To the Members of
Aavas Financiers Limited
Report on the Audit of the Standalone Ind AS Financial Statements
We have audited the accompanying standalone Ind AS financial statements of AavasFinanciers Limited ("the Company") which comprise the Balance sheet as at March31 2020 the Statement of Profit and Loss including the statement of Other ComprehensiveIncome the Cash Flow Statement and the Statement of Changes in Equity for the year thenended and notes to the standalone Ind AS financial statements including a summary ofsignificant accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone Ind AS financial statements give the informationrequired by the Companies Act 2013 as amended ("the Act") in the manner sorequired and give a true and fair view in conformity with the accounting principlesgenerally accepted in India of the state of affairs of the Company as at March 31 2020its profit including other comprehensive income its cash flows and the changes in equityfor the year ended on that date.
Basis for Opinion
We conducted our audit of the standalone Ind AS financial statements in accordance withthe Standards on Auditing (SAs) as specified under section 143(10) of the Act. Ourresponsibilities under those Standards are further described in the Auditor'sResponsibilities for the Audit of the Standalone Ind AS Financial Statements' section ofour report. We are independent of the Company in accordance with the Code of Ethics'issued by the Institute of Chartered Accountants of India together with the ethicalrequirements that are relevant to our audit of the financial statements under theprovisions of the Act and the Rules thereunder and we have fulfilled our other ethicalresponsibilities in accordance with these requirements and the Code of Ethics. We believethat the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our audit opinion on the standalone Ind AS financial statements.
Emphasis of Matter
We draw attention to Note 47 to the standalone Ind AS financial statement whichdescribes the extent to which the COVID-19 pandemic will impact the Company's operationsand its financial metrics including the expected credit loss on financial assets which aredependent on uncertain future developments. Our opinion is not modified in respect of thismatter.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the standalone Ind AS financial statements for the financialyear ended March 31 2020. These matters were addressed in the context of our audit of thestandalone Ind AS financial statements as a whole and in forming our opinion thereon andwe do not provide a separate opinion on these matters. For each matter below ourdescription of how our audit addressed the matter is provided in that context.
We have determined the matters described below to be the key audit matters to becommunicated in our report. We have fulfilled the responsibilities described in theAuditor's responsibilities for the audit of the standalone Ind AS financial statementssection of our report including in relation to these matters. Accordingly our auditincluded the performance of procedures designed to respond to our assessment of the risksof material misstatement of the standalone Ind AS financial statements. The results of ouraudit procedures including the procedures performed to address the matters below providethe basis for our audit opinion on the accompanying standalone Ind AS financialstatements.
|Key audit matters ||How our audit addressed the key audit matter |
|Impairment of Financial assets(as described in Note 4 of the standalone Ind AS financial statements) || |
|Ind AS 109 requires the Company to provide for impairment of its financial assets using the expected credit loss (ECL') approach involving an estimation of probability of loss on the financial assets over their life considering reasonable and supportable information about past events current conditions and forecasts of future economic conditions which could impact the credit quality of the Company's financial assets. In the process a significant degree of judgement has been applied by the management in respect of following matters: || Our audit procedures included considering the Company's accounting policies for impairment of financial instruments and assessing compliance with the policies in terms of Ind AS 109. |
|a) Grouping of the loan portfolio under risk-based categories determined using Company's risk-management framework. Loans grouped under a particular category are assumed to represent a homogenous pool thereby expected to demonstrate similar credit characteristics. ||Assessed the assumptions used by the Company for grouping and staging of loan portfolio into various categories and default buckets and their appropriateness for determining the probability-weighted default (PD) and loss-given default (LGD) rates. |
|b) Staging of loans. || Tested controls for staging of loans based on their past-due status. Also tested samples of stage 1 and Stage 2 loans to assess whether any loss indicators were present requiring them to be classified under stage 2 or stage 3. |
|c) Estimation of expected loss from historical observations. || Tested samples of the input data used for determining the PD and LGD rates and agreed the data with the underlying books of accounts and records. |
|d) Estimation of losses in respect of those groups of loans which had no/ minimal defaults in the past. || Assessed the management overlays applied by the Company to factor the impact of COVID-19 on the ECL as approved by their Board of Directors. |
|e) Management overlay for macro-economic factors and estimation of their impact on the credit quality. || Tested the arithmetical accuracy of computation of ECL provision performed by the Company. |
|The Company has developed models that derive key assumptions used within the provision calculation such as probability of default (PD) and loss given default (LGD). || Assessed that the assumptions used by the management for estimation of allowance for expected credit losses as at March 31 2020 are presented and disclosed in the Ind AS financial statements. |
|The output of these models is then applied to the provision calculation with other information including and the exposure at default (EAD). || Read and assessed the specific disclosures made in the Ind AS financial statements with regards to managements evaluation of the uncertainties arising from COVID-19 and its impact on ECL. |
