To the Members of HDFC Bank Limited
Report on the Audit of the Standalone Financial Statements
We have audited the standalone financial statements of HDFC Bank Limited ("theBank") which comprise the Balance Sheet as at March 31 2020 the Profit andLoss Account Cash Flow Statement for the year then ended and notes to the standalonefinancial statements including a summary of significant accounting policies and otherexplanatory information. In our opinion and to the best of our information and accordingto the explanations given to us the aforesaid standalone financial statements give theinformation required by the Banking Regulation Act 1949 as well as the Companies Act2013 ("the Act") in the manner so required for Banking Companies and give a trueand fair view in conformity with the accounting principles generally accepted in India ofthe state of affairs of the Bank as at March 31 2020 and its profit and its cash flowsfor the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) specifiedunder Section 143(10) of the Act. Our responsibilities under those Standards arefurther described in the Auditor's Responsibilities for the Audit of the StandaloneFinancial Statements section of our report. We are independent of the Bank in accordancewith the Code of Ethics issued by the Institute of Chartered Accountants of India("the ICAI") together with the ethical requirements that are relevant to ouraudit of the standalone financial statements under the provisions of the Act and the 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.
Emphasis of Matter
We draw attention to Note 43 to the standalone financial statements which describesthat the extent to which the COVID-19 Pandemic will impact the Bank's standalone financialstatements will depend on future developments which are highly uncertain. Our opinion isnot modified in respect of this matter.
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.
Identification of Non-performing advances (NPA) and provisioning on advances:
Total Loans and Advances (Net of Provision) as at March 31 2020: Rs. 993702.88 Crores
Provision for NPA as at March 31 2020: Rs. 9107.61 Crores (Refer Schedule 9 Schedule17(C)(2) Schedule 18(13))
|Key audit matters ||How our audit addressed the key audit matter |
|The Reserve Bank of India's ("RBI") guidelines on Income recognition and asset classification ("IRAC") prescribe the prudential norms for identification and classification of non-performing assets ("NPA") and the minimum provision required for such assets. ||Tested the design and operating effectiveness of key controls (including application controls) over approval recording monitoring and recovery of loans monitoring overdue / stressed accounts identification of NPA provision for NPA and valuation of security and collateral. |
|The Bank is required to have Board approved policy as per IRAC guidelines for NPA identification and provision. ||Testing of Application controls include testing of automated controls reports and system reconciliations. |
|The Bank is also required to apply its judgement to determine the identification and provision required against NPAs by applying quantitative as well as qualitative factors. The risk of identification of NPAs is affected by factors like stress and liquidity concerns in certain sectors. ||Evaluated the governance process and review controls over calculations of provision of non-performing advances basis of provisioning in accordance with the Board approved policy. |
| ||Selected the borrowers based on quantitative and qualitative risk factors for their assessment of appropriate classification as NPA including computation of overdue ageing to assess its correct classification and provision amount as per extant IRAC norms and Bank policy. |
|The provision on NPA are estimated based on ageing and classification of NPAs recovery estimates nature of loan product value of security and other qualitative factors and is subject to the minimum provisioning norms specified by RBI and approved policy of the Bank in this regard. || |
| ||Performed other substantive procedures included and not limited to the following; |
| || Selected samples of performing loans and assessed independently as to whether those should be classified as NPA; |
|Additionally the Bank makes provisions on exposures that are not classified as NPAs including advances in certain sectors and identified advances or group advances that can potentially slip into NPA. These are classified as contingency provisions. || |
| || For samples selected reviewed the collateral valuation financial statements and other qualitative information; |
| || Considered the accounts reported by the Bank and other Banks as Special Mention Accounts ("SMA") in RBI's central repository of information on large credits (CRILC) to identify stress; |
|In line with the COVID-19 Regulatory Package the Bank has framed policies for providing moratorium as a relief measure to the borrowers. || |
|Since the identification of NPAs and provisioning for advances require significant level of estimation and given its significance to the overall audit including possible observation by RBI which could result into disclosure in the financial statements we have ascertained identification and provisioning for NPAs as a key audit matter. || For selected samples assessed independently accounts that can potentially be classified as NPA and Red Flagged Accounts; |
| || Performed inquiries 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 needed to be considered as NPA; |
| || Examined the early warning reports generated by the Bank to identify stressed loan accounts; |
| || Held specific discussions with the management of the Bank on sectors where there is perceived credit risk and the steps taken to mitigate the risks to identified sectors; |
| || Selected samples for standard accounts default but standard accounts and overdue accounts and assessed compliance with RBI circular on COVID-19 Regulatory Package. |
| ||Assessed the adequacy of disclosures against the relevant accounting standards and RBI requirements relating to NPAs. |
Evaluation of open tax litigations (Direct and Indirect Tax)
Total claim not acknowledged as debt - Taxation as on March 31 2020: Rs. 1291.91Crores (Refer Schedule 12 Schedule 17(C)(18) Schedules 18(18)(d)(1))
|Key Audit Matter ||How our audit addressed the key audit matter |
