To the Members of Axis Bank Limited
Report on the Audit of the Standalone Financial Statements
We have audited the accompanying standalone financial statements of Axis BankLimited ("the Bank") which comprise the Standalone Balance Sheet as atMarch 31 2020 the Standalone Profit and Loss Account and the Standalone Cash FlowStatement for the year then ended and notes to the standalone financial statementsincluding a summary of significant accounting policies and other explanatory information(hereinafter referred to as "the standalone financial statements").
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone financial statements give the information requiredby the Banking Regulation Act 1949 as well as the Companies Act 2013 ("theAct") in the manner so required for banking companies and give a true and fair viewin conformity with the accounting principles generally accepted in India of the state ofaffairs of the Bank as at March 31 2020 its profit and its cash flows for the year endedon that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs) specified underSection 143(10) of the Act. Our responsibilities under those Standards are furtherdescribed in the Auditor's Responsibilities for the Audit of the Standalone FinancialStatements section of our report. We are independent of the Bank in accordance with theCode of Ethics issued by the Institute of Chartered Accountants of India("ICAI") together with the ethical requirements that are relevant to our auditof the standalone financial statements under the provisions of the Act and Rulesthereunder and we have fulfilled our other ethical responsibilities in accordance withthese requirements and the Code of Ethics. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our opinion on thestandalone financial statements.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the standalone financial statements of the current year.These matters were addressed in the context of our audit of the standalone financialstatements as a whole and in forming our opinion thereon and we do not provide aseparate opinion on these matters. We have determined the matters described below to bethe key audit matters to be communicated in our report.
|Sr. No. Keyauditmatters || |
How our audit addressed the key audit matter
|1. Information Technology (IT) Controls Framework || |
The Bank has a complex IT architecture to support its day to day business operations. The volume of transactions processed and recorded is huge. Moreover a transaction may be required to be recorded across multiple applications depending upon the process and each application has different rules and a different set of user access and authority matrix. These applications are interlinked using different technologies so that data transfer happens in real time or at a particular time of the day; in batches or at a transaction level and in an automated manner or manually. The Core Banking Solution (CBS) itself has many interfaces. All these data streams directly affect the financial accounting and reporting process of the Bank.
IT audit specialists are an integral part of our engagement team. Our approach of testing IT General Controls (ITGC) and IT Application Controls (ITAC) is risk based and business centric.
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As part of our IT controls testing we have tested ITGC as well as ITAC. The focus of testing of ITGCs was based on the various parameters such as Completeness Validity Identification Authentication Authorization Integrity and Accountability. On the other hand focus of testing automated controls from applications was whether the controls prevent or detect unauthorized transactions and support financial objectives including completeness accuracy authorization and validity of transactions.
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We gathered a comprehensive understanding of IT applications landscape implemented at the Bank. It was followed by process understanding mapping of applications to the same and understanding financial risks posed by people- process and technology.
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In ITGC testing we reviewed on sample basis control areas such as User Management Change Management Systems Security Incident Management Physical & Environmental Security Backup and Restoration Business Continuity and Disaster Recovery Service Level Agreement.
The Bank has a process for identifying the applications where the controls are embedded. It also has a process to ensure that systems processes and controls remain relevant. The Bank's IT control framework includes automated semi-automated and manual controls designed to address identified risks. IT controls are stated in Entity Level Controls (ELC) IT General Controls (ITGC) and IT Application Controls (ITAC).
|For ITAC we carried out on sample basis compliance tests of system functionality in order to assess the accuracy of system calculations. We also carried out procedures such as validations and limit checks on data entered into applications approvals process dependencies and restriction on time period in which transactions may be recorded. |
We have identified IT Controls Framework as a Key Audit Matteras the Bank's business is highly dependent on technology the IT environment is complex and the design and operating effectiveness of IT controls have a direct impact on its financial reporting process. Review of these controls allows us to provide assurance on the integrity and completeness of data processed through various IT applications which are used for the preparation of financial reports.