|The impact of COVID-19 on the ECL is highly uncertain however the Company has factored the higher risk in its computation of the ECL provision and has applied management overlays which are approved by the Board of Directors. || In assessing the reliability of electronic data processing we included specialized IT auditors as part of the audit team. |
|Considering the significance of such provision to the overall financial statements and the degree of management's judgment any error or misstatement in such estimate may give rise to a material misstatement of the Ind AS financial statements or omission of any disclosure required by the standards. Therefore it is considered as a key audit matter. Information Technology ("IT") systems and controls || Tested the design and operating effectiveness of the IT general controls (logical access changes management and aspects of IT operational controls). This included testing that requests for access to systems were reviewed and authorised. |
|Our audit procedures have a focus on IT systems and controls due to the pervasive nature and complexity of the IT environment the large volume of transactions processed in numerous locations daily and the reliance on automated and IT dependent manual controls. || Tested the Company's periodic review of access rights. We inspected requests of changes to systems for appropriate approval and authorisation. |
|Due to the pervasive nature and complexity of the IT environment we have ascertained IT systems and controls as a key audit matter. || Considered the control environment relating to various interfaces configuration and other application layer controls identified as key to our audit. |
|During the year the Company has assigned loans amounting to H738.59 crores for managing its funding requirements and recorded a net income of H76.59 crores and corresponding un- winding of excess interest spread receivable of H55.04 crores. || Where deficiencies were identified tested compensating controls or performed alternate procedure. |
|As per Ind AS 109 de-recognition of loans transferred by the Company through assignment is based on the risk and reward' model and a control' model. If de-recognition criteria are met the financial assets transferred are de-recognized and difference between carrying value and consideration including the present value of interest payments that it would not give up (excess interest spread receivable) is recorded as income in the statement of profit and loss. || Our audit procedures included considering the Company's accounting policies for de-recognition of financial instruments and assessing compliance with the policies in terms of Ind AS 109. |
|The Company also records a servicing asset and servicing liability at their fair value for the right retained for servicing the financial asset for the service contract and the related costs to be incurred. || Examined the terms of assignment agreements on a sample basis to evaluate whether the de-recognition criteria have been applied by the Company. |
|There are assumptions made with respect to the remaining tenor of the financial assets assigned and other factors which could materially impact the fair valuation as well the excess interest spread. Accordingly de-recognition of financial assets was considered as a key audit matter. || Assessed the significant estimates and judgments including the discount rate and expected remaining life of the portfolio transferred used by the Company for computation of excess interest spread receivable servicing asset and servicing liability. |
| || Tested the arithmetical accuracy of computation of the excess interest spread receivable servicing asset and servicing liability. Assessed the disclosures included in the Ind AS financial statements with respect to de-recognition in accordance with the requirements of Ind AS 109 and Ind AS 107. |
The Company's Board of Directors is responsible for the other information. The otherinformation comprises the information included in the Annual report but does not includethe standalone Ind AS financial statements and our auditor's report thereon. Our opinionon the standalone Ind AS financial statements does not cover the other information and wedo not express any form of assurance conclusion thereon.
In connection with our audit of the standalone Ind AS financial statements ourresponsibility is to read the other information and in doing so consider whether suchother information is materially inconsistent with the financial statements or ourknowledge obtained in the audit or otherwise appears to be materially misstated. If basedon the work we have performed we conclude that there is a material misstatement of thisother information we are required to report that fact. We have nothing to report in thisregard.
Responsibilities of Management for the Standalone Ind AS Financial Statements
The Company's Board of Directors is responsible for the matters stated in section134(5) of the Act with respect to the preparation of these standalone Ind AS financialstatements that give a true and fair view of the financial position financial performanceincluding other comprehensive income cash flows and changes in equity of the Company inaccordance with the accounting principles generally accepted in India including theIndian Accounting Standards (Ind AS) specified under section 133 of the Act read with [theCompanies (Indian Accounting Standards) Rules 2015 as amended. This responsibility alsoincludes maintenance of adequate accounting records in accordance with the provisions ofthe Act for safeguarding of the assets of the Company and for preventing and detectingfrauds and other irregularities; selection and application of appropriate accountingpolicies; making judgments and estimates that are reasonable and prudent; and the designimplementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the accuracy and completeness of the accountingrecords relevant to the preparation and presentation of the standalone Ind AS financialstatements that give a true and fair view and are free from material misstatement whetherdue to fraud or error.
