j) Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
When the effect of the time value of money is material, the Company determines the level of provision by discounting the expected cash flows at a pre-tax rate reflecting the current rates specific to the liability. The increase in the provision due to un-winding of discount over passage of time is recognized within finance costs.
Provisions are reviewed at each reporting date and are adjusted to reflect the current best estimate" for accounting policy of provisions
k) Contingent liabilities and assets
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 Company or a present obligation that is not recognized 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 recognized because it cannot be measured reliably. The Company does not recognize a contingent liability but discloses its existence in the financial statements.
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. The Company does not have any contingent assets in the financial statements.
l) Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities are recognized when the entity becomes a party to the contractual provisions of the instruments.
Financial Assets - All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset, except trade receivables which is recorded at transaction price. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset.
Subsequent measurement
For the purpose of subsequent measurement, financial assets are classified in four categories:
• Loan Portfolio at amortized cost
• Loan Portfolio at fair value through other comprehensive income (FVOCI)
• Investment in equity instruments and mutual funds at fair value through profit or loss
• Other financial assets at amortized cost
Loan Portfolio at amortized cost:
Loan Portfolio is measured at amortized cost where:
• contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest (SPPI)on the principal amount outstanding; and
• are held within a business model whose objective is achieved by holding to collect contractual cash flows.
Loan Portfolio at FVOCI:
Loan Portfolio is measured at FVOCI where:
• contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest (SPPI) on the principal amount outstanding; and
• the financial asset is held within a business model where objective is achieved by both collecting contractual cash flows and selling financial assets.
Business model: The business model reflects how the Company manages the assets in order to generate cash flows. That is, where the Company's objective is solely to collect the contractual cash flows from the assets, the same is measured at amortized cost or where the Company's objective is to collect both the contractual cash flows and cash flows arising from the sale of assets, the same is measured at fair value through other comprehensive income (FVOCI). If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other' business model and measured at FVTPL.
SPPI: Where the business model is to hold assets to collect contractual cash flows (i.e. measured at amortized cost) or to collect contractual cash flows and sell (i.e. measured at fair value through other comprehensive income), the Company assesses whether the financial instruments' cash flows represent solely payments of principal and interest (the ‘SPPI test'). In making this assessment, the Company considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. The amortized cost, as mentioned above, is computed using the effective interest rate method.
After initial measurement, these financial assets are subsequently measured at amortized cost using the effective interest rate (EIR) method less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the
profit or loss. The losses arising from impairment are recognized in the Statement of Profit and Loss.
The measurement of credit impairment is based on the three-stage expected credit loss model described in Note: Impairment of financial assets (refer note 3(e)).
Effective interest method - The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. The amortized cost of the financial asset is adjusted if the Company revises its estimates of payments or receipts. The adjusted amortized cost is calculated based on the original or latest re-estimated EIR and the change is recorded as ‘Interest and similar income' for financial assets. Income is recognized on an effective interest basis for loan portfolio other than those financial assets classified as at FVTPL
Equity instruments and Mutual Funds
Equity instruments in other than subsidiaries, associates and joint ventures and mutual funds included within the FVTPL category are measured at fair value with all changes recognized in the Profit and Loss Statement.
Investments in subsidiaries, associates and joint ventures
Investments in subsidiaries, associates and joint ventures are carried at cost less accumulated impairment losses, if any. Where an indication of impairment exists, the carrying amount of the investment is assessed and written down immediately to its recoverable amount. On disposal of investments in subsidiaries and joint venture, the difference between net disposal proceeds and the carrying amounts are recognised in the statement of profit and loss.
Financial liabilities Initial Measurement
Financial liabilities are classified and measured at amortized cost. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Company's financial liabilities include trade and other payables, loans and borrowings including bank overdrafts and derivative financial instruments.
Subsequent Measurement
Financial liabilities are subsequently carried at amortized cost using the effective interest method.
De-recognition
The Company derecognizes a financial asset when the contractual cash flows from the asset expire or it transfers its rights to receive contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
A financial liability is derecognized from the balance sheet when the Company has discharged its obligation or the contract is cancelled or expires.
m) Derivative financial instruments
Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
n) Fair value measurement
The Company measures financial instruments at fair value at each balance sheet date using various valuation techniques.
Fair value is the price at the measurement date, at which an asset can be sold or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
The Company's accounting policies require, measurement of certain financial / non-financial assets and liabilities at fair values (either on a recurring or non-recurring basis). Also, the fair values of financial instruments measured at amortized cost are required to be disclosed in the said financial statements.
The Company is required to classify the fair valuation method of the financial / non-financial assets and liabilities, either measured or disclosed at fair value in the financial statements, using a three level fair-value-hierarchy (which reflects the significance of inputs used in the measurement).
Accordingly, the Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy described as follows:
• Level 1 financial instruments - Those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the Company has access to at the measurement date. The Company considers markets as active only if there are sufficient trading activities with regards to the volume and liquidity of the identical assets or liabilities and when there are binding and exercisable price quotes available on the balance sheet date.
