3.17. Provisions, Contingent Liabilities and Contingent Assets
A provision is recognised when the Bank has a present obligation as a result of past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are not discounted to their present value and are determined based on the best estimate required to settle the obligation at the reporting date. These estimates are reviewed at each reporting date and adjusted to reflect the current best estimates.
A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in extremely rare cases where there is a liability that cannot be recognised because it cannot be measured reliably. The Bank does not recognise a contingent liability but discloses its existence in the financial statements. Contingent assets are neither recognised nor disclosed in the financial statements.
3.18. Cash and Cash Equivalents
Cash and cash equivalents comprises of Cash in Hand and Balances with RBI and Balances with Banks and Money at Call and Short Notice. Cash and cash equivalents for the purpose of cash flow statement comprise of Cash in Hand and Balances with RBI and Balances with Banks and Money at Call and Short Notice.
3.19. Short sale transactions
In respect of the short sale transactions in Central Government dated securities, the short position is covered by outright purchase of an equivalent amount of the same security within a maximum period of three months including the day of trade. The short position is reflected as the amount received on sale in a separate account and is classified under 'Other Liabilities'. The short position is marked to market and loss, if any, is charged to the Profit and Loss account, while gain, if any, is not recognised. Profit or loss on settlement of the short position is recognised in the Profit and Loss account.
3.20. Reward Points
The Bank runs a loyalty program, which seeks to recognise and reward customers based on their relationship with the Bank. Under the program, eligible customers are granted loyalty points redeemable in future, subject to certain conditions. The Bank estimates the probable redemption of such loyalty/reward points using an actuarial method at the Balance Sheet date 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.
3.21. Share issue expenses
Share issue expenses are adjusted from Share Premium Account in terms of Section 52 of the Companies Act, 2013.
3.22. Corporate social responsibility
Expenditure towards corporate social responsibility, in accordance with Companies Act, 2013, is recognised in the Profit and Loss Account.
(a) The Bank, during the year ended March 31,2024 has allotted 2,43,29,125 (Previous year 29,38,696 ) equity shares of ' 10/-each, fully paid up, on exercise of options by its employees in accordance with the ESFB ESOP Scheme.
(b) As per the approved Scheme of amalgamation, 933,943,363 shares held by Equitas Holdings Limited are to be extinguished and 789,535,166 shares are to be allotted to the shareholders of Equitas Holdings Limited upon the scheme becoming effective. The Board of Directors on their meeting held on February 08, 2023 have approved allotment and extinguishment of shares. Accordingly, the effect of such adjustments are given as on Appointed date i.e. January 01, 2023.
1 b) Draw down from Reserves:
The Bank has not drawn down any amount from its opening reserves during the year ended March 31,2024 and March 31, 2023. Please refer note no.18.21 for amalgamation of Equitas Holdings Ltd with Bank.
1 c) Appropriations to reserve:
(i) Statutory reserve
As mandated by the Banking Regulation Act, 1949, all banking companies incorporated in India shall create a reserve fund, out of the balance of profit of each year as disclosed in the profit and loss account and before any dividend is declared and transfer a sum equivalent to not less than twenty five percent of such profit. The Bank has transferred ' 199.74 Crore (Previous year ' 143.40 Crore) to Statutory Reserve for the year.
(ii) Capital Reserve
During the year, the Bank had appropriated ' 1.15 Crore (Previous Year ' Nil ), net of taxes and transfer to statutory reserve, to the Capital Reserve, being the gain on sale of HTM Investments in accordance with RBI guidelines.
(iii) Special reserve
As per the provisions under Section 36(1)(viii) of Income Tax Act, 1961, the specified entity is allowed the deduction in respect of any special reserve created and maintained by it, i.e. an amount not exceeding twenty percent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause). This would be applicable till the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital (excluding the amounts capitalised from reserves) of the entity. During the year, the Bank has transferred an amount of ' 19.46 Crore (Previous year ' 12.02 Crore) to Special Reserve. There is no drawdown from this reserve during FY 2023-24 and FY 2022-23.