|We tested the control environment using various techniques such as inquiry review of documentation/record/reports observation and re-performance. We also tested few controls using negative testing technique. We had taken adequate samples of instances for our tests. Wherever deviations were noted either the same were explained to our satisfaction or we tested compensating controls and performed alternate procedures where necessary to draw comfort. |
|2. Classification Provisioning and Write off of Advances ||Our audit procedures included but were not limited to the following: |
|(Refer note 5.2 of schedule 17 and note 1.2 2.1.1 and 2.1.5 of schedule 18 to the standalone financial statements) ||Provisions for Corporate advances against specific individual loans (Wholesale banking customer) |
The Bank's portfolio of advances to customers amounts to ' 571424.16 crores as at March 31 2020 comprising of wholesale banking and Retail banking customer.
|1. Tested the key controls over borrower risk grading for wholesale loans (larger customer exposures that are monitored individually) for classification of such loans as performing or non-performing advances. |
| || Tested on sample basis the approval of new lending facilities against the Bank's credit policies the performance of annual loan assessments and controls over the monitoring of credit quality. |
|As required under Income Recognition Asset Classification and provisioning norms (IRAC norms) guidelines on COVID 19 related Regulatory Package dated March 272020 and April 17 2020 issued by the Reserve Bank of India (the "RBI") ('Regulatory Package') and other circulars notifications and directives issued by the RBI the Bank classifies advances into performing and non-performing advances which consists of Standard Sub-standard Doubtful and Loss and makes appropriate provisions. || Assessed the process for classification by the Management including identification of non-performing assets. |
| || Tested loans on sample basis to form our own assessment as to whether impairment events had occurred and to assess whether impairments had been identified in a timely manner. |
|The Bank as per its governing framework identifies standard advances which require higher provision based on its evaluation of risk and internal ratings. The Bank also makes provisions against identified categories of non-fund based facilities basis the internal assessment and evaluation. The Bank identifies sectors wherein the Bank perceives stress and makes higher provisions. The Bank also identifies accounts which are to be technically written off based on the framework approved by the Bank's Board of Directors. || For the selected non-performing loans assessed Management's forecast and inputs of recoverable cash flows comments of auditor on the financial statements valuation of underlying security and collaterals estimates of recoverable amounts on default and other sources of repayment. |
| || Holding specific discussions with the credit and risk departments to ascertain if there were indicators of stress or an occurrence of an event of default in a particular loan account or any product category which need to be considered as NPA. |
| ||This included testing controls over the identification of exposures showing signs of stress either due to internal factors specific to the borrower or external macroeconomic factors and testing the timeliness of and the accuracy of risk assessments and risk grading against the requirements of the Bank's lending policies and RBI IRAC norms. |
|The same resulted in significant audit efforts to address the risks around loan recoverability and the determinaffon of related provisions and write off. ||Provisions for Retail advances against specific individual loans (Retail banking customer) |
| ||a. For retail loans (smaller customer exposures not monitored individually) tested controls over the systems which record lending arrears delinquency buckets based on the number of days loans are overdue and calculate individual provisions. |
The classification provisioning and write off of advances is a Key Audit Matter as the Bank has significant credit risk exposure to a large number of borrowers across a wide range of borrowers products industries and geographies and there is a high degree of complexity uncertainty and judgement involved in recoverability of advances estimation of provisions thereon and identification of accounts to be written off.
2. Performed credit assessments of a sample of corporate loans managed by a specialized group assessed as high risk or impaired focusing on larger exposures assessed by the Bank as showing signs of deterioration or in areas of emerging risk (assessed against external market conditions). We reviewed the Bank's risk grading of the loan their assessment of loan recoverability and the impact on the credit provision. To do this we used the information on the Borrowers loan file discussed the case with the concerned officials and senior management and performed our own assessment of recoverability.