• Level 2 financial instruments - Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument's life.
• Level 3 financial instruments - include one or more unobservable input where there is little market activity for the asset/liability at the measurement date that is significant to the measurement as a whole.
o) Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at banks and on hand and short-term deposits with an original maturity of three months or less, which are subject to an insignificant risk of changes in value.
p) Cash flow statements
The standalone cash flow statement is prepared in accordance with the Indirect method. Standalone cash flow statement presents the cash flows by operating, financing and investing activities of the Company. Operating cash flows are arrived by adjusting profit or loss before tax for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
q) Proposed dividend
As per Ind AS -10, ‘Events after the Reporting period', the Company disclose the dividend proposed by board of directors after the balance sheet date in the notes to these standalone financial statements. The liability to pay dividend is recognised when the declaration of dividend is approved by the shareholders.
r) New and amended standards
i) Disclosure of Accounting Policies- Amendments to lnd AS 1, Presentation of financial statements
The amendment requires entities to disclose their material rather than their significant accounting policies. The amendments define what is material accounting policy information and explain how
to identity when accounting policy information is material. They further clarify that immaterial accounting policy information does not need to be disclosed. If it is disclosed, it should not obscure material accounting information.
The amendment have had an impact on the Company's disclosure of accounting policy, but not on the measurement, recognition or presentation of any item in the financial statements
ii) Amendments to Ind AS 8, Accounting policies, changes in accounting estimates and errors
The amendment clarifies how entities should distinguish changes in accounting policies from changes in accounting estimates. The distinction is important, because changes in accounting estimates are applied prospectively to future transactions and other future events, but changes in accounting policies are generally applied retrospectively to past transactions and other past events as well as the current period. The amendment have no impact on the financial statements.
iii) Deferred tax related to assets and liabilities transaction - Amendments to Ind AS 12, Income taxes
The amendment requires entities to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. They will typically apply to transactions such as leases of lessees and decommissioning obligations and will require the recognition of additional deferred tax assets and liabilities. In addition, entities should recognise deferred tax assets (to the extent that it is probable that they can be utilised) and liabilities at the beginning of the eartiest comparative period for all deductible and taxable temporary differences associated with right-of-use assets and lease liabilities, and decommissioning restoration and similar liabilities, and the corresponding amounts recognised as part of the cost of the related assets. The amendment have no impact on the financial statements.
s) Recent Accounting pronouncements
Ministry of Corporate Affairs ("MCA") notifies new standards or amendments to the existing standards under Companies (Indian Accounting Standards) Rules as issued from time to time. For the year ended March 31, 2024, MCA has not notified any new standards or amendments to the existing standards applicable to the Company.
Note 3: The Company product programme guideline allows disbursement to borrowers which are in SMA buckets subject to fulfilment of other eligibility criteria as applicable. While product guidelines allow such disbursement, the decision to disburse to these specific clients (by preclosing existing loan and give top-up loans) are taken based on inputs received from the customer and the field staff. In a joint liability group model (JLG), the fellow group / centre members understand the financial position and their intent to pay. Inputs on product guideline are driven basis feedback received during interactions between the customers (group members attending centre meetings) and our field staff. Recommendations basis these interactions are then given to the supervisory hierarchy including the Chief Business Officer who in turn evaluates and recommends for approval to the COO. In determining whether lending to these customers has any significant increase in credit risk or impairment of such loans and potential future loss estimate, the Company takes into consideration the borrowers' vintage, past repayment behaviour and viability of their businesses, as a separate cohort. Accordingly, the company has classified such loans as follows:
a) The loans which are disbursed to stage II borrowers are classified based on their latest repayment schedule as at respective period end and in the respective stage buckets.
b) The loans which are disbursed to stage III borrowers are either classified under "stage III" or in respective staging bucket as per the latest repayment schedule, depending upon management's assessment of the customer repayment behaviour.
Note 4: No impairment allowance has been recognized on the outstanding inter-corporate advances to related parties as at March 31, 2024 and March 31, 2023.
13 (B) Instances of breach of covenant of loan availed or debt securities issued during year ended March 31, 2024:
(i) During the year ended March 31,2024, the Company was in non-confirmation of certain specific covenants associated with a few of its borrowings. However, following discussions with the lenders, the Company is confident that no adverse measures, such as increase in interest rates or demand for immediate repayment of the borrowed funds, will be taken by the lenders due to non-compliance with the covenants. The instances of non-confirmation of specific covenants relates to three months liquidity in case of two ISINs, two months liquidity in case of another two ISINs (upto September 30, 2023) and maintenance of tangible net worth in case of two ISINs (upto September 30, 2023). Pursuant to the non-confirmation, few debenture holders holding NCDs aggregating to '6.54 crs (out of '325 crs issue pertaining to these ISINs), have exercised their right of accelerated redemption and the Company has already honoured such request including payment / accrual of additional interest during the year. The Company has made necessary disclosures to stock exchanges in this regard.
