To the Members of IDFC FIRST Bank Limited
Report on the audit of the Standalone Financial Statements Opinion
We have audited the standalone financial statements of IDFC FIRST Bank Limited (theBank) which comprise the standalone balance sheet as at 31 March 2021 thestandalone profit and loss account the standalone cash flow statement for the standalonefinancial statements including a summary of the significant information.
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 fairview in conformity with the accounting principles generally accepted in India of thestate of affairs of the Bank as at 31 March 2021 and its profit and its cash flows forthe year ended on that date.
Basis of opinion
We conducted our audit in accordance with the Standards on Auditing (SAs)specified under Section 143 (10) of the Act. Our responsibilities under those SAs arefurther described in the Auditors Responsibilities for the Audit of theStandalone Financial Statements section of our report. We are independent of the Bankin accordance with the Code of Ethics issued by the Institute of Chartered Accountants ofIndia together with the ethical requirements that are relevant then ended and notes tothe to our audit of the standalone financial statements under the provisions of the Actand the Rules thereunder and we accounting policies and other explanatory have fulfilledour other ethical responsibilities in accordance with these requirements and the Code ofEthics. We believe that the audit evidence we have obtained is sufficient and appropriateto provide a basis for our opinion on the standalone 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 period.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.
|Key audit matter ||How the matter was addressed in our audit |
|Provisions on advances || |
|P/L Charge (Including provision on Non Performing Advances (NPA) Identified Standard Advances restructured advances COVID provisions and Write-off): Rs. 3888 crore for year ended 31 March 2021 ||Our key audit procedures included: |
|Provision on Advances (Including provision on Non Performing Advances Identified Standard Advances and Restructured Advances): Rs. 3173 crore as at 31 March 2021 ||Design / controls |
|Refer to the accounting policies in "Note 17.02 to the Standalone Financial Statements: Significant Accounting Policies - Advances" "Schedule 9 to the Standalone Financial Statements: Advances" "Note 18.12(d) to the Standalone Financial Statements: COVID-19 Regulatory Package - Asset Classification and Provisioning" and "Note 18.29 to the Standalone Financial Statements: Provisions and Contingencies" ||- Assessing the design implementation and operating effectiveness of key internal financial controls over monitoring of watch list loans including monitoring process of overdue loans (and those which became overdue subsequent to the reporting date) measurement of provision identification of NPA accounts assessing the reliability of management information which included overdue reports. Also assessing how management has evaluated the impact of stress in the overall economic environment arising from COVID-19 in its NPA assessment. |
|Subjective estimate ||- Understanding managements approach interpretation systems and controls implemented in relation to NPA computation. |
|Provisions in respect of non-performing and restructured advances are made based on managements assessment of the degree of impairment of the advances subject to the minimum provisioning levels prescribed under the Prudential Norms on Income Recognition Asset Classification & Provisioning prescribed by the RBI from time to time. The provision on non-performing assets (NPAs) are also based on the valuation of the security available. In case of restructured accounts provision is made in accordance with the RBI guidelines. ||- For corporate loans testing controls over the monitoring of the credit watch list credit file review processes approval of external collateral valuation vendors and review controls over the approval of significant individual impairments. |
|We identified provision on non-performing advances as a key audit matter because of- ||- Evaluating the design implementation and operating effectiveness of key internal controls over the valuation of the securities for the NPAs and watch list cases. |
|1) the management judgement involved in determining the provision; ||- Testing of review controls over measurement of provisions and disclosures in financial statements. |
|2) any regulator mandated provision that may be needed for the portfolio of loans; ||- Involving information system specialist to gain comfort over data integrity and calculations including system reconciliations. |
|3) the dependency on the valuation of the security available on NPAs; and ||- Testing key controls operating over the information technology in relation to NPA systems including system access and system change management program development and computer operations. |
|4) because of its significance to the financial results of the Bank. ||- Testing Banks controls relating to implementing and actioning any RBI mandated specific provision requirement. |
|Further we have identified the impact of and uncertainty related to the COVID-19 pandemic as a key event and consideration for recognition and measurement of NPAs on account of greater levels of management judgement and therefore increased levels of audit focus in the Banks estimation of provision for NPAs. Management has assessed the impact of COVID-19 on the loan portfolio in evaluating the need for recording additional provisions on loans at 31 March 2021. ||Substantive tests |