|The Bank has material open tax litigations including matters under dispute which involve significant judgment to determine the possible outcome of these disputes. Significant management judgement is needed in determining whether an obligation exists and whether a provision should be recognised as at the reporting date in accordance with the accounting criteria set under Accounting Standard 29 - Provisions Contingent Liabilities and Contingent Assets (AS 29') or whether it needs to be disclosed as a contingent liability. Further significant judgements are also involved in measuring such obligations the most significant of which are: ||Testing the design and operating effectiveness of the Bank's key controls over the estimation monitoring and disclosure of provisions and contingent liabilities. |
| ||Our substantive audit procedures included and were not limited to the following: - |
| || Obtained an understanding of the Bank's process for determining tax liabilities tax provisions and contingent liabilities pertaining to taxation matters; |
| || Obtained list of cases / matters in respect of which litigations were outstanding as at reporting date. For significant matters we involved our tax specialist to gain an understanding of the current status of the litigations including understanding of various orders / notices received by the Bank and the management's grounds of appeals before the relevant appellate authorities; |
| Assessment of liability: Judgement is involved in the determination of whether an outflow in respect of identified material matters are probable and can be estimated reliably; || Evaluated the merit of the subject matter under consideration with reference to the grounds presented therein and available independent legal / tax advice; |
| Adequacy of provisions: The appropriateness of assumptions and judgements used in the estimation of significant provisions; and || Agreed underlying tax balances to supporting documentation including correspondence with tax authorities. |
| Adequacy of disclosures of provision for liabilities and charges and contingent liabilities. The Bank's assessment is supported by the facts of matter their own judgment experience and advices from legal and independent tax consultants wherever considered necessary. Since the assessment of these open tax litigations requires significant level of judgement in interpretation of law we have included this as a key audit matter. ||Assessed the disclosures within the standalone financial statements in this regard. |
Information Technology ("IT") Systems and Controls
|Key Audit Matter ||How our audit addressed the key audit matter |
|The Bank has a complex IT architecture to support its day to day business operations. High volume of transactions is processed and recorded on single or multiple applications. ||For testing the IT general controls application controls and IT dependent manual controls we involved IT specialists as part of the audit. The team also assisted in testing the accuracy of the information produced by the Bank's IT systems. |
|The reliability and security of IT systems plays a key role in the business operations of the Bank. Since large volume of transactions are processed daily the IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. ||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. |
|Appropriate IT general controls and application controls are required to ensure that such IT systems are able to process the data as required completely accurately and consistently for reliable financial reporting. We have identified IT systems and controls' as key audit matter because of the high level automation significant number of systems being used by the management and the complexity of the IT architecture and its impact on the financial reporting system. ||Our key IT audit procedures includes testing design and operating effectivenessof keycontrolsoperatingoveruseraccessmanagement (which includes user access provisioning de-provisioning access review password configuration review segregation of duties and privilege access change management (which include change release in production environment are compliant to the defined procedures and segregation of environment is ensured) program development (which include review of data migration activity) computer operations (which includes testing of key controls pertaining to backup Batch processing (including interface testing) incident management and data centre security) System interface controls. This included testing that requests for access to systems were appropriately logged reviewed and authorized. Also entity level controls pertaining to policy and procedure and Business continuity plan assessment due impact of COVID-19 was also part of our audit procedure. |
| ||In addition to the above the design and operating effectiveness of certain automated controls that were considered as key internal system controls over financial reporting were tested. 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 test. |
| ||Tested compensating controls and performed alternate procedures where necessary. In addition understood where relevant changes made to the IT landscape during the audit period. |
Information Other than the Standalone Financial Statements and Auditor's Report Thereon
The Bank's Board of Directors is responsible for the other information. The otherinformation comprises the information in the Basel III - Pillar 3 disclosures andgraphical representation of financial highlights (but does not include the financialstatements and our auditor's reports thereon) which we obtained prior to the date of thisauditor's report and Annual Report which is expected to be made available to us afterthat date. Our opinion on the standalone financial statements does not cover the otherinformation and we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements our responsibilityis to read the other information and in doing so consider whether the other informationis materially inconsistent with the standalone financial statements or our knowledgeobtained in the audit or otherwise appears to be materially misstated. If based on thework we have performed we conclude that there is a material misstatement of this otherinformation we are required to report that fact. We have nothing to report in thisregard.