The Company is holding cash and cash equivalents of '1,385.55 crs as on March 31, 2024 and did not have any cumulative mismatch across all ALM buckets.
The two ISINs (having three months liquidity covenant) which continue to be non-compliant due to the reasons as explained below.
a) Significant increase in borrowings from '5,934.20 crs as of March 31,2023 to '9,012.16 crs as of March 31, 2024; and
b) An increase in liabilities leads to a higher amount of cash and bank balance to be maintained in accordance with the covenant related to three months liquidity. As of March 31, 2024, the Company is holding cash and cash equivalents aggregating '1,385.55 crs, against the required liquidity amount of '2,415.10 crs as per the term of the debenture trust deed and does not have any cumulative mismatch across all the ALM buckets. The maintenance of such higher level of cash and bank balances adversely impact the qualifying assets criteria as applicable to NBFC-MFIs pursuant to the Master Direction - Reserve Bank of India (Non-Banking Financial Company - Scale Based Regulation) Directions 2023' ("SBR Master Direction").
Till date, none of the lenders have indicated any intention to initiate remedial actions, and the Company has consistently met its debt servicing obligations. Accordingly, no adjustment are made in the financial statements..
(ii) During the year ended and as at March 31, 2023, the Company has been regular in serving all its borrowings though there has been breach of some of the convenants relating to 30 PAR, GNPA, NNPA, annualized return on assets, tangible net worth and two / three months Liquidity as per the formula defined in the respective Debenture Trust Deeds. All these covenants have been complied with since the quarter ended June 20, 2023 except as explained above during the year ended March 31, 2024.
18: Share capital (Contd.)
(a) Terms / rights attached to equity shares
The Company has only one class of equity shares of par value of '10 per share. Each holder of equity shares is entitled to one vote per share. Any dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting. The Company declares and pays dividends in Indian rupees. During the current financial year no dividend has been proposed by the Company.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.
19: Other Equity (Contd.)
Capital redemption reserve
in accordance with section 55 of the Companies Act, 2013, the Company had transferred an amount equivalent of the nominal value of OCCRPS redeemed during previous years, to the Capital Redemption Reserve. The reserve can be utilised only for limited purposes in accordance with the provisions of the Companies Act, 2013.
Share options outstanding account
The share option outstanding account is used to recognise the grant date fair value of option issued to employees under employee stock option scheme.
Statutory reserve (As required by Sec 45-IC of Reserve Bank of India Act, 1934
Statutory reserve represents the accumulation of amount transferred from surplus year on year based on the fixed percentage of profit for the year, as per section 45-IC of Reserve Bank of India Act 1934.
Money received against share warrants
During the year ended March 31, 2022, the Company had alloted 18,52,739 fully convertible warrants of '10 each at issue price of '458.78 per warrant including premium of '448.78 per warrant on preferential basis to Kedaara Capital Fund iii LLP, against receipt of upfront money amounting to '75 crore, in compliance with the SEBI Regulations and the Companies Act, 2013, to the extent applicable. Subsequently on May 21, 2022, these warrants have been exercised and are converted into 18,52,739 equity shares of '10 each at issue price of '458.78 per share including premium of '448.78 per share.
Retained earnings
Retained earnings are the profits that the Company has earned till date, less any transfers to statutory reserve, general reserve or any other such other appropriations to specific reserves.
Fair valuation on loans through other comprehensive income
The Company has elected to recognize changes in the fair value of loans in other comprehensive income. These changes are accumulated as reserve within equity. The Company transfers amount from this reserve to retained earnings when the relevant loans are derecognized.
31: Segment Reporting
The Company operates in a single business segment i.e. financing, as the nature of the loans are exposed to similar risk and return profiles hence they are collectively operating under a single segment as per I nd AS 108 on ‘Operating Segments'. The Company operates in a single geographical segment i.e. domestic, and hence there is no external revenue or assets which require disclosure. No revenue from transactions with a single external customer aggregates to 10% or more of the Company's total revenue during the year ended March 31, 2024 or March 31, 2023.
32: Related party disclosures (As per Ind AS 24)
(a) Name of related parties and nature of relationship
I. Subsidiary Company
a) Caspian Financial Services Limited
b) Criss Financial Limited
II. Entities in which Key Management Personnel and their relatives have significant influence
a) Spandana Employee Welfare Trust
b) Spandana Rural and Urban Development Organization (upto November 02, 2021)
c) Abhiram Marketing Services Limited (upto November 02, 2021)
III. Key Management Personnel ("KMP")
a) Mr. Shalabh Saxena - Managing Director & Chief Executive Officer
b) Mr. Ashish Damani - President & Chief Financial Officer
c) Mr. Ramesh Periasamy - Company Secretary & Chief Compliance Officer (KMP upto January 22, 2024)
d) Mr. Vinay Prakash Tripathi - Company Secretary (w.e.f. January 23, 2024)
32: Related party disclosures (As per Ind AS 24) (Contd.)