(iv) Investment Reserve
In accordance with Reserve Bank of India guidelines, reversal of excess depreciation on Investments to the profit and loss account, net off taxes and transfer to Statutory reserve is transferred to investment reserve. The total amount required to be transferred to the investment reserve in FY 2023-24 is ' 1.78 Crore (Previous year : Nil).
(v) Investment Fluctuation Reserve
During the FY 2023-24, the Bank has apportioned ' 127.50 Crore (Previous year : ' 38.08 Crore) to Investment Fluctuation Reserve, based on the value of investments in HFT and AFS category, to protect against future increase in yield, in accordance RBI guidelines.
(vi) Declaration of Dividends
The Board of Directors at their meeting held on April 24, 2024 proposed a dividend of ' 1.00 per share amounting to ' 113.49 Crore for the year ended March 31, 2024 (previous year: ' 1.00 per share amounting to ' 111.06 Crore) which is subject to shareholders approval in ensuing Annual General Meeting. In terms of revised Accounting Standard (AS) 4 'Contingencies and Events occurring after the Balance sheet date' as notified by the Ministry of Corporate Affairs through amendments to Companies (Accounting Standards) Amendment Rules, 2016, the Bank has not appropriated proposed dividend aggregating ' 113.49 Crore from Profit and Loss Account. However, the effect of the proposed dividend has been reckoned in determining Capital funds in the computation of capital adequacy ratio as at March 31,2024.
The objective of NSFR is to ensure that Banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the probability of erosion of a Bank's liquidity position due to disruptions in a Bank's regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding "Available stable funding" (ASF) is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding required ("Required stable funding") (RSF) of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.
Liquidity management of the Bank is undertaken by the Treasury department under the central oversight of the Asset Liability Management Committee (ALCO) in accordance with the Board approved policies and ALCO approved funding plans. The
The objective of NSFR is to ensure that Banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the probability of erosion of a Bank's liquidity position due to disruptions in a bank's regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. "Available stable funding" (ASF) is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding required ("Required stable funding") (RSF) of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.
Liquidity management of the Bank is undertaken by the Treasury department under the central oversight of the Asset Liability Management Committee (ALCO) in accordance with the Board approved policies and ALCO approved funding plans. The mandated regulatory threshold as per the transition plan is embedded in the Board approved ALM policy of the Bank, with appropriate cushion to ensure maintenance of adequate liquidity buffers. Risk Management Department computes the NSFR and monitors the same as per the operating guidelines for small finance banks. The Bank has been submitting NSFR reports to RBI from December 2021. Currently the Net Stable Funding Ratio is at optimal level compared with the prescribed regulatory limit of 100%. The Bank is consistently increasing the Available Stable Funds from stable customers which significantly increases NSFR. Periodical reports are placed before the Bank's ALCO for perusal and review.
In accordance with the RBI guidelines, Banks are required to make Net Stable Funding Ratio (NSFR) disclosures under the Basel III Framework. These disclosures are available on the Bank's website at the following link: https://ir.equitasbank.com/reports-and-presentations/. The quarterly disclosures are not subjected to audit by the Statutory auditors of the Bank.
(b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy:
Remuneration policy of the Bank covers remuneration payable for directors and employees of the Bank and all aspects of the compensation structure such as fixed pay, perquisites, bonus, guaranteed pay, severance package, stock, pension plan and gratuity.
The Bank believes in a sound compensation practice that ensures effective governance of compensation, alignment of compensation with prudent risk taking and effective supervisory oversight and stakeholder engagement. This policy is framed in accordance with the guidelines laid down by Reserve Bank of India (RBI) vide their circular reference no DOR. Appt. BC. No. 23/ 29.67.001/ 2019-20 dated November 04, 2019.
