To The Members of IDFC FIRST Bank Limited
(formerly IDFC BANK LIMITED)
Report on the Audit of the Standalone Financial Statements
We have audited the standalone financial statements of IDFC FIRST Bank Limited (FormerlyIDFC Bank Limited) (the Bank') which comprise the standalone balance sheet asat 31 March 2020 the standalone profit and loss account the standalone cash flowstatement for the year then ended and notes to the standalone financial statementsincluding a summary of the significant accounting policies and other explanatoryinformation.
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 (the Act') inthe manner so required for banking companies and give a true and fair view in conformitywith the accounting principles generally accepted in India of the state of affairs of theBank as at 31 March 2020 and its loss and its cash flows for the year ended on thatdate.
Basis for 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 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 togetherwith the ethical requirements that are relevant to our audit of the standalone financialstatements under the provisions of the Act and the Rules thereunder and we 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.
Emphasis of matter
As more fully described in Note 18.13(d) to the standalone financial statements theextent to which the COVID-19 pandemic will have an impact on the Bank's financialperformance is dependent on future developments which are highly uncertain.
Our opinion is not 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 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 write-off): Rs.1859 crore for year ended 31 March 2020 |
|Provision on advances: Rs.1471 crore as at 31 March 2020 |
|Refer to the accounting policies in "Note 17.02 to the Standalone Financial Statements: Significant Accounting Policies -Advances" and "Schedule 9 to the Standalone Financial Statements: Advances" |
|Significant estimate and judgment involved ||Our key audit procedures included: |
|Provisions in respect of non-performing and restructured advances are made based on management's 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 Reserve Bank of India (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. ||Design/controls |
|We identified provision on advances as a key audit matter because of the management judgement involved in determining the provision and the valuation of the security available in determining NPA loans and because of its significance to the financial results of the Bank. || 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 (including overdue reports). Also assessing how management has factored in the deterioration in the overall economic environment arising from COVID-19 in its NPA assessment. |
| || Understanding management's approach interpretation systems and controls implemented in relation to NPA computation particularly in light of the COVID-19 regulatory package. |
| || For corporate loans testing controls over credit review processes approval of external collateral valuation vendors and review controls over the approval of significant individual specific provisions. |
|Impact of COVID-19 || Tested review controls over measurement of provisions including documentation of the relevant approvals along with basis and rationale of the provision and disclosures in financial statements. |
|On 11 March 2020 the World Health Organisation declared the Novel Coronavirus (COVID-19) outbreak to be a pandemic. || Involving information system specialist to gain comfort over data integrity extraction of reports and system interface reconciliations. |
|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 application of regulatory package and relaxations announced by the RBI on asset classification regulatory reporting and provisioning. || 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. |
|Management has conducted an assessment of the loan portfolio which may be impacted on account of COVID-19 with respect to moratorium benefit and provision computation to borrowers prescribed by the regulatory package. || |
| ||Substantive tests |
| || Test of details over calculation of NPA provisions 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. |
| || Further for the accounts which meet the criteria for asset classification benefit in accordance with the RBI COVID-19 Regulatory Package as per days past due status at 29 February 2020 testing calculation of provisions in line with the Bank's Board approved policy and regulatory guidelines. |
| || Selection of a sample of loans to test potential cases of loans repaid and disbursed to the same customer during the current financial year and fresh disbursement(s) to stressed customers. |
| || Testing a sample (based on quantitative and qualitative thresholds) of large corporate loans where impairment indicators had been identified by management. Obtaining management's assessment of the recoverability of these exposures (including individual provisions calculations) and challenging whether individual impairment provisions or lack thereof were appropriate. |
| ||This included the following procedures: |
| ||- Reviewing in detail the statement of accounts approval process board minutes credit review of customers review of SMA reports and other related documents to assess recoverability and the classification of the facility; |
| ||- assessing external collateral valuer's credentials and comparing external valuations to values used in management's assessment. |
| ||- For a risk-based sample of corporate loans not identified as displaying indicators of impairment by management challenged this assessment by reviewing the historical performance of the customer and formed our own view whether any impairment indicators were present. |
| || Assessing the factual accuracy and appropriateness of the additional financial statement disclosures made by the Bank regarding impact of COVID-19. |
|Assessment of the realizability of deferred tax assets || |