IV. Directors
a) Mrs. Abanti Mitra - Non-Executive Chairperson and independent Director
b) Mr. Deepak Vaidya - independent Director
c) Mr. Animesh Chauhan - independent Director
d) Mrs. Deepali Seth - independent Director (w.e.f May 2, 2023)
e) Mr. Vinayak Prasad - independent Director (w.e.f May 2, 2023)
f) Mr. Sunish Sharma - Nominee Director
g) Mr. Kartikeya Dhruv Kaji - Nominee Director
h) Mr. Ramachandra Kasargod Kamath - Nominee Director
i) Mr. Neeraj Swaroop - Nominee Director
j) Mr. Bharat Shah - independent Director (upto April 16, 2023)
k) Mr. Jagdish Capoor - independent Director (upto June 05, 2023)
l) Mrs. Padmaja Gangireddy - Non-Executive Director (upto May 27, 2023)
V. Close member of family of director
a) Mr. Vijaya Sivarami Reddy Vendidandi (upto November 02, 2021)
Close members of the family of the person are those family members who may be expected to influence, or be influenced by, that person in their dealing with the entity including :-
a) that person's children, spouse or domestic partner, brother, sister, father and mother;
b) children of that person's spouse or domestic partner; and
c) dependant of that person or that person's spouse or domestic partner.
33: Contingent Liabilities (Contd.)
ii) The Commissioner, Service Tax Commissionerate, Hyderabad, through order dated August 7, 2012 levied service tax, interest and penalty on pre-closure interest charged by the Company on loans preclosed during FY 2006-07 to FY 2010-11. The Company filed an appeal against the order before the Custom, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad. During February 2024 CESTAT, Hyderabad bench has passed an Order in favour of the Company and held that "Foreclosure charges collected by the banks and non-banking financial companies on premature termination of loans are not leviable to service tax". Consequently, the Company has discontniued contingent liability provided for this case.
iii) Additional Director, DGGI, Mumbai, has issued penalty show cause notie ("SCN") and alleged that Company has by willful acts of omission and commission have passed ineligible ITC under cover of invoices without underlying supply of goods or services have rendered themselves liable for penal action under the provision of Section 122 (l)(ii) of CGST Act, 2017 during the FY April 2018 to Aug 2022. Company is in process of preparing reply to SCN. However, given the facts of these cases and managment's internal assessment, the penalty indicated in the SCN '13.41 crore is considered as a Contingent Liability as at March 31, 2024.
iv) The Asst. Commissioner of Commercial Taxes (Audit -2), Karnataka, through his order dated December 22, 2023, levied GST, interest and penalty on multiple issues during FY 2017-18. The Company filed an appeal against the order before the, The Additional Commissioner of Commercial Taxes (Appeals-3), which is pending for hearing on March 31, 2024. However, given the facts of these cases and managment's internal assessment, the demand indicated in the order '4.93 crore is considered as a contingent liability as at March 31, 2024.
v) The Asst. Commissioner of State Tax, Odisha, through his order dated December 30, 2023, levied GST, interest and
penalty on excess ITC claimed in comparison to GSTR 2A during FY 2017-18. The Company filed an appeal against the order before the, The Joint Commissioner (Appeals), which is pending for hearing on March 31, 2024. However, given the facts of these cases and managment's internal assessment, the demand indicated in the order '0.34 crore is considered as a contingent liability as at March 31, 2024.
vi) The Company received an income tax assessment-cum-demand order for FY 2016-17, inter alia, raising a demand of '51.92 crore (including accrued interest) under section 69A read with section 115BBE of the Income Tax Act, 1961 ("IT Act"). The Company has filed an appeal against this order before the Commissioner of Income Tax (Appeals) that will be heard in due course. However, based on the expert opinions obtained, the Company confident that the matter will be decided in its favour. Accordingly, the aforesaid amount has been considered as a contingent liability as at March 31, 2024. The Company has deposited '6.92 crore against such demand.
vii) The Company received an income tax assessment-cum-demand order for FY 2017-18, disallowing deduction of '1.34 crore claimed under section 80JJAA. While, the addition has not resulted in any additional tax demand (since during FY 2017-18), the Company had paid income tax under section 115JB of the IT Act. However, the assessing officer has levied a penalty of '0.89 crore under section 270A of the IT Act. The Company has filed an appeal before the CIT(A) against the levy of penalty.
Based on the internal assessment and / or legal opinion, the Management is confident that, for the aforesaid mentioned contingent liabilities under paragraph (i) to (vi) above, no further provision is required to be made as at March 31,2024.
34: Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price), regardless of whether that price is directly observable or estimated using a valuation technique. In order to show how fair values have been derived, financial instruments are classified based on a hierarchy of valuation techniques. This note describes the fair value measurement.