The remuneration payable to Managing Director ("MD")/Chief Executive Officer ("CEO") shall be based on the scope and responsibility that goes with such positions, shall be comparable to the compensation of MD/CEO of similar profiles in similar organisations and would be performance linked. From time to time, the NRC may fix a maximum ceiling on the fixed/variable component of compensation, subject to the approval of Reserve Bank of India and shareholders.
The Non-Executive Directors ("NED") including Independent Directors of the Bank shall be paid remuneration as a percentage of the net profits of the Bank for the financial year as may be fixed by the Board from time to time, calculated as per the provisions of the Companies Act, 2013 and subject to the limits fixed by the Reserve Bank of India, from time to time.
Further, within the above ceiling, the remuneration payable to the Chairman of the Board shall be two times the amount payable to other Non-Executive Directors and Independent Directors and further subject to approval of RBI and the remuneration payable to the Chairman of the Audit Committee shall be 1.5 times the amount payable to other NonExecutive Directors and Independent Directors.
NEDs are to be paid such sitting fee for each meeting of the Board/ Committees of the Board attended by them, as may be approved by the Board pursuant to provisions of Section 197 of the Companies Act, 2013 read with Section 35B (1) of the Banking Regulation Act 1949. NEDs including Independent Directors shall be reimbursed any out of pocket expenses incurred by them while performing duties for the Bank.
For the other categories of staff, the compensation is structured taking into account all relevant factors such as the level of the position, roles and responsibilities and the prevailing compensation structure in the industry for the similar role.
(c) Description of the ways in which current and future risks are taken into account in the remuneration processes.
The Board of Directors through the Nomination and Remuneration Committee ("NRC") is responsible for formulating and making the necessary amendments to the Remuneration Policy for the Directors, Key Managerial Persons ("KMP") and Senior Executives of the Bank from time to time. The NRC considers different aspects like risk-return alignment, cost to income ratio and the like in framing the remuneration policy and practice.
Performance parameters specified for the MD/ CEO also includes risk and control considerations such as Asset quality, implementation of guidelines on Compliance Risk Assessment, Reviewing And Enhancing Controls Of The Operating Risk Processes Of The Bank, Enhancing The Efficacy Of The Process & Quality Assurance Department.
The variable remuneration payable to MD/CEO & other Material Risk Takers are subject to relevant malus and clawback clauses to address issues such as losses in subsequent years due to acts in a given performance year, gross negligence, serious lapses in credit underwriting process, serious violations in AML / KYC, frauds and misconducts.
Further, the KRA's for Senior Executives of the Bank are clearly defined with adequate weightage given to Risk, Compliance, Credit & Asset Quality to ensure risks are assessed and mitigated. KRA's of Executives working in control functions like Risk & Compliance are defined independently and no weightage is given for achievement of business parameters/ targets to ensure independent evaluation.
(d) Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration
The Bank follows annual performance review (12 months period) to link performance. Remuneration is fixed based on the grade and merit rating for all the employees. Individual performances are assessed in line with business or deliveries of the Key Result Areas (KRA), top priorities of business, budgets, risk alignment etc. The performance appraisal system assigns a rating based on the achievement or otherwise of the KRAs. The change in remuneration is largely dependent on the rating assigned.
(e) A discussion of the Bank's policy on deferral and vesting of variable remuneration and a discussion of the Bank's policy and criteria for adjusting deferred remuneration before vesting and after vesting.
The Bank has ensured the remuneration for Material Risk Takers in line with the RBI circular dated November 04, 2019. Accordingly, the variable pay of identified MRTs is determined between 100% to 300% of fixed pay. This variable pay is further divided into cash and ESOPs. Both the cash and ESOPs of the said MRTs is to be deferred over a period of three year in line with the risk taken and as per relevant RBI approval received from time to time. Each such MRT has performance measures aligned to risk measures and the vesting of variable pay is also pro-rated till the end of the deferral period.
(f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilises and the rationale for using these different forms.