| ||b. Tested automated calculaffon and change Management controls and evaluated the Bank's oversight of the portfolios with a focus on controls over delinquency statfstfcs monitoring. |
| ||c. Tested on sample basis the level of provisions held against different loan products based on the delinquency profile and assumptfons made in respect of expected recoveries primarily from collateral held. We also carried out extensive data analytfcs procedures to identffy exceptfons and outliers. |
| ||Provisions estimated across loan portfolios (collective provision) |
| ||1. Tested the Bank's processes for making collectfve provision; |
| ||2. Reviewed the Policy for higher provision for weak standard advances and stressed sectors adopted by the Bank; |
| ||3. Reviewed the Policy for provision on non-fund facilitfes adopted by the Bank; |
| ||4. Validated the parameters used to calculate collectfve provisions with reference to IRAC norms internal policy on higher provisions on weak standard advances provisions on non-fund facilitfes; |
| ||5. Tested the completeness and accuracy of data transferred from underlying source systems used for computf'ng collectfve provision; |
| ||6. Re-performed for a sample of retail and wholesale portfolios the calculatfon of collectfve provisions todetermine the accuracy of the same; |
| ||7. Reviewed the Bank's process for grantf'ng moratorium to borrowers as per the Regulatory Package announced by RBI. We tested the completeness and accuracy of data used for computf'ng general provision in line with Regulatory package issued by RBI. With respect to additfonal provision made by the Bank on account of the impact of Covid-19 pandemic we broadly reviewed the underlying assumptfons and estfmates used by the management for the same but as the extent of impact is dependent on future developments which are highly uncertain we primarily relied on those assumptfons and estfmates. These assumptfons and estfmates are a subject matter of periodic review by the Bank. |
| ||Technical write off across loan portfolios |
| ||The Bank has adopted a framework for technical write off. We reviewed the framework and understood the process for identffication of loan portfolios to be technically written off. We tested on sample basis the accounts identffied during the year to be written off for compliance with the aforesaid framework. |
| ||Disclosure |
| ||We assessed the appropriateness and adequacy of disclosures against the relevant RBI requirements relatf'ng to NPAs including the additfonal disclosures required to be made in accordance with the Regulatory Package. |
Emphasis of Matter
We draw attention to Note 1.2 of Schedule 18 to the standalone financial statementswhich explains that the extent to which COVID-19 pandemic will impact the financialstatements is dependent on future developments which are highly uncertain.
Our opinion is not modified in respect of this matter.
The Bank's Board of Directors is responsible for the other information. The otherinformation comprises the information included in the Directors' Report and ManagementDiscussion and Analysis forming part of the Annual Report but does not include thestandalone financial statements consolidated financial statements and our auditor'sreport thereon and the Pillar III Disclosures under the New Capital Adequacy Framework(Basel III disclosures). The other information is expected to be made available to usafter the date of this report.
Our opinion on the standalone financial statements does not cover the other informationand the Basel III disclosures and accordingly we do not express any form of assuranceconclusion thereon.
In connection with our audit of the standalone financial statements our responsibilityis to read the other information identified above when it becomes available and in doingso consider whether the other information is materially inconsistent with the standalonefinancial statements or our knowledge obtained in the audit or otherwise appears to bematerially misstated.
When we read the other information if we conclude that there is a materialmisstatement therein we are required to communicate the matter to those charged withgovernance.
Responsibilities of Management and Those Charged with Governance for the StandaloneFinancial Statements
The Bank's Board of Directors is responsible for the matters stated in Section 134(5)of the Act with respect to the preparation of these standalone financial statements thatgive a true and fair view of the financial position financial performance and cash flowsof the Bank in accordance with the accounting principles generally accepted in Indiaincluding the Accounting Standards prescribed under Section 133 of the Act read with therelevant rules issued thereunder provision of Section 29 of the Banking Regulation Act1949 and the circulars guidelines and directions issued by Reserve Bank of India("RBI") from time to time. This responsibility also includes maintenance ofadequate accounting records in accordance with the provisions of the Act for safeguardingof the assets of the Bank and for preventing and detecting frauds and otherirregularities; selection and application of appropriate accounting policies; makingjudgments and estimates that are reasonable and prudent; and design implementation andmaintenance of adequate internal financial controls that were operating effectively forensuring the accuracy and completeness of the accounting records relevant to thepreparation and presentation of the standalone financial statements that give a true andfair view and are free from material misstatement whether due to fraud or error.