Valuation framework
The Company will assess the fair values for assets qualifying for fair valuation. The Company's valuation framework includes;"
1. Benchmarking prices against observable market prices or other independent sources;
2. Development and validation of fair valuation models using model logic, inputs, outputs and adjustments.
These valuation models are subject to a process of due diligence and validation before they become operational and are continuously calibrated. These models are subject to approvals by various functions.
Fair values of financial assets, other than those which are subsequently measured at amortised cost, have been arrived at as under;
1. Fair values of investments held under FVTPL have been determined under level 1 using quoted Net Asset Value of the underlying instruments;
2. Fair value of loans held under a business model that is achieved by both collecting contractual cash flows and selling the loans are measured at FVOCI. The fair value of these loans has been determined under level 2.
35: Fair Value Hierarchy of assets and liabilities Fair value measurement
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable and consists of the following three levels;
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - The fair value of financial instruments that are not traded in an active market are determined using valuation techniques which maximise the use of observable market data (either directly as prices or indirectly derived from prices) and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The financial instruments included in Level 2 of fair value hierarchy have been valued using quotes available for similar assets and liabilities in the active market.
Level 3 - If one or more of the significant inputs is not based on observable market data (unobservable), the instrument is included in level 3.
Note:
The carrying amounts of cash and cash equivalents, bank balances other than cash and cash equivalents and other financial assets / liabilities approximate the fair value because of their short-term nature.
Valuation technique used For Loans
The scheduled future cash flows (including principal and interest) are discounted using the lending rate prevailing as at the balance sheet date. The discounting factor is applied assuming the cash flows will be evenly received in a month. Further the overdue cash flows upto 90 Days (upto stage 2) are discounted assuming they will be received in the third month. Fairvalue of cash flows for stage 3 loans are assumed as carrying value less provision for expected credit loss.
For investment in equity instruments
For investments, the Company has assessed the fair value on the basis of using a market comparable book value multiple. For investment in security receipts
For investments in security receipts, the Company has considered the net asset value declared by the trust.
Financial liabilities measured at amortised cost For Borrowings
The fair value of fixed rate borrowings is determined by discounting expected future contractual cash flows using current market interest rate being charged for new borrowings. The fair value of floating rate borrowing is deemed to equal its carrying value.
There have been no transfer between Level 1, 2 and 3 during the year ended March 31, 2024 and March 31, 2023.
36: Capital Management
The Company's objective for capital management is to maximize shareholders' value, safeguard business continuity, meet the regulatory requirement and support the growth of the Company. The Company determines the capital requirement based on annual operating plans and long-term and other strategic investment plans. The funding requirements are met through borrowings, retained earnings and operating cash flows generated.
As an NBFC-MFI, the RBI requires us to maintain a minimum capital to risk weighted assets ratio ("CRAR") consisting of Tier I and Tier II capital of 15% of our aggregate risk weighted assets. Further, the total of our Tier II capital cannot exceed 100% of our Tier I capital at any point of time. The capital management process of the Company ensures to maintain a healthy CRAR at all the times.
The Company has a board approved policy on resource planning which states that the resource planning of the Company shall be based on its Asset Liability Management (ALM) requirement. The policy of the Company on resource planning will also cover the objectives of the regulatory requirement. The policy prescribes the sources of funds, threshold for mix from various sources, tenure, manner of raising the funds etc.
38:Leases Company as a lessee
The Company's significant leasing arrangements are in respect of operating leases of office premises (Head office and branch offices). The branch office premises are generally rented on cancellable term of eleven months with or without escalation clause, however none of the branch lease agreements carries non-cancellable lease periods. The head office premises have been obtained on a lease term of five years with an annual escalation clause of five percent. The Company has applied short term lease exemption for leasing arrangements where the period of lease is less than 12 months.
39: Amount payable to micro small and medium enterprises
Based on information available with the Company, as at the reporting period, there are no dues payable to suppliers who are registered as micro and small enterprises under the provisions of the Micro, Small and Medium Enterprises Development Act, 2006.
40: Risk Management and financial objectives
Risk is an integral part of the Company's business and sound risk management is critical to the success. As a financial intermediary, the Company is exposed to risks that are particular to its lending and the environment within which it operates and primarily includes credit, liquidity and market risks. The Company has a risk management policy which covers risks associated with the financial assets and liabilities. The risk management policy is approved by the Board of Directors.
The Company has identified and implemented comprehensive policies and procedures to assess, monitor and manage risk throughout the Company. The risk management process is continuously reviewed, improved and adapted in the context of changing risk scenario and the agility of the risk management process is monitored and reviewed for its appropriateness in the changing risk landscape. The process of continuous evaluation of risks includes taking stock of the risk landscape on an event-driven basis.
The Company has an elaborate process for risk management. Major risks identified by the businesses and functions are systematically addressed through mitigating actions on a continuing basis.
40: Risk Management and financial objectives (Contd.)
40.1 Credit Risk
Credit risk is the risk that the counterparty shall not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Credit risk encompasses of both, the direct risk of default and the risk of deterioration of the creditworthiness as well as concentration of risks. Credit risk arises primarily from financial assets such as loan receivables, investment in equity shares, balances with banks and other receivables.
