determination is based on actuarial calculations,
which include assumptions about demographics, early retirement, salary
increases and interest rates. Actuarial gain or loss is recognized in
the profit / loss account.
Superannuation
Employees of the Bank, above a prescribed grade, are entitled to
receive retirement benefits under the BankÃs Superannuation Fund. The
Bank contributes a sum equivalent to 13% of the employeeÃs eligible
annual basic salary (15% for the Managing Director, Executive Directors
and for certain eligible eCBoP staff) to insurance companies, which
administer the fund. The Bank has no liability for future
superannuation fund benefits other than its contribution, and
recognizes such contributions as an expense in the year incurred, as
such contribution is in the nature of defined contribution.
Provident fund
In accordance with law, all employees of the Bank are entitled to
receive benefits under the provident fund. The Bank contributes an
amount, on a monthly basis, at a determined rate (currently 12% of
employeeÃs basic salary). Of this, the Bank contributes an amount of
8.33 % of employeeÃs basic salary upto a maximum salary level of Rs.
6500/- per month to the Pension Scheme administered by the Regional
Provident Fund Commissioner (RPFC) and the Bank has no liability for
future provident fund benefits other than its contribution. The balance
amount is contributed to a fund set up by the Bank and administered by
a board of trustees. In respect of eCBoP employees, employerÃs and
employeeÃs share of contribution to Provident Fund till March 2009, was
administered by RPFC and from April 2009 onwards, the same is
transferred to fund set up by the Bank and administered by a board of
trustees. In respect of eLKB employees, the Bank contributes to a fund
set up by eLKB and administered by the board of trustees. The Bank
recognizes such contributions as an expense in the year incurred.
Interest payable to the members of the trust shall not be lower than
the statutory rate of interest declared by the Central government under
the Employees Provident Funds and Miscellaneous Provisions Act 1952 and
shortfall, if any, shall be made good by the Bank. The guidance note on
implementing AS-15 (revised 2005), Employee Benefits, states that
benefits involving employer established provident funds, which requires
interest shortfalls to be provided, are to be considered as defined
benefit plans. Pending the issuance of the guidance note from the
Actuary Society of India, the BankÃs actuary has expressed an inability
to reliably measure provident fund liabilities. Accordingly the Bank is
unable to ascertain the related information.
The Bahrain Branch makes contributions to the relevant government
scheme calculated as a percentage of the employeesà salaries. The
Bahrain BranchÃs obligations are limited to these contributions, which
are expensed when due, as such contribution is in nature of defined
contribution.
Leave Encashment / Compensated Absences
The Bank does not have a policy of encashing unavailed leave for its
employees, except for certain eLKB employees under IBA structure. The
Bank provides for leave encashment / compensated absences based on an
independent actuarial valuation at the balance sheet date, which
includes assumptions about demographics, early retirement, salary
increases, interest rates and leave utilisation.
Pension
In respect of pension payable to certain eLKB employees under IBA
structure, which is a defined benefit scheme, the Bank contributes 10%
of basic salary to a pension fund set up by the Bank and administered
by the board of trustees and balance amount is provided based on
actuarial valuation at the balance sheet date conducted by an
independent actuary. In respect of employees who have moved to a cost
to company (CTC) driven compensation structure and have completed
services up to 15 years as on the date of movement to CTC structure,
contribution made till the date of movement to CTC structure and with
additional one-time contribution of 10% of Bank contribution
accumulation as on date of movement to CTC, made for employees (who
have completed more than 10 years but less than 15 years) will be
maintained as a fund and will be converted into annuity on separation
after a lock-in-period of two years. Hence for this category of
employees, liability stands frozen and no additional provision would be
required except for interest at par as applicable to PF, which has been
provided for. In respect of the employees who accepted the offer and
have completed services for more than 15 years, pension would be paid
on separation based on salary applicable as on date of movement to CTC
and provision is made based on actuarial valuation at the balance sheet
date conducted by an independent actuary.
9 Revenue and Expense Recognition
Interest income is recognised in the Profit and Loss Account on an
accrual basis, except in the case of non-performing assets where it is
recognized upon realization as per RBI norms.