In preparing the standalone Ind AS financial statements management is responsible forassessing the Company's ability to continue as a going concern disclosing as applicablematters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Company or to cease operations or has norealistic alternative but to do so.
Those Board of Directors are also responsible for overseeing the Company's financialreporting process.
Auditor's Responsibilities for the Audit of the Standalone Ind AS Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalone Ind ASfinancial statements as a whole are free from material misstatement whether due to fraudor error and to issue an auditor's report that includes our opinion. Reasonable assuranceis a high level of assurance but is not a guarantee that an audit conducted in accordancewith SAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if individually or in theaggregate they could reasonably be expected to influence the economic decisions of userstaken on the basis of these standalone Ind AS financial statements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the [standalone] IndAS financial statements whether due to fraud or error design and perform auditprocedures responsive to those risks and obtain audit evidence that is sufficient andappropriate to provide a basis for our opinion. The risk of not detecting a materialmisstatement resulting from fraud is higher than for one resulting from error as fraudmay involve collusion forgery intentional omissions misrepresentations or the overrideof internal control.
Obtain an understanding of internal control relevant to the audit in order todesign audit procedures that are appropriate in the circumstances. Under section 143(3)(i)of the Act we are also responsible for expressing our opinion on whether the Company hasadequate internal financial controls with reference to financial statements in place andthe operating effectiveness of such controls.
Evaluate the appropriateness of accounting policies used and the reasonablenessof accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basisof accounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Company'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our auditor's report to the related disclosures inthe financial statements or if such disclosures are inadequate to modify our opinion.Our conclusions are based on the audit evidence obtained up to the date of our auditor'sreport. However future events or conditions may cause the Company to cease to continue asa going concern.
Evaluate the overall presentation structure and content of the standalone IndAS financial statements including the disclosures and whether the standalone Ind ASfinancial statements represent the underlying transactions and events in a manner thatachieves fair presentation.
We communicate with those charged with governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit. We alsoprovide those charged with governance with a statement that we have complied with relevantethical requirements regarding independence and to communicate with them allrelationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.
From the matters communicated with those charged with governance we determine thosematters that were of most significance in the audit of the standalone Ind AS financialstatements for the financial year ended March 31 2020 and are therefore the key auditmatters. We describe these matters in our auditor's report unless law or regulationprecludes public disclosure about the matter or when in extremely rare circumstances wedetermine that a matter should not be communicated in our report because the adverseconsequences of doing so would reasonably be expected to outweigh the public interestbenefits of such communication.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor's Report) Order 2016 ("the Order")issued by the Central Government of India in terms of sub-section (11) of section 143 ofthe Act we give in the "Annexure-1" a statement on the matters specified inparagraphs 3 and 4 of the Order.
2. As required by Section 143(3) of the Act we report that: (a) We have sought andobtained all the information and explanations which to the best of our knowledge andbelief were necessary for the purposes of our audit; (b) In our opinion proper books ofaccount as required by law have been kept by the Company so far as it appears from ourexamination of those books; (c) The Balance Sheet the Statement of Profit and Lossincluding the Statement of Other Comprehensive Income the Cash Flow Statement andStatement of Changes in Equity dealt with by this Report are in agreement with the booksof account; (d) In our opinion the aforesaid standalone Ind AS financial statementscomply with the Accounting Standards specified under Section 133 of the Act read withCompanies (Indian Accounting Standards) Rules 2015 as amended;
(e) On the basis of the written representations received from the directors as on March31 2020 taken on record by the Board of Directors none of the directors is disqualifiedas on March 31 2020 from being appointed as a director in terms of Section 164 (2) of theAct; (f) With respect to the adequacy of the internal financial controls over financialreporting of the Company with reference to these standalone Ind AS financial statementsand the operating effectiveness of such controls refer to our separate Report in"Annexure-2" to this report; (g) In our opinion the managerial remuneration forthe year ended March 31 2020 has been paid / provided by the Company to its directors inaccordance with the provisions of section 197 read with Schedule V to the Act; (h) Withrespect to the other matters to be included in the Auditor's Report in accordance withRule 11 of the Companies (Audit and Auditors) Rules 2014 as amended in our opinion andto the best of our information and according to the explanations given to us: i. TheCompany does not have any pending litigations which would impact its financial positionRefer Note 39 in the financial statement; ii. The Company did not have any long-termcontracts including derivative contracts for which there were any material foreseeablelosses. Refer Note 34 in the financial statement; iii. There were no amounts which wererequired to be transferred to the Investor Education and Protection Fund by the Company.
