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 rebrsented by Pass Through Certificates (‘PTCs’), subject to the RBI brscribed 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. This amortisation is calculated as the maximum of either of the three parameters stated below:
i. The losses incurred on the portfolio, including marked to market losses in case of securitization 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
ii. The amount of unamortized 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
iii.The amount of unamortized cash profit at the beginning of the year divided by residual maturity of the securitization 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 / brmium 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 sbrad 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 brmium is amortised based on Effective Interest Rate (EIR) method.
4 Fixed assets and debrciation
Fixed assets are stated at cost less accumulated debrciation as adjusted for impairment, if any. Cost includes cost of purchase and all expenditure like site brparation, 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.
Debrciation 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:
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 equipment and installations 6 to 10 years 10 years
Office equipment 3 to 6 years 5 years
Computers 3 years 3 years
Modems, routers, switches, servers, network and related IT equipment 3 to 6 years 6 years
Motor cars 4 years 8 years Furniture and fittings 16 years 10 years
• Improvements to lease hold brmises are charged off over the remaining primary period of lease.
• Software and system development expenditure is debrciated over a period of 5 years.
• Point of sale terminals are fully debrciated in the year of purchase.
• For assets purchased and sold during the year, debrciation is provided on pro-rata basis by the Bank.
• Whenever there is a revision of the estimated useful life of an asset, the unamortised debrciable 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 brvailing on the date of the transaction. Income and expenditure items of integral foreign operations (rebrsentative 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, 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 brsent 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 brmia 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 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 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, brference 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 brceding the date of grant. Compensation cost, if any is amortised over the vesting period.
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, Employee Benefits, to determine the brsent 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.
Employees of the Bank, above a brscribed 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.
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 (‘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, 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 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.
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 liabilities on said reward points are made based on the actuarial valuation report as furnished by the said independent actuary and included in other liabilities.
The Bank imports bullion including brcious 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 paid to the 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, 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 debrciation 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 brsent 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 nonoccurrence of one or more uncertain future events not within the control of the Bank; or
• a brsent 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 brsent 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.
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 brsent 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
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, are recognised in the Statement of Profit and Loss.
Notes forming part of the financial statements for the year ended March 31, 2016
Amounts in notes forming part of the financial statements for the year ended March 31, 2016 are denominated in rupee crore to conform to extant RBI guidelines.
1 Change in classification
Pursuant to RBI circular dated July 16, 2015, deposits placed, with NABARD, SIDBI and NHB aggregating to Rs. 13,719.68 crore (brvious year: Rs. 14,818.19 crore), arising out of the shortfall in meeting the priority sector lending targets / sub-targets, have been included under ‘Other Assets’ and interest thereon aggregating to Rs. 861.15 crore (brvious year: Rs. 847.12 crore) under ‘Interest Earned - Others’. Hitherto, these were included under ‘Investments’ and ‘Interest Earned - Income on Investments’ respectively. Figures for the brvious year have been regrouped / reclassified to conform to current year’s classification. The above change in classification has no impact on the profit of the Bank for the years ended March 31, 2016 and March 31, 2015.
2 Other expenditure
Other expenditure includes outsourcing fees amounting to Rs. 764.76 crore (brvious year: Rs. 671.38 crore) and commission paid to sales agents amounting to Rs. 1,671.88 crore (brvious year: Rs. 1,305.11 crore), exceeding 1% of the total income of the Bank.
3 Penalties levied by the RBI
During the year ended March 31, 2016, RBI has not imposed any penalties on the Bank.
During the brvious year ended March 31, 2015, RBI levied on the Bank a penalty of Rs. 0.05 crore on the grounds that the Bank failed to exchange information about the conduct of a corporate borrower’s account with other banks at intervals as brscribed in the RBI guidelines on ‘Lending under Consortium Arrangement / Multiple Banking Arrangements’ and the same was paid by the Bank.
4 Disclosure of Letters of Comfort (LoC) issued by the Bank
The Bank has not issued any Letter of Comfort during the years ended March 31, 2016 and March 31, 2015.
5 Small and micro industries
Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases ofdelays in payments to micro and small enterprises or of interest payments due to delays in such payments.
6. Off –Balance Sheet SPVs
There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.
7 Credit default swaps
The Bank has not transacted in credit default swaps during the year ended March 31, 2016 (brvious year: Nil).
8 Investor education and protection fund
There has been no delay in transferring amounts, required to be transferred to the Investor Education and Protection Fund by the Bank.
9 Disclosure on remuneration to Non-Executive Directors
The Non-Executive Directors are paid remuneration by way of sitting fees for attending meetings of the Board and its committees. Sitting fees are paid at the rate of Rs. 100,000 per Board meeting and at the rate of Rs. 50,000 per meeting of the Board Committees. An amount of Rs. 1.33 crore was paid as sitting fees to the Non-Executive Directors during the year ended March 31, 2016 (brvious year: Rs. 0.76 crore).
In accordance with RBI guidelines, the Board of Directors has, subject to the approval of the shareholders at the ensuing Annual General Meeting, approved payment of profit related commission to all Non-Executive Directors at the rate of Rs. 10 lacs per annum per Director other than the Chairperson.
10 Comparative figures
Figures for the brvious year have been regrouped and reclassified wherever necessary to conform to the current year’s brsentation.
For and on behalf of the Board
Shyamala Gopinath Chairperson
Aditya Puri Managing Director
Paresh Sukthankar Deputy Managing Director
Kaizad Bharucha Executive Director
Sanjay Dongre Executive Vice President (Legal) & Company Secretary
Sashidhar Jagdishan Chief Financial Officer
Anami Roy Bobby Parikh Keki Mistry Malay Patel Partho Datta Renu Karnad Umesh Sarangi Directors
Mumbai, April 22, 2016