| ||- Test of details over of calculation of NPA provisions including provisions on restructured loans as at the year-end for assessing the completeness accuracy and relevance of data and to ensure that the same is in compliance with the Prudential Norms on Income Recognition Asset Classification & Provisioning Banks policy and the Resolution Framework for COVID-19 related stress announced by the RBI. |
| ||- Select a sample of corporate loans to test potential cases of loans repaid and disbursed to the same customer during the period and fresh disbursement(s) to stressed customers. |
| ||- Testing a sample (based on quantitative and qualitative thresholds) of large sized corporate clients where impairment indicators had been identified by management. Obtaining managements assessment of the recoverability of these exposures (including individual provisions calculations) and challenging whether individual impairment provisions or lack of were appropriate. |
| ||This included the following procedures: |
| || evaluating the statement of accounts approval process committee meeting minutes credit review of customers review of SMA reports and other related documents to assess recoverability and the classification of the facility; and |
| || assessing external collateral valuers work and the results and comparing external valuations to values used in managements assessment. |
| ||- For a selection of corporate loans not identified as displaying indicators of impairment by management independently challenging their assessment by reviewing the historical performance of the customer and formed our own view whether any impairment indicators were present. |
| ||- Evaluating managements rationale for making additional provision on account of COVID-19 and testing the computation. |
| ||- Assessing the factual accuracy and appropriateness of the financial statements disclosures made by the Bank in context of impact of COVID-19 and restructured loans. |
|Assessment of the realizability of deferred tax assets || |
|Deferred tax asset (net): Rs. 1999 crore as at 31 March 2021 || |
|Refer to the accounting policies in "Note 17.08 to the Standalone Financial Statements: Significant Accounting Policies - Income Tax" and "Note 18.28 to the Standalone Financial Statements: Deferred Tax" || |
|Significant estimate and judgement involved ||Our key audit procedures included: |
|Recognition of deferred tax assets require a determination of future taxable income based on the Banks expectations. The assessment of realizability of deferred tax assets is based on a virtual or reasonable certainty test depending on the composition of the deferred tax assets. || Assessing the design implementation and operating effectiveness of managements key internal financial controls over the recognition of deferred tax assets. |
| || Obtained details of different components of deferred tax assets and details of estimates of taxable incomes for future periods as approved by the Board of Directors. |
|Given the Banks recent financial performance and uncertainty in business growth on account of COVID-19 we identified recognition of deferred tax assets as a key audit matter because of the significant management judgement and assumptions involved in estimating the future taxable income based on the income forecasts approved by the Banks Board of Directors. || Obtained confirmation where the future forecasts were approved in the meetings of the Board of Directors. |
| || Evaluating management assessment relating to the amendment in Income Tax Act and its consequential impact on items that qualify for recognition of deferred tax assets. |
| || Evaluating management assessment for estimating availability of future taxable profits for determination of recognition of deferred tax assets. |
| || Evaluated managements considerations involved in forecasting future taxable profits due to the uncertainty on account of COVID-19. |
| || Assessed the period over which the deferred tax assets would be recovered against future taxable income. |
| || Evaluated the Banks actual performance vis-a-vis the budgets for the current and past years and discussed with management their basis and assumptions in respect of evidence to support that there will be sufficient taxable income to absorb the deferred tax asset. |
| || Performed sensitivity analysis over the Banks expectations of the future taxable income. |
|Valuation of Investments || |
|Net Value of Investments: Rs. 45412 crore as at 31 March 2021 || |
|Provision on depreciation on investments (including the amount related to standard identified investments): Rs. (820) crore for year ended 31 March 2021 || |
|Refer to the accounting policies in "Note 17.01 to the Standalone Financial Statements: Significant Accounting Policies- Investments Classification" "Schedule 8 to the Standalone Financial Statements: Investments" and "Schedule 18.29 to the Standalone Financial Statements: Provision and Contingencies" || |
|Subjective estimates and judgment involved ||Our key audit procedures included: |
|Investments ||Test of design / controls |
|Investments are classified into Held for Trading (HFT) Available for Sale (AFS) and Held to Maturity (HTM) categories at the time of purchase. Investments which the Bank intends to hold till maturity are classified as HTM investments. ||- Assessed the design implementation and operating effectiveness of managements key internal financial controls over specific provisions on certain investments. |
| ||- Evaluated controls relating to creation and reversal of provisions |
|Investments classified as HTM are carried at amortised cost. Where in the opinion of management a diminution other than temporary in the value of investments has taken place appropriate provisions are required to be made. ||Substantive tests |
| ||- For a selection of investments we re-performed the valuation computation. For cases where no directly observable inputs were used we examined and reperformed the calculation basis the cashflows by using a discounted cashflow method to compare the results with that of the Banks which was computed in accordance with the relevant RBI guidelines. |