Income on non-coupon bearing discounted instruments and instruments
which carry a premia on redemption is recognised over the tenor of the
instrument on a constant yield basis.
Dividend on equity shares, preference shares and on mutual fund units
is recognised as income when the right to receive the dividend is
established.
Interest income is net of commission paid to sales agents (net of non
volume based subvented income from dealers, agents and
manufacturers)-(hereafter called Ãnet commissionÃ) for originating
fixed tenor retail loans.
Interest income on investments in Pass Through Certificates (PTCs) and
loans bought out through the direct assignment route is recognised at
their effective interest rate.
Net commission paid to sales agents for originating retail loans is
expensed in the year in which it is incurred.
Fees and commission income is recognised when due, except for guarantee
commission and annual fees for credit cards which are recognised on a
straight line basis over the period of contract.
10 Credit Cards Reward Points
The Bank estimates the probable redemption of credit card reward points
and cost per point using an actuarial method by employing an
independent actuary. Provision for the said reward points is then made
based on the actuarial valuation report as furnished by the said
independent actuary.
11 Income Tax
Income tax expense comprises current tax provision and the net change
in the deferred tax asset or liability in the year. Deferred tax assets
and liabilities are recognised for the future tax consequences of
timing differences between the carrying values of assets and
liabilities and their respective tax bases, and operating loss carry
forwards. Deferred tax assets and liabilities are measured using the
enacted or substantially enacted tax rates at the balance sheet date.
Deferred tax assets are recognized only to the extent there is
reasonable certainty that the assets can be realized in future. In case
of unabsorbed depreciation or carried forward loss under taxation laws,
deferred tax assets are recognized only if there is virtual certainty
of realization of such assets. Deferred tax assets are reviewed at each
balance sheet date and appropriately adjusted to reflect the amount
that is reasonably / virtually certain to be realized.
Until the previous year, income tax expense included provision for
fringe benefit tax (FBT) which was made on the basis of applicable FBT
on the taxable value of chargeable expenditure of the Bank as was
prescribed under the Income Tax Act, 1961 and rules framed there under.
With effect from the current year, FBT has been abolished.
12 Derivative Contracts
The Bank recognizes all derivative contracts at their fair values, on
the dates on which the derivative contracts are entered into and are
re-measured at fair value as at the balance sheet or reporting dates.
Derivatives are classified as assets when the net fair value is
positive (Positive marked to market value) or as liabilities when the
net fair value is negative (Negative marked to market value). Changes
in the fair value of derivatives other than those designated as hedges
are included in the Profit and Loss Account.
Derivative contracts designated as hedges are not marked to market
unless their underlying is marked to market. In respect of derivative
contracts that are marked to market, changes in the market value are
recognized in the Profit and Loss Account in the relevant period. Gains
or losses arising from hedge ineffectiveness, if any, are recognised in
the Profit and Loss Account.
Contingent Liabilities on account of derivative contracts denominated
in foreign currencies are reported at closing rates of exchange
notified by FEDAI at the Balance Sheet date.
13 Earnings Per Share
The Bank reports basic and diluted earnings per equity share in
accordance with AS-20, Earnings Per Share, issued by the Institute of
Chartered Accountants of India. Basic earnings per equity share has
been computed by dividing net profit for the year by the weighted
average number of equity shares outstanding for the period. 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 year. Diluted earnings per equity share has been
computed using the weighted average number of equity shares and
dilutive potential equity shares outstanding during the period except
where the results are anti-dilutive.
14 Segment Information à Basis of preparation
The classification of exposures to the respective segments conforms to
the guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07
dated April 18, 2007. Business Segments have been identified and
reported taking into account, the target customer profile, the nature
of products and services, the differing risks and returns, the
organization structure, the internal business reporting system and the
guidelines prescribed by RBI. The Bank operates in the following
segments :
(a) Treasury
The treasury segment primarily consists of net interest earnings on
investments portfolio of the bank, gains or losses on investment
operations and gains or losses on account of trading in foreign
exchange and derivative contracts.