When we read the Annual Report if we conclude that there is a material misstatementtherein we are required to communicate the matter to those Charged with Governance.
Responsibilities of Management and those charged with Governance for 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 specified under Section 133 of the Act and provisionsof Section 29 of the Banking Regulation Act 1949 and circulars guidelines and directionsissued by the Reserve Bank of India from time to time as applicable to Bank. Thisresponsibility also includes maintenance of adequate accounting records in accordance withthe provisions of the Act for safeguarding of the assets of the Bank and for preventingand detecting frauds and other irregularities; selection and application of appropriateaccounting policies; making judgments and estimates that are reasonable and prudent; anddesign implementation 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 financialstatements that give a true and fair view and are free from material misstatement whetherdue to fraud or error. In preparing the standalone financial statements the Board ofDirectors is responsible for assessing the Bank's ability to continue as a going concerndisclosing as applicable matters related to going concern and using the going concernbasis of accounting unless the Board of Directors either intends to liquidate the Bank orto cease operations or has no realistic alternative but to do so. Those Board ofDirectors are also responsible for overseeing the Bank's financial reporting 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 these 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 financialstatements whether due to fraud or error design and perform audit procedures responsiveto those risks and obtain audit evidence that is sufficient and appropriate to provide abasis for our opinion. The risk of not detecting a material misstatement resulting fromfraud is higher than for one resulting from error as fraud may involve collusionforgery intentional omissions misrepresentations or the override of 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 Bank hasinternal financial controls with reference to financial statements in place and theoperating 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 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 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 Bank to cease to continue as agoing concern.
Evaluate the overall presentation structure and content of the financialstatements including the disclosures and whether the financial statements represent theunderlying transactions and events in a manner that achieves fair presentation. Wecommunicate with those charged with governance regarding among other matters the plannedscope and timing of the audit and significant audit 3ndings including any significantde3ciencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regarding independence and to communicate with themall 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 statementsfor the financial year ended March 31 2020 and are therefore the key audit matters. Wedescribe these matters in our auditor's report unless law or regulation precludes publicdisclosure about the matter or when in extremely rare circumstances we determine that amatter should not be communicated in our report because the adverse consequences of doingso would reasonably be expected to outweigh the public interest benefits of suchcommunication.
The standalone financial statements of the Bank for the year ended March 31 2019 wereaudited by another auditor whose report dated April 20 2019 expressed an unmodifiedopinion on those standalone financial statements.
Our opinion is not modified in respect of this matter.
Report on Other Legal and Regulatory Requirements
1. The Balance Sheet and the Profit and Loss Account have been drawn up in accordancewith the provisions of Section 29 of the Banking Regulation Act 1949 read with Section133 of the Companies Act 2013 read with Rule 7 of the Companies (Accounts) Rules 2014.