|Investments classified as AFS and HFT are marked- to- market on a periodic basis as per the relevant RBI guidelines. ||- We verified the management assessment of specific provisions against certain investments and evaluated the appropriateness of the provisions made and rationale put forward by the Bank for reversal of such specific provision. |
|We identified valuation of investments as a key audit matter because of the: ||- Assessed whether the financial statement disclosures appropriately reflect the Banks exposure to investments with reference to the requirements of the prevailing RBI guidelines. |
|- management judgement and external data involved in- ||- We verified that the specific provision are netted off from the carrying value of such investments in line with the accounting policy of the Bank. |
| determining the value of certain investments like security receipts venture capital units pass through certificates and unquoted equity securities || |
| creation and reversal of specific provisions on certain identified investments; and the overall significance of investments to the financial statements of the Bank. || |
|Information technology ||Our key IT audit procedures included: |
|Information Technology (IT) systems and controls ||- We focused on user access management change |
|The Banks key financial accounting and reporting processes are highly dependent on information systems including automated controls in systems such that there exists a risk that gaps in the IT control environment could result in the ||management segregation of duties system interface controls system application controls and Information Produced by entity (IPE) controls over key financial accounting and reporting systems. |
|financial accounting and reporting records being misstated. Amongst its multiple IT systems we scoped in systems that are key for the overall financial reporting. ||- We tested a sample of key controls for data migration operating over the information technology in relation to financial accounting and reporting systems including analysis of strategy documents review of data mapping sheets and reconciliation confirmations from operations team user acceptance test (UAT) sign offs incidents monitoring and approvals for pre and post migration. |
|The Bank has also undertaken few data migration projects post the merger in the last financial year. ||- We tested the design and operating effectiveness of key controls over user access management which include new user creation and granting access rights removal of user rights user access review and preventive controls designed to enforce segregation of duties. |
|Further the prevailing COVID-19 situation has caused the required IT applications to be made accessible on a remote basis. || |
|We have identified IT systems and controls as a key audit matter because of the high level of automation significant number of systems being used by management and the complexity of the IT architecture. ||- For a selected group of key controls over financial and reporting systems we independently performed procedures to determine that these controls remained unchanged during the year or were changed following the standard change management process. |
| ||- Other areas that were assessed included password policies security configurations controls over changes to applications and databases and controls to ensure that developers and production support did not have access to change applications the operating system or databases in the production environment. |
| ||- Performed inquiry for data security controls in the context of a large population of staff working from remote location at the year end. |
Information Other than the Standalone Financial Statements and Auditors ReportThereon
The Banks management and Board of Directors are responsible for the otherinformation. The other information comprises the information included in the BanksAnnual report but does not include the standalone financial statements and ourauditors report thereon. The Banks Annual report is expected to be madeavailable to us after the date of this auditors report.
Our opinion on the standalone financial statements does not cover the other informationand we will 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 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 Banks Annual Report if we conclude that there is a materialmisstatement therein we are required to communicate the matter to those charged withgovernance.
Managements and Board of Directors Responsibility for the StandaloneFinancial Statements
The Banks management and Board of Directors are responsible for the mattersstated in Section 134(5) of the Act with respect to the preparation of these standalonefinancial statements that give a true and fair view of the state of affairs profit andcash flows of the Bank in accordance with the accounting principles generally accepted inIndia including the Accounting Standards specified under Section 133 of the Actprovisions of Section 29 of the Banking Regulation Act 1949 and the circulars andguidelines issued by Reserve Bank of India (RBI) from time to time. 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 Management and Board of Directorsare responsible for assessing the Banks ability to continue as a going concerndisclosing as applicable matters related to going concern and using the going concernbasis of accounting unless the Management and Board of Directors either intends toliquidate the Bank or to cease operations or has no realistic alternative but to do so.
The Board of Directors are also responsible for overseeing the Banks financialreporting process.
