The Key Audit Matter

How the matter was addressed in our audit

The net advances of the Bank constitute 67.21 percent of the total assets, which is the significant part of the financial statements. They are, inter-alia, governed by income recognition, asset classification and provisioning (IRACP) norms and other circulars and directives issued by the RBI from time to time which provides guidelines related to classification of Advances into performing and non-performing Advances (NPA) except in case of foreign offices in which case the classification of advances and provisioning thereof is made as per local regulations or RBI guidelines, whichever is more stringent. The Bank classifies these Advances based on IRACP norms as per its accounting policy followed.

Identification of performing and non-performing Advances involves establishment of proper mechanism. The Bank accounts for all the transactions related to Advances in its Information Technology System (IT System) viz. Core Banking Solution (CBS) which also identifies whether the advances are performing or non-performing.

Besides following the prudential norms on Income Recognition, Asset Classification and Provisioning relating to Advances issued by the Reserve Bank of India (“RBI”), the Bank also has certain policies for provisioning on non- performing assets.

The carrying value of these advances (net of provisions) may be materially misstated if, either individually or in aggregate, the IRACP norms are not properly followed.

Additionally, the Bank makes provisions on exposures that are not classified as NPA including advances to certain sectors and identified advances or group advances.

Considering the nature of the transactions, regulatory requirements, existing business environment, estimation/ judgement involved in valuation of securities and calculation of provisions, it is a matter of high importance for the intended users of the Standalone Financial Statements.

Further due to reliance placed on data submitted by the borrowers & lead bank for Drawing Power calculations, third party for security valuation, computation of provisions as per various guidelines issued by the RBI, computation of diminution in value for restructured advances and recognition of interest income including in non-performing advances, we determined the above area as a Key Audit Matter.

We assessed the Bank's system in place to identify and provide for non-performing assets. Our audit approach consisted testing of the design and operating effectiveness of the internal controls and substantive testing including the following:

a)    We had obtained understanding from the Bank about the controls built in the system, checks and balances incorporated with respect to adherence to the RBI guidelines and related Bank's Policies for identification of non-performing assets, provisioning to determine the nature, timing and extent of the substantive procedures and had accordingly planned our audit procedures.

b)    The accuracy of the data input in the system for income recognition, classification into performing and non performing Advances and provisioning in accordance with the IRACP norms in respect of the top 20 branches allotted to us. In carrying out substantive procedures at the branches allotted to us, we have examined large advances/ stressed advances while other advances have been examined on a sample basis including review of valuation reports of independent valuers as provided by the Bank's management.

c)    Existence and effectiveness of monitoring mechanisms such as Internal Audit, Systems Audit, Credit Audit and Concurrent Audit as per the policies and procedures of the Bank.

d)    Relied on the returns received from the branches not subject to audit and in that regard reviewed the internal monitoring mechanisms/systems of the Bank to satisfy the correctness of the sample data made available to us and ensured exceptions/deviations/errors noticed during our audit procedures were adequately considered by the Bank.

e)    Test checked the identification and provisioning of nonperforming assets and corresponding reversal of income, in accordance with RBI Guidelines issued from time to time.

f)    Evaluated and tested the management estimates and judgements for the purpose of identification of NPA and adequacy of provision required as per RBI's Prudential norms.

g)    Evaluated the effectiveness of automated IT based system of asset classification implemented by the Bank in accordance with the directives of RBI.

h)    We have also relied on the work done by the branch auditors for other domestic and foreign branches selected by the Bank.

i)    Ensured exceptions noticed during our audit procedures are duly corrected.

The Key Audit Matter

How the matter was addressed in our audit

The Bank's financial accounting and reporting systems given its complexity are highly dependent on the Bank's IT systems.

The Bank's IT architecture supports the Bank's day-to-day business operations. Given the size of the Bank, enormous volume of transactions are being processed and recorded on multiple applications.

The reliability and security of IT systems plays a very important role in the operations of the Bank. Hence controls in the system architecture are required to ensure that the applications process the data as expected and that changes are made in an appropriate manner.

Given the complexity of the IT architecture, high level automation, simultaneous and significant use of IT systems, there is an inherent risk that automated accounting procedures, processes and related internal controls may not be accurately designed to ensure its operative effectiveness and its impact on the financial reporting.

Hence IT system controls has been considered as a Key Audit Matter.

We obtained an understanding of IT systems used by the Bank and the applications implemented. For this purpose, we had discussions with the process owners on the defined policy/process/procedures of the Bank's IT control environment that is relevant to the audit and reviewed the processes followed with regard to the major applications to understand the financial risks posed by people-process and technology.

Our audit procedures to obtain audit evidence included (on a test check basis):

(a)    verifying, testing and reviewing the operating effectiveness of the IT system on the basis of reports, generated from the system;

(b)    review of the operating effectiveness of the Bank's IT controls including application, access controls that are critical to financial reporting;

(c)    verifying the results obtained from the systems with the other information sources; and

(d)    testing of logic used for extracting the data.