(b) Retail Banking
The retail banking segment serves retail customers through a branch
network and other delivery channels. This segment raises deposits from
customers and makes loans and provides other services with the help of
specialist product groups to such customers. Exposures are classified
under retail banking taking into account the status of the borrower
(orientation criterion), the nature of product, granularity of the
exposure and the quantum thereof.
Revenues of the retail banking segment are derived from interest earned
on retail loans, net of commission (net of
subvention received) paid to sales agents and interest earned from
other segments for surplus funds placed with those segments, fees from
services rendered, foreign exchange earnings on retail products etc.
Expenses of this segment primarily comprise interest expense on
deposits, infrastructure and premises expenses for operating the branch
network and other delivery channels, personnel costs, other direct
overheads and allocated expenses of specialist product groups,
processing units and support groups.
(c) Wholesale Banking
The wholesale banking segment provides loans, non-fund facilities and
transaction services to large corporate, emerging corporate, public
sector units, government bodies, financial institutions and medium
scale enterprises. Revenues of the wholesale banking segment consist of
interest earned on loans made to customers, interest earned on the cash
float arising from transaction services, fees from such transaction
services, earnings from trade services and other non-fund facilities
and also earnings from foreign exchange and derivatives transactions on
behalf of customers. The principal expenses of the segment consist of
interest expense on funds borrowed from external sources and other
internal segments, premises expenses, personnel costs, other direct
overheads and allocated expenses of delivery channels, specialist
product groups, processing units and support groups .
(d) Other Banking Business
This segment includes income from para banking activities such as
credit cards, debit cards, third party product distribution, primary
dealership business and the associated costs.
(e) Unallocated
All items which are reckoned at an enterprise level are classified
under this segment. This includes capital and reserves, debt
classifying as Tier I or Tier II capital and other unallocable assets
and liabilities.
Segment revenue includes earnings from external customers plus earnings
from funds transferred to other segments. Segment result includes
revenue less interest expense less operating expense and provisions, if
any, for that segment. Segment-wise income and expenses include
certain allocations. Interest income is charged by a segment that
provides funding to another segment, based on yields benchmarked to an
internally approved yield curve or at a certain agreed transfer price
rate. Transaction charges are levied by the retail-banking segment to
the wholesale banking segment for the use by its customers of the
retail banking segmentÃs branch network or other delivery channels;
such transaction costs are determined on a cost plus basis. Segment
capital employed represents the net assets in that segment.
Geographic Segments
Since the Bank does not have material earnings emanating outside India,
the Bank is considered to operate in only the domestic segment.
15 Accounting for Provisions, Contingent Liabilities and Contingent
Assets
In accordance with AS 29, Provisions, Contingent Liabilities and
Contingent Assets, issued by the Institute of Chartered Accountants of
India, the Bank recognises provisions 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.
Provisions are determined based on management estimate required to
settle the obligation at the balance sheet date, supplemented by
experience of similar transactions. These are reviewed at each balance
sheet date and adjusted to reflect the current management estimates. In
cases where the available information indicates that the loss on the
contingency is reasonably possible but the amount of loss cannot be
reasonably estimated, a disclosure is made in the financial statements.
Contingent Assets, if any, are not recognised in the financial
statements since this may result in the recognition of income that may
never be realized.
16 Bullion
The Bank imports bullion including precious metal bars on a consignment
basis for selling to its wholesale and retail customers. The imports
are typically on a back-to-back basis and are priced to the customer
based on an estimated price quoted by the supplier. The Bank earns a
fee on such wholesale bullion transactions. The fee is classified under
commission income.
The Bank also sells bullion to its retail customers. The difference
between the sale price to customers and actual price quoted by supplier
is also reflected under commission income.
The Bank also borrows and lends gold, which is treated as borrowing /
lending as the case may be with the interest paid / received classified
as interest expense / income.
Disclaimer: This is 3rd Party content/feed, viewers are requested to use their discretion and conduct proper diligence before investing, GoodReturns does not take any liability on the genuineness and correctness of the information in this article