Auditors 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 auditors report that includes our opinion. Reasonableassurance is a high level of assurance but is not a guarantee that an audit conducted inaccordance with SAs will always detect a material misstatement when it exists.Misstatements can arise from fraud or error and are considered material if individuallyor in the aggregate they could reasonably be expected to influence the economic decisionsof users taken on the basis of these standalone financial statements. As part of an auditin accordance with SAs we exercise professional judgment and maintain professionalskepticism throughout the audit. We also: identify and assess the risks of materialmisstatement of the standalone financial statements whether due to fraud or error designand perform audit procedures responsive to those risks and obtain audit evidence that issufficient and appropriate to provide a basis for our opinion. The risk of not detecting amaterial misstatement resulting from fraud is higher than for one resulting from error asfraud may involve collusion forgery intentional omissions misrepresentations or theoverride of internal control. obtain an understanding of internal control relevant to theaudit in order to design audit procedures that are appropriate in the circumstances. Undersection 143(3) (i) of the Act we are also responsible for expressing our opinion onwhether the bank has adequate internal financial controls with reference to financialstatements in place and the operating effectiveness of such controls.
evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures in the standalone financial statements madeby the Management and Board of Directors. conclude on the appropriateness of theManagement and Board of Directors use of the going concern basis of accounting and basedon the audit evidence obtained whether a material uncertainty exists related to events orconditions that may cast significant on the Banks ability to continue as a goingconcern. If we conclude that a material uncertainty exists we are required to drawattention in our auditors report to the related disclosures in the standalonefinancial statements or if such disclosures are inadequate to modify our opinion. Ourconclusions are based on the audit evidence obtained up to the date of our auditorsreport. However future events or conditions may cause a Bank to cease to continue as agoing concern.
evaluate the overall presentation structure and content of the standalone financialstatements including the disclosures and whether the standalone financial statementsrepresent the underlying transactions and events in a manner that achieves fairpresentation. We communicate with those charged with governance regarding among othermatters the planned scope and timing of the audit and significant any significantidentify during our audit. We also provide those charged with governance with a statementthat we have complied with relevant ethical requirements regarding independence and tocommunicate with them all relationships and other matters that may reasonably be thoughtto bear on our independence and where applicable related safeguards. From the matterscommunicated with those charged with governance we determine those matters that were ofmost significance in the audit of the standalone financial statements of the currentperiod and are therefore the key audit matters. We describe these matters in ourauditors report unless law or regulation precludes public disclosure about thematter or 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
The standalone balance sheet and the standalone profit and loss account have been drawnup in accordance with the provisions of Section 29 of the Banking Regulation Act 1949 andSection 133 of the Act.
A. As required by sub-section (3) of Section 30 of the Banking Regulation Act 1949 wereport that:
(a) we have obtained all the information and explanations which to the best of ourknowledge and belief were necessary for the purpose of our audit and have found them tobe satisfactory;
(b) read with the matter discussed in Note 18.01 of standalone financial statementstransactions of the Bank which have come to our notice have been within the powers ofthe Bank; and
(c) since the key operations of the Bank are automated with the key applicationsintegrated to the core banking systems the audit is carried out centrally as all thenecessary records and data required for the purposes of our audit are available therein.However during the course of our audit we have visited 27 branches.
B. Further 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 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;
(d) in our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act to the extent they are notinconsistent with the accounting policies prescribed by RBI;
(e) on the basis of the written representations received from the directors as on 31March 2021 taken on record by the Board of Directors none of the directors isdisqualified as on 31 March 2021 from being appointed as a director in terms of Section164 (2) of the Act; and
(f) with respect to the adequacy of the internal financial controls with reference tostandalone financial statements of the Bank and the operating effectiveness of suchcontrols refer to our separate Report in Annexure A.
C. With respect to the other matters to be included in the Auditors 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 as at 31 March 2021 on itsfinancial position in its standalone financial statements - Refer Schedule 12 and Note18.58 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 12 and Note 18.58 to the standalone financialstatements;
iii. there has been no delay in transferring amounts required to be transferred tothe Investor Education and Protection Fund by the Bank; and
iv. The disclosures required on holdings as well as dealing in Specified bank notesduring the period from 8 November 2016 to 30 December 2016 as envisaged in notificationG.S.R. 308(E) dated 30 March 2017 issued by the Ministry of Corporate Affairs is notapplicable to the Bank.