Financial instruments that are subject to concentration of credit risk principally consist of investments, cash and cash equivalents, bank deposits and other financial assets. None of the financial instruments of the Company result in material concentration of credit risk.
Financial assets that are neither past due nor impaired.
None of the Company's cash equivalents, including fixed deposits, were either past due or impaired as at March 31, 2024 and March 31,2023. The Company has diversified its portfolio of investment in cash and cash equivalents and term deposits with various banks with sound credit ratings, hence the risk is reduced.
Loans
Credit risk is the risk of loss that may occur from defaults by our Borrowers under our loan agreements. In order to address credit risk, we have stringent credit assessment policies for client selection. Measures such as verifying client details, online documentation and the usage of credit bureau data to get information on past credit behaviour also supplement the efforts for containing credit risk. We also follow a systematic methodology in the opening of new branches, which takes into account factors such as the demand for credit in the area; income and market potential; and socio-economic and law and order risks in the proposed area. Further, our client due diligence procedures encompass various layers of checks, designed to assess the quality of the proposed group and to confirm that they meet our criteria."
The Company is a rural focused NBFC-MFI with a geographically diversified presence in India and offer income generation loans under the joint liability group model, predominantly to women from low-income households in Rural Areas. Further, as we focus on providing micro-loans in Rural Areas, our results of operations are affected by the performance and the future growth potential of microfinance in rural India. Our clients typically have limited sources of income, savings and credit histories and our loans are typically provided free of collateral. Such clients generally do not have a high level of financial resilience, and, as a result, they can be adversely affected by declining economic conditions and natural calamities. In addition, we rely on non-traditional guarantee mechanisms rather than tangible assets as collateral, which may not be effective in recovering the value of our loans.
In order to mitigate the impact of credit risk in the future profitability, the Company creates impairment loss allowance basis the expected credit loss (ECL) model for the outstanding loans as at balance sheet date.
The criteria of default, significant increase in credit risk and stage assessment is mentioned in note 3 (e) of the significant accounting policies. The below discussion describes the Company's approach for assessing impairment.
A) Probability of default (PD)
The Company compute PD at enterprise level considering the borrower profile and loan product offered to them are homogeneous. The product features like loan tenure, interest rate, ticket size, customer selection are uniform across the branches and thus carry similar uncertainties. The geographical related political and natural calamity risk is more rationalised when looked at the enterprise level.
Accordingly, the Company determines PD for each stage depending upon the underlying classification of asset (i.e., Stage I or Stage II). The PD rates for Stage I and II have been further bifurcated based on the days-past-due (DPD) status of the loans (i.e., current to 30 DPD, 31-60 DPD and 61-90 DPD) to incorporate adequate granularity. PD rate for stage 3 is derived as 100% considering that the default occurs as soon as the loan becomes overdue for 90 days.
B) Exposure at default (EAD)
Exposure at default (EAD) is the sum of outstanding principal and the interest amount accrued but not received on each loan as at reporting date.
40: Risk Management and financial objectives (Contd.)
C) Loss given default
The Company determines its expectation of lifetime loss by estimating recoveries towards its loan through analysis of historical information. The Company determines its recovery rates by analysing the recovery trends over different periods of time after a loan has defaulted. LGD is the difference between the exposure at default and its recovery rate. It is based on the difference between the contractual cash flows due and those that the Company would expect to receive. LGD is calculated as % of Exposure that the Company expects to lose at the time of default. LGD is computed as {1-Recovery Rate (RR)} where RR indicates % of Recovery post default.
Collateral and other credit enhancement
The Company's secured portfolio consists of loans against property (including land and building). Although collateral is an important mitigant credit risk, the Company's practice is to lend on the basis of its assessment of the customer's ability to repay rather than placing primary reliance on collateral. Based on the nature of the product and the Company's assessment of the customer's credit risk, a loan may be offered with suitable collateral.
40.1.a Inter-corporate advance given by the Company to related parties are repayable on demand and governed by Company's policy on demand loans approved by the board of directors. Such policy requires credit appraisal of the financial and operational performance of the counter parties, to be performed by the Company before renewing/rolling over of the advance.
40.2 Liquidity Risk
Liquidity risk refers to the risk that the Company may not meet its financial obligations. Liquidity risk arises due to the unavailability of adequate funds at an appropriate cost or tenure. The objective of liquidity risk management is to maintain sufficient liquidity and ensure that funds are available for use as per requirements. The Company consistently generates sufficient cash flows from operating and financing activities to meet its financial obligations as and when they fall due. Our resource mobilization team sources funds from multiple sources, including from banks, financial institutions and capital markets to maintain a healthy mix of sources. The resource mobilization team is responsible for diversifying fundraising sources, managing interest rate risks and maintaining a strong relationship with banks, financial institutions, mutual funds, insurance companies, other domestic and foreign financial institutions and rating agencies to ensure the liquidity risk is well addressed. In order to reduce dependence on a single lender, the Company has adopted a cap on borrowing from any single lender at 25%. The maturity schedule for all financial liabilities and assets are regularly reviewed and monitored. Company has a asset liability management (ALM) policy and ALM Committee to review and monitor the liquidity risk and ensure the compliance with the prescribed regulatory requirement. The ALM Policy prescribes the detailed guidelines for managing the liquidity risk.
