SCHEDULE 17: SIGNIFICANT ACCOUNTING POLICIES APPENDED TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2024
1 Corporate Information
Capital Small Finance Bank Limited ('the Bank') a banking company incorporated under The Companies Act, 1956, is engaged in providing a wide range of banking and financial services including retail & commercial banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949. The name of the Bank has been included in the Second Schedule to the Reserve Bank of India Act, 1934 vide Reserve Bank of India ('the RBI' or 'RBI') notification dated February 16, 2017. Headquartered in Jalandhar, Punjab. Capital Small Finance Bank began operations as India's first small finance bank (SFB) in April 2016 after conversion from Capital Local Area Bank. The Bank operates in India and does not have any branch outside India.
2 Basis of Preparation
The accompanying financial statements have been prepared under the historical cost convention and on accrual basis except where otherwise stated, and in compliance with the generally accepted accounting principles in India ("Indian GAAP") and in accordance with statutory requirements prescribed under the Banking Regulation Act 1949, circulars and guidelines issued by the RBI from time to time (RBI guidelines), Accounting Standards referred to in Section 133 of the Companies Act, 2013 (the Act) read with the Companies (Accounting Standards) Rules, 2021 to the extent applicable and practices prevailing within the banking industry in India. The financial statements are presented in Indian Rupees rounded off to the nearest thousands unless otherwise stated.
3 Use of Estimates
The preparation of financial statements in conformity with Indian GAAP requires management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) and the reported income and expenses during the year. The management believes that the estimates used in preparation of financial statements are prudent and reasonable. Actual results could differ from estimates and the differences between the actual results and the estimates are recognised prospectively in the year in which the results are known/ materialised.
4 Fixed Assets and Depreciation/Amortisation
4.1 Fixed assets are stated at cost, net of accumulated depreciation and accumulated impairment if any. The cost of an asset comprises its purchase price and any cost directly attributable to bringing the asset to its working condition and location for its intended use. Subsequent expenditure on fixed assets after its purchase is capitalised only if such expenditure results in an increase in the future benefits from such asset beyond its previously assessed standard of performance.
4.2 Depreciable amount for assets is the cost of an asset, or other amount substituted for cost, less its estimated residual value. Depreciation on tangible fixed assets has been provided on the straight-line method as per the useful life prescribed in Schedule II to the Companies Act, 2013. Leasehold improvements are amortised over the duration of the primary lease period or useful life whichever is less. Software and system development expenditure is amortised over a period of 5 years.
4.3 Intangible assets are amortised on a straight- line basis over their estimated useful life. The amortisation period is reviewed at the end of each financial year and the amortisation period is revised to reflect the changed pattern, if any.
4.4 The useful life of depreciation for key fixed assets is based on historic experience of the Bank, which is different from the useful life as prescribed in Schedule II of Companies Act, 2013 are as follows:
4.6 Assets purchased/sold during the year are depreciated on a pro-rata basis.
4.7 An item of fixed assets is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising on de-recognition is recognised in the Profit and Loss account.
4.8 Gains or losses arising from disposal or retirement of tangible fixed assets are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised on net basis, within "Other Income" as Profit/(Loss) on sale of fixed assets, as the case maybe, in the Profit and Loss account in the year of disposal or retirement.
4.9 Assets individually costing up to ' 5,000/- are depreciated fully in the year of acquisition. Further, profit on sale of premises by the Bank is appropriated to capital reserve, net of transfer to Statutory Reserve and taxes, in accordance with RBI guidelines.
5 Impairment of Assets
The carrying amount of assets is reviewed at the Balance Sheet date to determine if there are any indications of impairment based on internal / external factors. In case of impaired assets, the impairment loss i.e. the amount by which the carrying amount of the asset exceeds its recoverable value is charged to the Profit and Loss account to the extent the carrying amount of assets exceeds its estimated recoverable amount.
6 Investments
Classification and valuation of the Bank's investments are carried out in accordance with RBI guidelines which are as follows:
6.1 Categorisation of Investments
The Bank classifies its investment at the time of purchase into one of the following three categories:
• Held to Maturity (HTM) - Securities acquired with the intention to hold till maturity.
• Held for Trading (HFT) - Securities acquired with the intention to trade.
• Available for Sale (AFS) - Securities which do not fall within the above two categories.
6.2 Classification of Investments
For the purpose of disclosure in the Balance Sheet, investments in India are classified under six groups viz., (i) Government Securities, (ii) Other Approved Securities, (iii) Shares, (iv) Debentures and Bonds, (v) Investments in Subsidiaries and Joint Ventures and (vi) Other Investments.