We also placed reliance on the work performed by the statutory branch auditors, external vendor inspection reports, specialised audits undertaken by independent experts on the Bank's IT systems.

(iii) Classification and Valuation of Investments, Identification of and provisioning for Non-Performing Investments (Schedule 8 read with Note 3 of Schedule 17 to the financial Statements)

The Key Audit Matter

How the matter was addressed in our audit

Investments include investments made by the Bank in various Government Securities, Bonds, Debentures, Shares, Security receipts and other approved securities.

Investments constitute 23.32 per cent of the Bank's total assets. These are governed by the circulars and directives of the RBI. These directions of RBI, inter-alia, cover valuation of investments, classification of investments, identification of nonperforming investments, the corresponding non-recognition of income and provision there against.

The valuation of unquoted investments and thinly traded investments is an area of inherent risk because of market volatility, unavailability of reliable prices and macroeconomic uncertainty.

Valuation of investments, classification, identification of non-performing investments and provisioning related to investments are critical functions.

The valuation of each category (type) of the aforesaid securities is to be done as per the method prescribed in circulars and directives issued by the RBI which involves collection of data/information from various sources such as FIBIL rates, rates quoted on BSE/NSE, financial statements of unlisted companies etc

Our audit approach towards Investments with reference to the RBI Circulars/directives included the understanding of internal controls and substantive audit procedures in relation to valuation, classification, identification of non-performing investments (NPIs), provisioning/depreciation related to Investments.

Our audit procedures with respect to audit of Treasury, focused on -

a)    We evaluated and understood the Bank's internal control system to comply with relevant RBI guidelines regarding valuation, classification, identification of NPIs, provisioning/depreciation related to investments.

b)    For the selected smple of investments in hand, we tested accuracy and compliance with the RBI Master Circulars and directions by re-performing valuation for each category of the security. Samples were selected after ensuring that all the categories of investments (based on nature of security) were covered in the sample.

c)    Independently test-checked valuation of unquoted investments, based on the financial statements for the year ended March 31, 2024 or on the basis of other prescribed procedures in terms of the RBI guidelines.

The Key Audit Matter

How the matter was addressed in our audit

Considering the complexities and extent of judgment involved in the valuation, volume of transactions, investments on hand and degree of regulatory focus, we determined the above area as a Key Audit Matter.

d) We assessed and evaluated the process of identification of NPIs and corresponding reversal of income and creation of provision.

We carried out substantive audit procedures to recompute independently the provision to be maintained and depreciation to be provided in accordance with the circulars and directives of the RBI. Accordingly, we selected samples from the investments of each category and tested for NPIs as per the RBI guidelines and recomputed the provision to be maintained in accordance with the RBI Circular for those selected sample of NPIs.

(iv) Assessment of Provisions and Contingent liabilities including in respect of certain litigations, various claims filed by other parties not acknowledged as debt (Schedule 12 read with Note 15 of Schedule 17 to the financial statements):

The Key Audit Matter

How the matter was addressed in our audit

The Bank has disputed claims against it including matters pending at various levels in Tax and non tax matters which are pending at various courts/forums and are at various stages in the judicial process. The management has exercised significant judgement in assessing the possible outflow of resources in such matters.

There is high level of judgement required in estimating the level of provisioning. The Bank's assessment is supported by the facts of matter, their own judgment, past experience, and advice from legal and independent tax consultants wherever considered necessary. Accordingly, unexpected adverse outcomes may significantly impact the Bank's reported profit and state of affairs presented in the Balance Sheet.

We determined the above area as a Key Audit Matter in view of associated uncertainty relating to the outcome of these matters which requires application of judgment in interpretation of law. Accordingly, our audit was focused on analysing the facts of subject matter under consideration and judgments/ interpretation of law involved.

a)    We have evaluated the appropriateness of the design and tested the operating effectiveness of the management's controls over the tax litigation matters.

b)    We reviewed the management's underlying assumptions in estimating the possible outflow and the possible outcome of the disputes. The legal precedence and other rulings were considered in evaluating management's position on these uncertain tax /non tax positions.

c)    Further we have relied upon the management judgements, industry level deliberations and estimates for possible outflow and opinion of internal experts of the Bank in relations to such disputed tax positions.

d)    Reviewed and verified other legal pronouncements wherever available in similar matters in the case of the Bank/other corporate.

e)    Read and analysed select key correspondences, internal/ external legal opinions / consultations by management for key disputed non tax matters.

f)    Discussed with appropriate senior management and evaluated management's underlying key assumptions in estimating the provisions.

g)    Assessed management's estimate of the possible outcome of the disputed non tax cases and relied on the management judgments in such cases.

h)    Reliance on the work performed by the statutory branch auditors and the rectification entries passed based on branch audits/additional information to the extent available at Head office.