Employees of the Bank are eligible for variable pay in terms of both cash and ESOPs. At field level the variable pay is linked to defined performance targets. Other roles may be given variable pay based on their performance ratings. The variable pay amount varies depending on both the role of the individual as well as his/her performance levels. For senior executives of the Bank due consideration is also given to the overall performance of the Bank & respective division / function apart from individual performance ratings.
Employees above defined grade are eligible for Employee Stock Options issued by the Bank as determined by the Nomination and Remuneration Committee of the Bank. These options are granted annually based on performance ratings and role of the individual. Junior employees in cases of consistent exemplary performance are also granted options being part of High Achievers Club.
In very select instances, employees are offered options over a four year period, with a quarter of the options vesting every year. The vesting of the options are dependent on continuity and performance of the said individual.
A variable component may also be made available for specific employees as agreed and included as a part of their respective compensation structure. Variable pay for MRTs have been explained in (e) earlier.
As on the reporting date, the Bank does not have any form of variable remuneration other than as stated above. Thus, the various types of variable pay is aligned over both short and long term periods.
g) Implementation of IFRS converged Indian Accounting Standards (Ind AS)
In January 2016, the Ministry of Corporate Affairs issued the roadmap for implementation of new Indian Accounting Standards (Ind AS), converged with International Financial Reporting Standards (IFRS), for scheduled commercial Banks, insurance companies and non-banking financial companies (NBFCs). However, currently the implementation of Ind AS for Banks has been deferred by RBI till further notice pending the consideration of some recommended legislative amendments by the Government of India. The Bank is in an advanced stage of preparedness for implementation of Ind AS, as and when these are made applicable to the Indian Banks.
As required by the RBI guidelines, the accounts of the Bank are converted into Ind AS format and submitted to the RBI at periodic intervals. The Bank has put in place Board approved policy on Expected Credit Loss (ECL) as per Indian Accounting Standards. The Bank carries out the expected loss provisioning using Probability of Default (PD) and Loss Given Default (LGD) framework by considering historical data. The Bank has identified an IT solution for Ind AS reporting and is currently in the process of implementing the solution.
l) Description of Contingent liabilities
i. Claims against the Bank not acknowledged as debts:
Claims against the Bank not acknowledged as debts includes liability on account of Service tax, Goods and Service Tax and Income Tax . The Bank is a party to various legal proceedings in the ordinary course of business which are contested by the Bank and are therefore subjudice. The Bank does not expect the outcome of these proceedings to have a material adverse impact on the Bank's financial position.
ii. Guarantees given on behalf of constituents:
As a part of banking activities, the Bank issues Letter of Guarantees on behalf of its customers, with a view to augment the customer's credit standing. Through these instruments, the Bank undertakes to make payments for its customers obligations either directly or in case the customer fails to fulfill their financial or performance obligations.
iii. Other items for which the Bank is contingently liable:
These include:
a) Capital commitments
b) Amount transferred to the RBI under the Depositor Education and Awareness Fund (DEAF)
c) Investment purchases pending settlement
d) Credit enhancements provided by the Bank towards assets securitisation
m) Dues to Micro, Small and Medium Enterprises
Dues to Micro and Small Enterprises have been determined to the extent such parties have been identified on the basis of information collected by the Management. Based on the information available with the Bank, there are no overdue amounts payable to Micro and Small Enterprises as defined under the Micro, Small and Medium Enterprises Development Act, 2006 as at the Balance Sheet date. Further, the Bank has not paid any interest to any Micro and Small Enterprises during the current and previous year.
n) Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the Bank.
During the year, the Bank has not exceeded the prudential credit exposure limit as prescribed by the Reserve Bank of India in respect of Single Borrower and Group Borrowers. (Previous year: Nil).
o) Letters of Comfort
The Bank has not issued any letters of comfort during the year.(Previous year: Nil).
p) No funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Bank to or in any other person(s) or entity(ies), including foreign entities ("Intermediaries") with the understanding, whether recorded in writing or otherwise, that the Intermediary shall lend or invest in party identified by or on behalf of the Bank (Ultimate Beneficiaries). The Bank has not received any fund from any party(s) (Funding Party) with the understanding that the Bank shall whether, directly or indirectly lend or invest in other persons or entities identified by or on behalf of the Bank ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
r) Portfolio-level information on the use of funds raised from green deposits :
The Bank has not accepted green deposits during the current financial year (Previous year : Nil).