|Deferred tax asset (net): Rs.2021 crore as at 31 March 2020 || |
|Refer to the accounting policies in "Note 17.08 to the Stands Income Tax" and "Note 18.29 to the Standalone Financial Standalone Financial Statements: Significant Accounting Policies - tements: 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 Bank's 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 management's key internal financial controls over the recognition of deferred tax assets. |
|Given the Bank's 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 Bank's Board of Directors. || 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. |
| || Sighted minutes of the meetings of the Board of Directors where the future forecasts were approved. |
| || Evaluating management assessment for estimating availability of future taxable profits for determination of recognition of deferred tax assets. |
| || Evaluated management's 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 Bank's actual performance vis-a-vis the budgets for the current and past years and discussed with management their basis and assumptions in respect of convincing evidence to support that there will be sufficient taxable income to absorb the deferred tax asset. |
| || Performed sensitivity analysis over the Bank's expectations of the future taxable income. |
|Valuation of Investments || |
|Net Value of Investments: Rs.45405 crore as at 31 March 2020 || |
|Refer to the accounting policies in "Note 17.01 to the Standalone Financial Statements: Significant Accounting Policies- Investments" and "Schedule 8 to the Standalone Financial Statements: Investments" || |
|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 management's key internal financial controls over classification valuation valuation models and specific provisions on certain investments. |
|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. || Read investment agreements/term sheets entered during the current year on a sample basis to understand the relevant investment terms and identify any conditions that were relevant to the valuation of financial instruments. |
|Investments classified as AFS and HFT are marked- to-market on a periodic basis as per the relevant RBI guidelines. ||Substantive tests For a selection of investments we re-performed valuations. |
|We identified valuation of investments as a key audit matter because of the management judgement involved in determining the value of certain investments (bonds and debentures security receipts venture capital units pass through certificates and unquoted equity securities) based on the policy and methodology developed by the Bank impairment assessment for HTM book specific provisions on certain investments and the overall significance of investments to the financial statements of the Bank. ||For cases where no directly observable inputs were used we examined and challenged the assumptions used by the Bank in determination of net assets and cashflows while using a discounted cashflow method. |
| || We verified the management assessment of specific provisions against certain investments and evaluated the appropriateness of the provisions made. |
| || Assessed whether the financial statement disclosures appropriately reflect the Bank's exposure to investments with reference to the requirements of the prevailing RBI guidelines. |
|Key Audit Matter ||How the matter was addressed in our audit |
|Information technology ||Our key IT audit procedures included: |
|Information Technology (IT) systems and controls || We focused on user access management change management segregation of duties system interface controls system application controls and Information Provided by entity (IPE) controls over key financial accounting and reporting systems. |
|The Bank's 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 financial accounting and reporting records being misstated. Amongst its multiple IT systems we scoped in systems that are key for the overall financial reporting. || |
|The Bank has also undertaken few data migration projects post the merger in the last financial year. || 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. |
| || |
|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. || 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. |
| || 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 Auditor's Report thereon
The Bank's management and Board of Directors are responsible for the other information.The other information comprises the information included in the Bank's Annual report butdoes not include the standalone financial statements and our auditor's report thereon. TheBank's Annual report is expected to be made available to us after the date of thisauditor's 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 Bank's Annual Report if we conclude that there is a materialmisstatement therein we are required to communicate the matter to those charged withgovernance.
Management's and Board of Director's Responsibility for the Standalone FinancialStatements
The Bank's management and Board of Directors are responsible for the matters stated inSection 134(5) of the Act with respect to the preparation of these standalone financialstatements that give a true and fair view of the state of affairs loss and cash flows ofthe Bank in accordance with the accounting principles generally accepted in Indiaincluding the Accounting Standards specified under Section 133 of the Act provisions ofSection 29 of the Banking Regulation Act 1949 and the circulars and guidelines issued byReserve Bank of India (RBI') from time to time. This responsibility also includesmaintenance of adequate accounting records in accordance with the provisions of the Actfor safeguarding of the assets of the Bank and for preventing and detecting frauds andother irregularities; 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 and fair view and are free from material misstatement whether due to fraud orerror.