40.3 Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market factor. Such changes in the values of financial instruments may result from changes in the interest rates, credit, liquidity and other market changes. The Company is exposed to two types of market risks as follows;"
40.3a Interest rate risk
Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates."
We are subject to interest rate risk, principally because we lend to clients at fixed interest rates and for periods that may differ from our funding sources, while our borrowings are at both fixed and variable interest rates for different periods. We assess and manage our interest rate risk by managing our assets and liabilities. Our Asset Liability Management Committee evaluates asset liability management, and ensures that all significant mismatches, if any, are being managed appropriately.
The Company has Board Approved Asset Liability Management (ALM) policy for managing interest rate risk and policy for determining the interest rate to be charged on the loans given.
The following table demonstrates the sensitivity to a reasonably possible change in the interest rates on the portion of borrowings affected. With all other variables held constant, the profit before tax / equity is affected through the impact on floating rate borrowings, as follows;
41: Transfer of Financial assets a. Securitisation Transaction:
The Company has entered into securitisation arrangement with various parties. Under such arrangement, the Company has transferred a pool of loans, which does not fulfil the derecognition criteria specified under Ind AS 109 as the Company has concluded that risk and rewards with respect to these assets are not substantially transferred. Following such transfer, the Company's involvement in these assets is as follows:
• As a servicer of the transferred assets
• To the extent of credit enhancements provided to such parties
J. Registration obtained from other financial sector regulators:
The Company is registered with the ‘Ministry of Corporate Affairs' (Financial regulators as described by Ministry of
Finance).
K. Disclosure of Penalties imposed by RBI and Other Regulators:
For the year ended March 31, 2024: no penalty imposed by RBI and other Regulators
For the year ended March 31, 2023:
(i) Reserve Bank of India in exercise of powers under the provisions of clause (b) of sub-section (1) of section 58 G read with clause (aa) of sub-section (5) of section 58 B of the Reserve Bank of India Act, 1934, by an order dated August 05, 2022 (notified on August 08, 2022), based on the observations of statutory inspections for FY2019 and FY2020, has imposed a monetary penalty of '2.33 Cr on the Company for non-adherence to the pricing of credit guidelines as applicable to Non-Banking Financial Company- Micro Finance Institutions for that period.
(ii) Pursuant to the RBI Guidelines for Appointment of Statutory Central Auditors (SCAs) / Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) dated April 27, 2021 (the "RBI Guidelines") and in line with the specific instructions received from the RBI, the predecessor auditor's had resigned on January 28, 2022, after completion of limited review on the financial results of the Company for the quarter and half year ended September 30, 2021. Such resignation and subsequent appointment of new statutory auditors, being contrary to the provisions of para 6(A) of SEBI guidelines on "Resignation of statutory auditors from listed entities and their material subsidiaries" issued vide circular no. CIR/CFD/CMD1/114/2019 dated October 18, 2019, the Company has submitted application dated February 3, 2022 with SEBI, seeking settlement in this matter. Further, the Company vide letter dated June 3, 2022, has paid '0.25 Cr to settle the matter as directed by SEBI vide the Settlement Order no. SO/EFD-2/SD/429/OCTOBER/2022 dated October 25, 2022.
AC: Liquidity coverage ratio
The RBI has issued final guidelines on Liquidity Risk Management Framework for Non-Banking Financial Companies and Core investment Companies on November 04, 2019. As per the said guidelines, LCR requirement shall be binding on all non-deposit taking systemically important NBFCs with asset size of 5000 crore and above but less than 10,000 crs from December 1, 2020, with the minimum LCR to be 30%, progressively increasing, till it reaches the required level of 100%, by December 1, 2024.
The Company follows the criteria laid down by RBI for calculation of High Quality Liquid Assets (HQLA), gross outflows and inflows within the next 30-day period. HQLA predominantly comprises cash and balance with other banks in current account. All significant outflows and inflows determined in accordance with RBI guidelines are included in the prescribed LCR computation template. The disclosure on Liquidity Coverage Ratio of the Company for the year ended March 31,2024 is as under:
6. Institutional set-up for liquidity risk management:
The Company has an Asset Liability Management Committee (ALCO), a management level committee to handle liquidity risk management. The ALCO meetings are held at periodic intervals. At the apex level, the Risk Committee (RC), a sub-committee of the Board of Directors of the Company, oversees the liquidity risk management. The RC subsequently updates the Board of Directors on the same.