Investments outside India are classified under three groups viz., (i) Government Securities (Including local authorities), (ii) Subsidiaries and/or Joint Ventures abroad and (iii) Other Investments.
6.3 Acquisition cost
6.3.1 Brokerage, commission, etc. pertaining to investments, paid at the time of acquisition is charged to the Profit and Loss account.
6.3.2 Cost of investments is computed based on the weighted average cost method.
6.4 Valuation of Investments
6.4.1 Held to Maturity - Each security in this category is carried at its acquisition cost or amortised cost. Any premium on acquisition of the security is amortised over the balance period to maturity. The amortised amount is classified under Interest earned - Income on investments (Item II of Schedule 13). The book value of the security is reduced to the extent of amount amortised during the relevant accounting period. Diminution, other than temporary, is determined and provided for each investment individually.
6.4.2 Held for Trading - Securities are valued scrip-wise and depreciation / appreciation is aggregated for each classification. Net appreciation in each classification is ignored, while net depreciation is provided for.
6.4.3 Available for Sale - Securities are valued scrip-wise and depreciation / appreciation is aggregated for each classification. Net appreciation in each classification, is ignored, while net depreciation is provided for.
6.4.4 Market value of government securities (excluding treasury bills) is determined on the basis of the prices / YTM declared by Primary Dealers Association of India (PDAI) jointly with Financial Benchmark India Private Limited (FBIL).
6.4.5 Treasury bills are valued at carrying cost, which includes discount amortised over the period to maturity.
6.4.6 Unquoted equity shares are valued at the break-up value, if latest balance sheet is available or at ' 1 as per the RBI guidelines.
6.4.7 Security purchase and sale transactions are recorded under Settlement Date method of accounting.
6.4.8 Provision for non-performing investments is made in conformity with RBI guidelines.
6.4.9 Profit in respect of investments sold from HTM category is included in the Profit on Sale of Investments and an equivalent amount (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such profits) is appropriated from the Profit and Loss Appropriation account to Capital Reserve account.
6.4.10 In the event, provisions created on account of depreciation in the AFS or HFT categories are found to be in excess of the required amount in any year, the excess is credited to the Profit and Loss account and an equivalent amount (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such excess provisions) is appropriated to an Investment Reserve Account (IRA). The balance in IRA account is used to meet provision on account of depreciation in AFS and HFT categories by transferring an equivalent amount to the Profit and Loss Appropriation account as and when required.
6.4.11 Units of the scheme of Mutual Funds are valued at the lower of cost and Net asset value (NAV) provided by the respective schemes of Mutual Funds.
6.4.12 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.
6.4.13 Borrowing cost on repo transactions is accounted for as interest expense and revenue on reverse repo transactions is accounted for as interest income.
6.5 Broken period Interest
Broken period interest on debt instruments is charged to Profit and Loss Account.
6.6 Transfer of Security between Categories
Transfer of Securities from one category to another is carried out as per the RBI guidelines at acquisition cost or book value or market value, whichever is lower on the date of transfer and the depreciation, if any, on such transfer is fully provided for.
7 Advances
7.1 Advances are classified as per the RBI guidelines into standard, sub-standard, doubtful and loss assets. Advances are stated net of specific loan loss provision.
7.2 Specific provisions for non-performing advances and floating provisions are made in conformity with the RBI guidelines.
7.3 In addition, the Bank considers accelerated provisioning based on past experience, evaluation of securities and other related factors.
7.4 Provisions on Standard Assets are made @ 0.40% of the outstanding advances. Further, as per the RBI guidelines, the standard asset provisioning on individual housing loans sanctioned on and after June 07, 2017, is made @ 0.25%. However, provision for banks direct advances to agriculture and SME sectors is made @ 0.25%, medium enterprises sector is made @ 0.4%, commercial real estate sector is made @ 1% and housing loans at teaser rates @ 2% in pursuance to the RBI circulars issued from time to time. Further the same is shown under the head 'Other Liabilities and Provisions'.
7.5 Amounts recovered during the year against bad debts written off in earlier years are credited to the Profit and Loss account.
7.6 Provision no longer considered necessary in the context of the current status of the borrower as a performing asset, are written back to the Profit and Loss account to the extent such provisions were charged to the Profit and Loss account.
7.7 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 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. Provision for restructuring is considered at borrower level.
7.8 The Bank enters into transactions for the sale/purchase of Priority Sector Lending Certificates (PSLCs) through the RBI platform. There is no transfer of risks or loan assets. The net fee received for the sale of PSLCs is recorded as 'Miscellaneous Income' and the net expense paid on purchase of PSLC is recorded as 'Miscellaneous Expense'.