15 Employee Benefits (AS 15)
Defined Contribution Plan Provident Fund and NPS
The Bank makes Provident Fund contributions and NPS contributions to State administered fund for qualifying employees. The Bank is required to contribute a specified percentage of the payroll costs to the Fund. The Bank has recognised ' 63.56 Crore (Previous Year: ' 52.68 Crore) towards Provident Fund contributions and NPS contributions in the Profit and Loss Account. The contributions payable to the fund by the Bank is at rates specified in the rules of the scheme.
Defined Benefit Plans Gratuity
The Bank has a funded gratuity scheme for its employees and the Gratuity liability has been made based on the actuarial valuation done as at the year end. The details of actuarial valuation as provided by the Independent Actuary is as follows:
22 Employees Stock Option Scheme
a) Change in Accounting Policy:
The Bank was following the intrinsic value method to account for its stock based employee compensation plans (Employees other than WTD/CEO/MRTs) and fair value method stock options using Black-Scholes model for all the options granted after March 31, 2021 to WTD/CEO/MRTs as required under RBI circular.
The Bank, having regard to the RBI advisory, has changed the accounting policy from intrinsic value method to fair value method for all employee stock options granted after March 31, 2021 and consequently recognised fair value of options estimated using Black-Scholes model, as compensation expense over the vesting period.
As a result, the Bank has additionally provided ' 29.21 Crore on March 31,2024 as employee stock options expenses and included under operating expenses (employees cost).
b) ESFB ESOP 2019
During the year ended March 31, 2020, the Bank established a employee stock option scheme titled ESFB Employees Stock Option Scheme, 2019 (ESFB ESOP 2019) effective from November 22, 2019. Under the plan, the Bank was authorised to issue upto 110,000,000 options (including 33,487,873 options under Grant 1 issued as a replacement option for the Scheme under the Holding Company) to eligible employees of the Bank and the erstwhile Holding Company. Each option entitles for apply and allotment of one fully paid share on payment of exercise price during the exercise period.
Volatility
Volatility is a measure of the amount by which a price has fluctuated or is expected to fluctuate during a period. The measure of volatility used in the Black-Scholes option pricing model is the annualised standard deviation of the continuously compounded rates of return on the stock over a period of time.
d) Dividend Yield
Expected dividend yield has been calculated based on the dividend declared for 1 financial year prior to the date of grant. The dividend yield has been derived by dividing the dividend per share by the market price per share on the date of grant.
23 Prior period comparatives
Prior period comparatives have been reclassified / regrouped by the management, wherever necessary.
As per our report of even date
For Varma & Varma, For and on behalf of Board of Directors of Equitas Small Finance Bank Limited
Chartered Accountants Firm Registration No.: 004532S
P R Prasanna Varma Arun Ramanathan Vasudevan PN Arun Kumar Verma
Partner Chairman Managing Director and Director
Membership No: 025854 DIN:00308848 Chief Executive Officer DIN:03220124
Place: Chennai Place: Chennai DIN:01550885 Place: Chennai
Date: April 24, 2024 Date: April 24, 2024 Place: Chennai Date: April 24, 2024
Date: April 24, 2024
As per our report of even date
For ASA & Associates LLP,
Chartered Accountants
Firm Registration No.: 009571N / N500006
G N Ramaswami N Sridharan Ramanathan N
Partner Chief Financial Officer Company Secretary
Membership No: 202363 M.No:28366
Place: Chennai Place: Chennai Place: Chennai
Date: April 24, 2024 Date: April 24, 2024 Date: April 24, 2024
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