Annexure 1 referred to in paragraph 1 under the heading "Report on other legal andregulatory requirements" of our report of even date
Re: Aavas Financiers Limited
(i) (a) The Company has maintained proper records showing full particulars includingquantitative details and situation of fixed assets.
(b) All fixed assets were physically verified by the management in the previous year inaccordance with a planned programme of verifying them once in two years which in ouropinion is reasonable having regard to the size of the Company and the nature of itsassets. No material discrepancies were noticed on such verification.
(c) According to the information and explanations given by the management the titledeeds of immovable properties included in property plant and equipment are held in thename of the company.
(ii) The Company's business does not involve inventories and accordingly therequirements under clause 3 (ii) of the Order are not applicable to the Company and hencenot commented upon.
(iii) According to the information and explanations given to us the Company has notgranted any loans secured or unsecured to companies firms Limited LiabilityPartnerships or other parties covered in the register maintained under section 189 of theCompanies Act 2013. Accordingly the provisions of clause 3(iii) (a) (b) and (c) of theOrder are not applicable to the Company and hence not commented upon.
(iv) In our opinion and according to the information and explanations given to usthere are no loans investments guarantees and securities given in respect of whichprovisions of section 185 and 186 of the Act are applicable and hence not commented upon.
(v) The Company has not accepted any deposits within the meaning of Sections 73 to 76of the Act and the Companies (Acceptance of Deposits) Rules 2014 (as amended).Accordingly the provisions of clause 3(v) of the Order are not applicable.
(vi) To the best of our knowledge and as explained the Central Government has notspecified the maintenance of cost records under section 148(1) of the Act for theservices of the Company.
(vii) (a) Undisputed statutory dues including provident fund employees' stateinsurance income-tax value added tax goods and service tax cess and other statutorydues have generally been regularly deposited with the appropriate authorities though therehas been a slight delay in a few cases. The provisions relating to duty of excise andsales-tax are not applicable to the Company.
(b) According to the information and explanations given to us no undisputed amountspayable in respect of provident fund employees' state insurance income-tax service taxsales-tax duty of custom duty of excise value added tax goods and service tax cessand other statutory dues were outstanding at the year end for a period of more than sixmonths from the date they became payable.
(c) According to the information and explanations given to us there are no dues ofincome tax sales-tax service tax customs duty excise duty value added tax and cesswhich have not been deposited on account of any dispute.
(viii) In our opinion and according to the information and explanations given by themanagement the Company has not defaulted in repayment of loans or borrowing to afinancial institution bank or government or dues to debenture holders.
(ix) In our opinion and according to the information and explanations given by themanagement the Company has utilized the monies raised by way of initial public offer anddebt instruments in the nature of Non-convertible debentures for the purposes for whichthey were raised. Further monies raised by the Company by way of term loans were appliedfor the purpose for which those were raised though idle/surplus funds which were notrequired for immediate utilization were gainfully invested in liquid investments payableon demand. The maximum amount of idle/surplus funds invested during the year was H224crores of which H Nil was outstanding at the end of the year.
(x) Based upon the audit procedures performed for the purpose of reporting the true andfair view of the financial statements and according to the information and explanationsgiven by the management we report that no fraud by the Company or no material fraud onthe Company by the officers and employees of the Company has been noticed or reportedduring the year.
(xi) According to the information and explanations given by the management themanagerial remuneration has been paid and provided in accordance with the requisiteapprovals mandated by the provisions of section 197 read with Schedule V to the Act.
(xii) In our opinion the Company is not a nidhi company. Therefore the provisions ofclause 3(xii) of the Order are not applicable to the Company and hence not commented upon.
(xiii) According to the information and explanations given by the managementtransactions with the related parties are in compliance with section 177 and 188 of theAct where applicable and the details have been disclosed in the notes to the financialstatements as required by the applicable accounting standards.