8 Net Profits
The Net Profits have been arrived at after:
• Provisions for Income Tax in accordance with the statutory requirements.
• Provisions on Advances
• Adjustments to the value of Investments
• Other usual and necessary provisions.
9 Revenue recognition
Income is accounted on Accrual basis except in the following cases:
9.1 Income on Non-Performing Assets is recognised on realisation basis as per the RBI guidelines.
9.2 Interest which remains overdue for 90 days on securities not covered by Government Guarantee is recognised on realisation basis as per RBI guidelines.
9.3 Commission (other than on Deferred Payment Guarantees and Government Transactions), Exchange and Brokerage are recognised on realisation basis. However, Commission, Exchange and Brokerage on loan accounts is recognised as and when charged to the borrower account.
9.4 Interest on Overdue Bills is recognised on Realisation Basis as per the RBI guidelines.
10 Employee benefits
10.1 Provident Fund: As per the statute, contribution towards provident fund for certain employees is made to the regulatory authorities, where the Bank has no further obligations. Such benefits are classified as Defined Contribution Schemes as the Bank does not carry any further obligations, apart from the contributions made on a monthly basis.
10.2 Gratuity: Every employee is entitled to a benefit equivalent to 15 days' salary last drawn for each completed year of
service in line with the Payment of Gratuity Act, 1972. The same is payable at the time of separation from the Bank or retirement, whichever is earlier. The benefits vest after five years of continuous service.
The Gratuity scheme of the Bank is a defined benefit scheme and the expense for the period is recognised on the basis of actuarial valuation at the Balance Sheet date. The present value of the obligation under such benefit plan is determined based on independent actuarial valuation using the Projected Unit Credit Method which recognises each period of service that gives rise to additional unit of employee benefit entitlement and measures each unit separately to build up the final obligation. Actuarial losses/ gains are recognised in the Profit and Loss Account in the year in which they arise. Payment obligations under the Group Gratuity scheme are managed through a fund maintained by ICICI Prudential Life Insurance under separate Trust set up by the Bank.
10.3 Compensated absences: The compensated absences is a long term employee benefit. Provision for compensated absences is made on the basis of actuarial valuation as at the Balance Sheet date. The actuarial valuation is carried out using the Projected Unit Credit Method.
10.4 Share-based payments: The measurement and disclosure of Employee Stock Options offered by the Bank is as per the Guidance Note on Accounting for Share-based Payments issued by the Institute of Chartered Accountants of India.
The cost of equity-settled transactions for stock options granted after the period ending March 31,2021 is measured using the fair value method and for stock options granted prior to such period, is measured using the intrinsic value method. The costs are recognised, together with a corresponding increase in the Schedule 2- Revenue & Other Reserves Account. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Bank's best estimate of the number of equity instruments that will ultimately vest. The expense or credit recognised in the statement of profit and loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense.
11 Lease
11.1 Lease arrangements where risk and rewards incidental to ownership of an assets substantially vest with the lessor are recognised as operating leases.
11.2 Lease rentals under operating lease are charged to the Profit and Loss account on straight line basis over the lease term in accordance with AS-19, Leases.
12 Segment Reporting
The disclosure relating to segment information is in accordance with AS-17, Segment Reporting and as per the RBI guidelines.
Business Segment
The Bank's business has been segregated into four segments namely Treasury, Wholesale Banking, Retail Banking and other Banking Operations.
Geographical Segment
Since the business operations of the Bank are primarily concentrated in India, the Bank is considered to operate only in the domestic segment.
13 Earnings per Share
13.1 Basic Earnings per share is calculated by dividing the Net Profit or Loss for the year attributable to equity shareholders by the weighted average number of equity shares outstanding during the year.
13.2 Diluted earnings per equity share are computed using the weighted average number of equity shares and dilutive potential equity shares outstanding as at end of the year except when its results are anti-dilutive.
14 Taxes
Tax expenses comprise of current and deferred taxes. Current tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961. Deferred taxes reflect the impact of current year timing
differences between taxable income and accounting income for the year and reversal of timing differences of earlier years. Deferred tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the Balance Sheet date. Deferred tax assets are recognised, in general, only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised; where there is unabsorbed depreciation and/or carry forward of losses under tax laws, deferred tax assets are recognised only if there is virtual certainty supported by convincing evidence that such deferred tax asset can be realised against future taxable income.
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.
Current tax assets and liabilities and deferred tax assets and liabilities are calculated at the rates u/s section 115BAA of the Income Tax Act, 1961. Accordingly, as per Section 115JB, Minimum Alternate Tax (MAT) is not applicable.
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