2. As required by sub-section 3 of Section 30 of the Banking Regulation Act 1949 wereport that: a) We have sought and obtained all the information and explanations which tothe best of our knowledge and belief were necessary for the purpose of our audit and havefound them to be satisfactory; b) The transactions of the Bank which have come to ournotice during the course of our audit have been within the powers of the Bank; c) Sincethe key operations of the Bank are automated with the key applications integrated to thecore banking system the audit is carried out centrally as all the necessary records anddata required for the purposes of our audit are available therein. However during thecourse of our audit we visited 192 branches.
3. As required by Section 143(3) of the Act 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 purposes of our audit;
b) In our opinion proper books of account as required by law have been kept by theBank so far as it appears from our examination of those books;
c) The Balance Sheet the Profit and Loss Account and the Cash Flow Statement dealtwith by this Report are in agreement with the books of account;
d) In our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act read with Rule 7 of theCompanies (Accounts) Rules 2014 to the extent they are not inconsistent with theaccounting policies prescribed by the Reserve Bank of India;
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 with reference tofinancial statements of the Bank and the operating effectiveness of such controls referto our separate Report in "Annexure A";
g) 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 as amended.
The Bank is a Banking Company as defined under Banking Regulation Act 1949.Accordingly the requirements prescribed under section 197 of the Companies Act 2013 donot apply; and
h) 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 knowledge and belief and according to the information andexplanations given to us:
i. The Bank has disclosed the impact of pending litigations on its financial positionin its standalone financial statements - Refer Schedule 12 Schedule 17(C)(18) andSchedule 18(18)(d)(1) 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 17(C)(8) and 17(C)(18) Schedule 18(12) and Schedule18(18)(d) to the standalone financial statements; and
iii. There were no amounts which were required to be transferred to the InvestorEducation and Protection Fund by the Bank.
|For MSKA & Associates |
|Chartered Accountants |
|ICAI Firm Registration Number: 105047W |
|Swapnil Kale |
|Membership Number: 117812 |
|UDIN: 20117812AAAAET9256 |
|April 18 2020 |
ANNEXURE A TO THE INDEPENDENT AUDITOR'S REPORT OF EVEN DATE ON THE STANDALONE FINANCIALSTATEMENTS OF HDFC BANK LIMITED
[Referred to in paragraph 3(f) under Report on Other Legal and RegulatoryRequirements' in the Independent Auditor's Report of even date to the Members of HDFC BankLimited on the Financial Statements for the year ended March 31 2020]
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section143 of the Companies Act 2013 ("the Act")
We have audited the internal financial controls with reference to financial statementsof HDFC Bank Limited ("the Bank") as of March 31 2020 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 issued by the Institute of Chartered Accountants of India (ICAI) (the"Guidance Note"). These responsibilities include the design implementation andmaintenance of internal financial controls that were operating effectively for ensuringthe orderly and efficient conduct of its business including adherence to Bank's policiesthe safeguarding of its assets the prevention and detection of frauds and errors theaccuracy and completeness of the accounting records and the timely preparation ofreliable 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 issued by ICAI and deemedto be prescribed under section 143(10) of the Act to the extent applicable to an audit ofinternal financial controls. Those Standards and the Guidance Note require that we complywith ethical requirements and plan and perform the audit to obtain reasonable assuranceabout whether 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 financialstatements included obtaining an understanding of internal financial controls withreference to financial statements assessing the risk that a material weakness exists andtesting and evaluating the design and operating effectiveness of internal control based onthe assessed risk. The procedures selected depend on the auditor's judgement includingthe assessment of the risks of material misstatement of the financial statements whetherdue 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 generally accepted accounting principles and that receiptsand expenditures of the Bank are being made only in accordance with authorizations ofmanagement and directors of the Bank; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition use or disposition of theBank's assets that could have a material effect on the financial statements.
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 control 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 an adequate internal financialcontrols with reference to financial statements and such internal financial controls withreference to financial statements were operating effectively as at March 31 2020 basedon the internal control with reference to financial statements criteria established by theBank considering the essential components of internal control stated in the Guidance Note.
For MSKA & Associates
ICAI Firm Registration Number: 105047W
Membership Number: 117812
Mumbai April 18 2020