In preparing the standalone financial statements Management is responsible forassessing the Bank'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 Bank or to cease operations or has norealistic alternative but to do so.
The Board of Directors are also responsible for overseeing the Bank's financialreporting process.
Auditor's Responsibilities for the Audit of the Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalonefinancial 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 this standalone financial statements. As part of an audit inaccordance with SAs we exercise professional judgment and maintain professionalskepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the standalonefinancial statements whether due to fraud or error design and perform audit proceduresresponsive to those risks and obtain audit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatementresulting from fraud is higher than for one resulting from error as fraud may involvecollusion forgery intentional omissions misrepresentations or the override of internalcontrol.
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 Bank 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 in the standalone financialstatements 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 Bank'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 standalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Bank to cease tocontinue as a going concern.
Evaluate the overall presentation structure and content of the standalonefinancial statements including the disclosures and whether the standalone financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.
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 also provide those charged with governance with a statement that we have compliedwith the relevant ethical requirements regarding independence and to communicate withthem all relationships 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 financial statementsof the current year and are therefore the key audit matters. We describe these matters inour auditor's report unless law or regulation precludes public disclosure about the matteror when in extremely rare circumstances we determine that a matter should not becommunicated in our report because the adverse consequences of doing so would reasonablybe expected to outweigh the public interest benefits of such communication.
Report on Other Legal and Regulatory Requirements
(1) The standalone Balance Sheet and the Standalone Profit and Loss Account have beendrawn up in accordance with the provisions of Section 29 of the Banking Regulation Act1949 read with Section 133 of the Act read with relevant rules issued thereunder.
(2) As required under Section 143 (3) of the Act and Section 30 (3) of the BankingRegulation Act 1949 we report that:
a. We have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purpose of our audit and have foundthem to be satisfactory;
b. In our opinion the transactions of the Bank which have come to our notice havebeen within the powers of the Bank;
c. The financial accounting systems of the Bank are centralized and thereforeaccounting returns for the purpose of preparing financial statements are not required tobe submitted by the branches; we have visited 129 branches for the purpose of our audit;
d. In our opinion proper books of account as required by law have been kept by theBank so far as it appears from our examination ofthose books;
e. The standalone Balance Sheet the standalone Profit and Loss Account and thestandalone Cash Flow Statement dealt with by this report are in agreement with the booksof account;
f. In our opinion the aforesaid standalone financial statements comply with theAccounting Standards prescribed under Section 133 of the Act read with relevant rulesissued thereunder to the extent they are not inconsistent with the accounting policiesprescribed by RBI;
g. On the basis of the written representations received from the directors as on March31 2020 and taken on record by the Board of Directors none of the directors isdisqualified as on March 31 2020 from being appointed as a director in terms of Section164(2) of the Act;
h. With respect to the adequacy of the internal financial controls with reference tofinancial statements of the Bank and the operating effectiveness of such controls referto our separate report in "Annexure";
i. With respect to the other matters to be included in the Auditor's Report inaccordance with the requirements of Section 197(16) of the Act;
In our opinion and to the best of our information and according to the explanationsgiven to us requirements prescribed under Section 197 of the Act is not applicable byvirtue of Section 35B (2A) of the Banking Regulation Act 1949.
j. With respect to the other matters to be included in the Auditor's Report inaccordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 in our opinionand to the best of our information and according to the explanations given to us:
i. The Bank has disclosed the impact of pending litigations on its financial positionin its standalone financial statements - Refer Schedule 12 read with note 2.2.16 ofSchedule 18 - Contingent Liabilities to the standalone financial statements;
ii. The Bank has made provision as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts - Refer schedule 5 read with note 2.2.16 of Schedule 18 to thestandalone financial statements in respect of such items as it relates to the Bank; and
iii. There has been no delay in transferring amounts required to be transferred tothe Investor Education and Protection Fund bythe Bank.