In preparing the standalone financial statements the Management and Board of Directorsare 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 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 is 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 these standalone financial statements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
identify and assess the risks of material misstatement of the 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 in the standalone financial statementsmade by the Management and Board of Directors.
conclude on the appropriateness of the Management and Board of Directors use ofthe going concern basis of accounting and based on the audit evidence obtained whether amaterial uncertainty exists related to events or conditions that may cast significantdoubt on the Bank's ability to continue as a going concern. If we conclude that a materialuncertainty exists we are required to draw attention in our auditor's report to therelated disclosures in the standalone financial statements or if such disclosures areinadequate to modify our opinion. Our conclusions are based on the audit evidenceobtained up to the date of our auditor's report. However future events or conditions maycause a Bank to cease to continue 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 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 statementsof the current period and are therefore the key audit matters. We describe these mattersin our auditor's 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.
The comparative figures for the year ended 31 March 2019 provided in the standalonefinancial statements have been audited by the predecessor auditor who expressed anunmodified opinion on those Audited Standalone Financial Statements vide their IndependentAuditors' Report dated 10 May 2019.
Our opinion on the standalone financial statements is not modified in respect of thismatter.
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 14 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 2020 taken on record by the Board of Directors none of the directors isdisqualified as on 31 March 2020 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 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 as at 31 March 2020 on itsfinancial position in its standalone financial statements - Refer Schedule 12 and Note18.59 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 18.59 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 matter to be included in the Auditors' Report under section197(16) of the Act:
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.
| ||For B S R & Co. LLP |
| ||Chartered Accountants |
| ||Firm's Registration No: 101248W/W-100022 |
|Manoj Kumar Vijai || |
|Partner || |
|Membership No: 046882 || |
|UDIN: 20046882AAAABF4728 || |
|Place: Mumbai || |
|Date: 22 May 2020 || |
Annexure A to the independent Auditor's Report of even date on the standalone financialstatements of IDFC FIRST Bank Limited (Formerly IDFC Bank Limited) for the periodended 31 March 2020
Report on the internal financial controls with reference to the aforesaid standalonefinancial statements under Clause (i) of Sub-section 3 of Section 143 of the CompaniesAct 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 financial controls with reference to standalone financialstatements of IDFC FIRST Bank Limited (Formerly IDFC Bank Limited) (theBank') as of 31 March 2020 in conjunction with our audit of the standalone financialstatements of the Bank for the year ended on that date.
In our opinion the Bank has in all material respects adequate internal financialcontrols with reference to standalone financial statements and such internal financialcontrols were operating effectively as at 31 March 2020 based on the internal financialcontrols with reference to standalone financial statements criteria established by theBank considering the essential components of internal control stated in the Guidance Noteon Audit of Internal Financial Controls Over Financial Reporting issued by the Instituteof Chartered Accountants of India (the Guidance Note').
Management's responsibility for internal financial controls
The Bank's management and the Board of Directors are responsible for establishing andmaintaining 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 Bank's policies the safeguarding ofits 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 Bank's internal financial controlswith reference to standalone financial statements based on our audit. We conducted ouraudit in accordance with the Guidance Note and the Standards on Auditing prescribed undersection 143 (10) of the Act to the extent applicable to an audit of internal financialcontrols with reference to standalone financial statements. Those Standards and theGuidance Note require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether adequate internal financial controlswith reference to standalone financial statements were established and maintained andwhether such controls operated effectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls with reference to standalone financial statements andtheir operating 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 auditor's judgment 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 standalone financial statements.
Meaning of internal financial controls over financial reporting
A bank's internal financial controls with reference to standalone financial statementsis a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of the standalone financial statements forexternal purposes in accordance with generally accepted accounting principles. A bank'sinternal financial controls with reference to standalone financial statements includethose policies and procedures that (1) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions and dispositions of theassets of the bank; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of standalone financial statements in accordance withgenerally accepted accounting principles and that receipts and expenditures of the bankare being made only in accordance with authorizations of management and directors of thebank; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition use or disposition of the bank's 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 financial controls 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 |
| ||Chartered Accountants |
| ||Firm's Registration No: 101248W/W-100022 |
|Manoj Kumar Vijai || |
|Partner || |
|Membership No: 046882 || |
|UDIN: 20046882AAAABF4728 || |
|Place: Mumbai || |
|Date: 22 May 2020 || |