(xiv) According to the information and explanations given to us and on an overallexamination of the balance sheet the company has not made any preferential allotment orprivate placement of shares or fully or partly convertible debentures during the yearunder review and hence reporting requirements under clause 3(xiv) are not applicable tothe company and not commented upon. (xv) According to the information and explanationsgiven by the management the Company has not entered into any non-cash transactions withdirectors or persons connected with the directors as referred to in section 192 of theAct. (xvi) According to the information and explanations given to us the provisions ofsection 45-IA of the Reserve Bank of India Act 1934 are not applicable to the Company.
For S.R. Batliboi & Associates LLP
ICAI Firm Registration Number: 101049W/E300004
Annexure 2 referred in paragraph 2(f) under the heading "Report on other legal andregulatory requirements" of our report of even date
We have audited the internal financial controls over financial reporting of AavasFinanciers Limited ("the Company") as of March 31 2020 in conjunction with ouraudit of the standalone financial statements of the Company for the year ended on thatdate.
Management's Responsibility for Internal Financial Controls
The Company's Management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Company considering the essential components of internal control statedin the Guidance Note on Audit of Internal Financial Controls Over Financial Reportingissued by the Institute of Chartered Accountants of India. These responsibilities includethe design implementation and maintenance of adequate internal financial controls thatwere operating effectively for ensuring the orderly and efficient conduct of its businessincluding adherence to the Company's policies the safeguarding of its assets theprevention and detection of frauds and errors the accuracy and completeness of theaccounting records and the timely preparation of reliable financial information asrequired under the Companies Act 2013.
Our responsibility is to express an opinion on the Company's internal financialcontrols over financial reporting with reference to these standalone financial statementsbased on our audit. We conducted our audit in accordance with the Guidance Note on Auditof Internal Financial Controls Over Financial Reporting (the "Guidance Note")and the Standards on Auditing as specified under section 143(10) of the Companies Act2013 to the extent applicable to an audit of internal financial controls and both issuedby the Institute of Chartered Accountants of India. Those Standards and the Guidance Noterequire that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether adequate internal financial controls over financialreporting with reference to these standalone financial statements was established andmaintained and if such controls operated effectively in all material respects. Our auditinvolves performing procedures to obtain audit evidence about the adequacy of the internalfinancial controls over financial reporting with reference to these standalone financialstatements and their operating effectiveness. Our audit of internal financial controlsover financial reporting included obtaining an understanding of internal financialcontrols over financial reporting with reference to these standalone financial statementsassessing the risk that a material weakness exists and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. The proceduresselected depend on the auditor's judgement including the assessment of the risks ofmaterial misstatement of the financial statements whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the internal financial controls over financialreporting with reference to these standalone financial statements.
Meaning of Internal Financial Controls Over Financial Reporting With Reference to theseFinancial Statements
A company's internal financial control over financial reporting with reference to thesestandalone financial statements is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accountingprinciples. A company's internal financial control over financial reporting with referenceto these standalone financial statements includes those policies and procedures that (1)pertain to the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles and thatreceipts and expenditures of the company are being made only in accordance withauthorisations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorised acquisition use ordisposition of the company's assets that could have a material effect on the financialstatements.
Inherent Limitations of Internal Financial Controls Over Financial Reporting WithReference to these Standalone Financial Statements
Because of the inherent limitations of internal financial controls over financialreporting with reference to these standalone financial statements including thepossibility of collusion or improper management override of controls materialmisstatements due to error or fraud may occur and not be detected. Also projections ofany evaluation of the internal financial controls over financial reporting with referenceto these standalone financial statements to future periods are subject to the risk thatthe internal financial control over financial reporting with reference to these standalonefinancial statements may become inadequate because of changes in conditions or that thedegree of compliance with the policies or procedures may deteriorate.
In our opinion the Company has in all material respects adequate internal financialcontrols over financial reporting with reference to these standalone financial statementsand such internal financial controls over financial reporting with reference to thesestandalone financial statements were operating effectively as at March 31 2020 based onthe internal control over financial reporting criteria established by the Companyconsidering the essential components of internal control stated in the Guidance Note onAudit of Internal Financial Controls Over Financial Reporting issued by the Institute ofChartered Accountants of India.
For S.R. Batliboi & Associates LLP
ICAI Firm Registration Number: 101049W/E300004
per Sarvesh Warty
Membership Number: 121411
Place of Signature: Mumbai
Date: May 14 2020