Annexure to the Independent Auditor's Report
[Referred to in paragraph 2(h) under 'Report on Other Legal and RegulatoryRequirements' section in our Independent Auditor's Report of even date to the members ofAxis Bank Limited on the Standalone financial statements for the year ended March 312020]
Report on the Internal Financial Controls with reference to Financial Statements underclause (i) of sub-section 3 of Section 143 of the Companies Act 2013 ("theAct")
We have audited the internal financial controls with reference to financial statementsof Axis Bank Limited ("the Bank") as of March 312020 in conjunction with ouraudit of the standalone financial statements of the Bank for the year ended on that date.
Management's Responsibility for Internal Financial Controls
The Bank's management is responsible for establishing and maintaining internalfinancial controls based on the internal control with reference to financial statementscriteria established by the Bank considering the essential components of internal controlstated in the Guidance Note on Audit of Internal Financial Controls Over FinancialReporting (the "Guidance Note") issued by the Institute of Chartered Accountantsof India ("ICAI"). These responsibilities include the design implementation andmaintenance of adequate internal financial controls that were operating effectively forensuring the orderly and efficient conduct of its business including adherence to Bank'spolicies the safeguarding of its assets the prevention and detection of frauds anderrors the accuracy and completeness of the accounting records and the timelypreparation of reliable financial information as required under the Act.
Our responsibility is to express an opinion on the Bank's internal financial controlswith reference to financial statements based on our audit. We conducted our audit inaccordance with the Guidance Note and the Standards on Auditing specified under Section143(10) of the Act to the extent applicable to an audit of internal financial controlsboth issued by the ICAI. Those Standards and the Guidance Note require that we comply withethical requirements and plan and perform the audit to obtain reasonable assurance aboutwhether adequate internal financial controls with reference to financial statements wasestablished and maintained and if such controls operated effectively in all materialrespects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls with reference to financial statements and their operatingeffectiveness.
Our audit of internal financial controls with reference to financial statementsincluded obtaining an understanding of internal financial controls with reference tofinancial statements assessing the risk that a material weakness exists and testing andevaluating the design and operating effectiveness of internal controls based on theassessed risk. The procedures selected depend on the auditor's judgement including theassessment of the risks of material misstatement of the standalone financial statementswhether 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 Bank's internal financial controls withreference to financial statements.
Meaning of Internal Financial Controls with reference to Financial Statements
A Bank's internal financial control with reference to financial statements is a processdesigned to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A Bank's internal financial control withreference to financial statements includes those policies and procedures that (1) pertainto the maintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of the assets of the Bank; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with the generally accepted accounting principles and thatreceipts and expenditures of the Bank are being made only in accordance withauthorisations of the management and directors of the Bank; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorised acquisition use ordisposition of the Bank's assets that could have a material effect on the financialstatements.
Inherent Limitations of Internal Financial Controls with reference to FinancialStatements
Because of the inherent limitations of internal financial controls with reference tofinancial statements including the possibility of collusion or improper managementoverride of controls material misstatements due to error or fraud may occur and not bedetected. Also projections of any evaluation of the internal financial controls withreference to financial statements to future periods are subject to the risk that theinternal financial controls with reference to financial statements may become inadequatebecause of changes in conditions or that the degree of compliance with the policies orprocedures may deteriorate.
In our opinion the Bank has in all material respects adequate internal financialcontrols with reference to the financial statements and such internal financial controlswith reference to financial statements were operating effectively as at March 31 2020based on the internal control with reference to financial statements criteria establishedby the Bank considering the essential components of internal controls stated in theGuidance Note issued by the ICAI.
For Haribhakti & Co. LLP
ICAI Firm Registration No.l03523W/W100048
Purushottam Nyati Partner
Membership No. 118970 UDIN No. 20118970AAAABJ7471
Place : Mumbai Date : April 28 2020