Notes:
1. Significant counterparty is as defined in RBI Circular RBI/2019-20/88 DOR.NBFC (PD) CC.No.102/03.10.001/2019-20 dated November 4, 2019 on Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies.
2. Significant instrument/product is as defined in RBI Circular RBI/2019-20/88 DOR.NBFC (PD) CC.No.102/03.10.001/2019-20 dated November 4, 2019 on Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies.
3. Total Liabilities has been computed as sum of all liabilities (Balance Sheet figure) less Equities and Reserves/Surplus.
4. Short term liabilities includes all financial and non-financial liabilities expected to be paid within one year.
5. Public funds is as defined in Master Direction - Non-Banking Financial Company - Systemically Important NonDeposit taking Company and Deposit taking Company (Reserve Bank) Direction, 2016.
47: The Company in respect of the observation made by the RBI in its inspection report for the years ended March 31,2018 and March 31, 2019 and subsequent correspondence with Reserve Bank of India ("RBI") with respect to the compliance with the pricing of credit guidelines prescribed under paragraph 56 of the Master Direction - Non-Banking Financial Company -Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, dated September 1, 2016, as amended had adequately recognised the impact of excess interest collected on loans disbursed during the period from Oct 2017 to Feb 2020, in the financial statements for the year ended March 31, 2021. During the year ended March 31, 2024, the Company had refunded '15.51 crores by way of credit into customers bank accounts / loan accounts. Given the profile of the customers and accessibility issues, the company is unable to trace borrower / bank account of borrower for remaining balances of '23.36 crores and has sought advice from Reserve bank of India on the refund of balance amount (for which bank account details are not available with the Company) and will act as per directive from Reserve bank of India.
49: Additional Regulatory Information
(a) There is no such immovable properties held whose title deeds are not held in the name of the Company.
(b) There are no investment property as on March 31, 2024 and March 31, 2023.
(c) The Company has not revalued its Property, Plant and Equipment (including Right-of Use Assets) and intangible assets based on the valuation by a registered valuer as defined under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.
(d) No proceeding has been initiated or pending against the Company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder.
(e) The Company has not taken borrowings from banks or financial institutions on the basis of security of current assets.
(f) The Company has not been declared wilful defaulter by any bank or financial Institution or other lender.
(g) No transactions were carried out during the year with companies struck off under section 248 of the Companies Act, 2013 or section 560 of Companies Act, 1956.
(h) No charges or satisfaction yet to be registered with ROC beyond the statutory period.
(i) The Company has complied with the number of layers prescribed under clause (87) of section 2 of the Act read with Companies (Restriction on number of Layers) Rules, 2017
(j) There is no income surrendered or disclosed as income during the current or previous year in the tax assessments under the Income Tax Act, 1961, that has not been recorded in the books of account.
(k) The Company has not traded or invested in Crypto currency or Virtual Currency during the financial year.
(l) The Company has not been sanctioned working capital limits by banks or financial institutions on the basis of security of current assets at any point of time during the year.
50. The Ministry of Corporate Affairs (MCA) has prescribed a new requirement for companies under the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 inserted by the Companies (Accounts) Amendment Rules 2021 requiring companies, which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled. The Company, in respect of financial year commencing on 1 April 2023 has used an accounting software Financial Information Monitoring Organizer (FIMO) for maintaining books of account which has a feature of recording audit trail (edit log). The users of the Company do not have any access to database IDs with Data Manipulation Language (DML) authority, which can make direct data changes (create, change, delete) at database level. Accordingly, the Company had not enabled the feature of recording audit trail (edit log) at the database level for the said accounting software to log any direct data changes as the same consume storage space on the disk and can impact database performance significantly. Audit trail (edit log) is enabled at the application level, and the Company's users have access to perform transactions only from the application level. Further, the Company, has used accounting software (Adrenalin Max) which is operated by a third-party software service provider. The ‘Independent Service Auditor's Assurance Report on the Description of Controls, their Design and Operating Effectiveness' (‘Type 2 report' issued in accordance with SAE 3402, Assurance Reports on Controls at a Service Organization) is not available for the year ending March 2024.
51: Previous year figures have been regrouped/ reclassified wherever applicable. The impact of such restatements/ regroupings are not material to Financial Statements.
52. The Company has chosen to publish the financial statements in ' crores for the year ended 31 March 2024. Accordingly, the previous year figures have been rounded off.
As per our report of even date
For Walker Chandiok & Co LLP For and on behalf of the Board of Directors of
Chartered Accountants Spandana Sphoorty Financial Limited
ICAI Firm registration number:
001076N/N500013
Manish Gujral Abanti Mitra Shalabh Saxena
Partner Chairperson Managing Director & CEO
Membership No.: 105117 DIN: 02305893 DIN: 08908237
Ashish Damani Vinay Prakash Tripathi
President & Chief Financial Officer Company Secretary
Membership No.: ACS-18976
Place: Hyderabad Place: Hyderabad
Date: April 29, 2024 Date: April 29, 2024
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