D. With respect to the other matters to be included in the Auditors Report inaccordance with the requirements of Section 197(16) of the Act as amended: In our opinionand to the best of our information and according to the explanations given to us being abanking company Section 35B (2A) of the Banking Regulation Act 1949 regarding managerialremuneration applies to the Bank and Section 197 (16) of the Act is not applicable.
For B S R & Co. LLP
ICAI Firm Registration No: 101248W/W-100022
Manoj Kumar Vijai
Date: 8 May 2021
Annexure A to the Independent Auditors Report
of even date on the standalone financial statements of IDFC FIRST Bank Limited for theperiod ended 31 March 2021 Report on the internal financial controls with reference to theaforesaid standalone financial statements under Clause
(i) of Sub-section 3 of Section 143 of the Companies Act 2013
(Referred to in paragraph (B (f)) under Report on other legal and regulatoryrequirements section of our report of even date)
We have audited the internal financialcontrols with reference to standalone financialstatements of IDFC FIRST Bank Limited (the Bank) as of 31 March 2021 inconjunction with our audit of the standalone financial statements of the Bank for the yearended on that date. In our opinion the Bank has in all material respects adequateinternal financial controls with reference to standalone financial statements and suchinternal financial controls were operating effectively as at 31 March 2021 based on theinternal financial controls with reference to standalone financial statements criteriaestablished by the Bank considering the essential components of internal control stated inthe Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issuedby the Institute of Chartered Accountants of India (the Guidance Note).
Managements responsibility for internal financial controls
The Banks management and the Board of Directors are responsible for establishingand maintaining internal financial controls based on the internal financial controls withreference to standalone financial statements criteria established by the Bank consideringthe essential components of internal control stated in the Guidance Note. Theseresponsibilities include the design implementation and maintenance of adequate internalfinancial controls that were operating effectively for ensuring the orderly and efficientconduct of its business including adherence to the Banks policies the safeguardingof its assets the prevention and detection of frauds and errors the accuracy andcompleteness of the accounting records and the timely preparation of reliable financialinformation as required under the Companies Act 2013 (the Act).
Our responsibility is to express an opinion on the Banks internal financialcontrols with reference to standalone financial statements based on our audit. Weconducted our audit in accordance with the Guidance Note and the Standards on Auditingprescribed under section 143 (10) of the Act to the extent applicable to an audit ofinternal financial controls with reference to standalone financial statements. ThoseStandards and the Guidance Note require that we comply with ethical requirements and planand perform the audit to obtain reasonable assurance about whether adequate internalfinancial controls with reference to standalone financial statements were established andmaintained and whether such controls operated effectively in all material respects. Ouraudit involves performing procedures to obtain audit evidence about the adequacy of theinternal financial controls with reference to standalone financial statements and theiroperating effectiveness. Our audit of internal financial controls with reference tostandalone financial statements included obtaining an understanding of such internalfinancial controls assessing the risk that a material weakness exists and testing andevaluating the design and operating effectiveness of internal control based on theassessed risk. The procedures selected depend on the auditors judgment includingthe assessment of the risks of material misstatement of the standalone financialstatements whether due to fraud or error. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our audit opinion on theBanks internal financial controls with reference to standalone financial statements.
Meaning of internal financial controls over financial reporting
A banks internal financial controls with reference to standalone financialstatements is a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of the standalone financial statements forexternal purposes in accordance with generally accepted accounting principles. Abanks internal financial controls with reference to standalone financial statementsinclude those policies and procedures that
(1) pertain to the maintenance of records that in reasonable detail accurately andfairly reflect the transactions and dispositions of the assets of the bank;
(2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of standalone financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the bank are being made onlyin accordance with authorizations of management and directors of the bank; and
(3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition use or disposition of the banks assets that could have amaterial effect on the standalone financial statements.
Inherent limitations of internal financial controls with reference to standalonefinancial statements
Because of the inherent limitations of internal financialcontrols with reference tostandalone financial statements including the possibility of collusion or impropermanagement override of controls material misstatements due to error or fraud may occurand not be detected. Also projections of any evaluation of the internal financialcontrols with reference to standalone financial statements to future periods are subjectto the risk that the internal financial controls with reference to standalone financialstatements may become inadequate because of changes in conditions or that the degree ofcompliance with the policies or procedures may deteriorate.
For B S R & Co. LLP
ICAI Firm Registration No: 101248W/W-100022
Manoj Kumar Vijai
Date: 8 May 2021