To the Members of Kotak Mahindra Bank Limited
Report on the Audit of the Standalone Financial Statements
1. We have audited the accompanying standalone financial statements of Kotak MahindraBank Limited ("the Bank") which comprise the Balance Sheet as at 31 March 2020the Profit and Loss Account the Cash Flow Statement for the year then ended and asummary of the significant accounting policies and other explanatory information.
2. 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 ('Act') andcirculars and guidelines issued by the Reserve Bank of India in the manner so requiredfor banking companies and give a true and fair view in conformity with the accountingprinciples generally accepted in India including the Accounting Standards prescribed undersection 133 of the Act read with rule 7 of the Companies (Accounts) Rules 2014 (asamended) of the state of affairs of the Bank as at 31 March 2020 and its profit and itscash flows for the year ended on that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing specified undersection 143(10) of the Act. Our responsibilities under those standards are furtherdescribed in the Auditor's Responsibilities for the Audit of the Standalone FinancialStatements section of our report. We are independent of the Bank in accordance with theCode of Ethics issued by the Institute of Chartered Accountants of India ('ICAI') 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.
Emphasis of Matter
4. We draw attention to Schedule 17 (B) and Schedule 18A Note 20(b) of the accompanyingstandalone financial statements which describes the uncertainties due to the outbreak ofnovel coronavirus (COVID- 19). In view of these uncertainties the impact on the Bank'sstandalone financial statements is significantly dependent on future developments.
Our opinion is not modified in respect of this matter.
Key Audit Matters
5. 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.
6. We have determined the matters described below to be the key audit matters to becommunicated in our report.
1. Identification and provisioning of non-performing assets ('NPAs') includingimplementation of COVID-19 RBI Regulatory Package
As at 31 March 2020 the Bank reported total advances (net of provisions) of Rs219748.19 crores gross NPAs of Rs 5026.89 crores and provision for non-performingassets of Rs 3469.00 crores. The provision coverage ratio after considering technicalwrite-off as at 31 March 2020 is 76.30%. (Refer schedule 17C(2) for the accounting policyschedule 9 18A Note 9 and 18A Note 11)
|Key audit matter ||How our audit addressed the key audit matter |
|The Reserve Bank of India's ("RBI") guidelines on Income Recognition and Asset Classification ("IRAC norms") prescribe the prudential norms for identification and classification of NPAs and the minimum provision required for such assets. 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. ||Our audit procedures included but were not limited to the following: |
| || Understood the process and controls and tested the design and operating effectiveness of key controls including IT based controls focusing on the following: |
|The risk of identification of NPAs is affected by factors like stress and liquidity concerns in certain sectors. ||- Approval of new lending facilities against the Bank's credit policies and the performance of annual loan assessments. |
| ||- Controls over the monitoring of credit quality which amongst other things included the monitoring of overdue reports drawing power limit pending security creation |
|The provisioning for identified NPAs is estimated based on ageing and classification of NPAs recovery estimates value of security and other qualitative factors and is subject to the minimum provisioning norms specified by RBI. || |
|Due to the ongoing pandemic during our audit we have also identified implementation of the "COVID- 19 Regulatory Package- Asset Classification and Provisioning" ('Regulatory Package') issued by the RBI on 17 April 2020 as a matter of significance in measurement of provision for advances. Since the Bank is permitted to grant a moratorium of three months to borrowers from payment of installments and interest falling due from 1 March 2020 to 31 May 2020 as per RBI's announcement on 27 March 2020 separate asset classification and provisioning norms have been also prescribed by the RBI in the Regulatory package for such borrowers availing the moratorium benefit. ||- Identification and classification of NPAs in line with RBI IRAC norms and certain qualitative aspects; and |
| ||- Assessment of adequacy of NPA provisions. |
| || To test the identification of loans with default events and other qualitative factors selected a sample of performing loans and independently assessed as to whether there was a need to classify such loans as NPAs. |
|Since the identification of NPAs and provisioning for such advances requires considerable level of estimation and given its significance to the overall audit including possible observations by RBI which could result in disclosures in the financial statements and regulatory changes due to COVID- 19 we have identified this as a key audit matter. || Verified the accounts classified by the Bank as Special Mention Accounts ("SMA") in RBI's Central Repository of Information on Large Credits ("CRILC") and performed discussion with the management |
| || Held discussion with the management of the Bank on sectors wherein there has been stress and the steps taken by the Bank to mitigate such sectorial risks |
| || With respect to provisions recognised towards NPAs on sample basis we reperformed the provision calculations taking into consideration the value of security where applicable RBI IRAC norms and NPA policy of the Bank and compared our outcome to that prepared by the management and challenged various assumptions and judgements which were used by the management. |
| || Obtained an understanding of implementation of the Regulatory Package and with respect to borrowers to whom a moratorium was granted on a sample basis we tested that such moratorium was granted in accordance with the board approved policy. We re-performed the calculations for the additional general provisions made in accordance with the "Regulatory Package". |
| || We read the RBI Annual Financial Inspection report for the financial year ended 31 March 2019 and other communication with regulators. |
| || We assessed the appropriateness and adequacy of disclosures against the relevant accounting standards and RBI requirements relating to NPAs including the additional disclosures required to be made in accordance with the Regulatory Package. |
2. Information Technology ("IT) Systems and controls impacting financialreporting
|Key audit matter ||How our audit addressed the key audit matter |
|The IT environment of the Bank is complex and involves a large number of independent and interdependent IT systems used in the operations of the Bank for processing and recording a large volume of transactions at numerous locations. As a result there is a high degree of reliance and dependency on such IT systems for the financial reporting process of the Bank. ||In assessing the integrity of the IT systems we involved our IT experts to obtain an understanding of the IT infrastructure and IT systems relevant to the Bank's financial reporting process for evaluation and testing of relevant IT general controls and IT application controls. |
|Access rights were tested over applications operating systems networks and databases which are relied upon for financial reporting. We also assessed the operating effectiveness of controls over granting removal and periodical review of access rights. We further tested segregation of duties including preventive controls to ensure that access to change applications the operating system or databases in the production environment were granted only to authorized personnel. |
|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. |
|The accuracy and reliability of the financial reporting process depends on the IT systems and the related control environment including: ||We have also evaluated changes in IT process (including usage of technology) for access to IT assets and infrastructure in work from home scenario due to COVID-19 pandemic. |
| IT general controls over user access management and change management across applications networks database and operating systems. ||Other areas that were assessed under the IT control environment included password policies security configurations business continuity and controls around change management. |
| IT application controls. || |
|Due to the pervasive nature complexity and importance of the impact of the IT systems and related control environment on the Bank's financial reporting process we have identified testing of such IT systems and related control environment as a key audit matter for the current year audit. ||We also evaluated the design and tested the operating effectiveness of key automated controls within various business processes. This included testing the integrity of system interfaces the completeness and accuracy of data feeds system reconciliation controls and automated calculations. |
| ||Where deficiencies were identified we tested compensating controls or performed alternate procedures. |
Information other than the Standalone Financial Statements and Auditor's Report thereon
7. The Bank's Board of Directors are responsible for the other information. The otherinformation comprises the information included in the Annual Report including the Pillar 3Disclosure under the New Capital Adequacy Framework (Basel III disclosures) but does notinclude the standalone financial statements and our auditor's report thereon. The AnnualReport is expected to be made available to us after the date of this auditor'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 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 the StandaloneFinancial Statements
8. The Bank's Board of Directors is responsible for the matters stated in section134(5) of the Act with respect to the preparation of these standalone financial statementsthat give a true and fair view of the financial position financial performance and cashflows of the Bank in accordance with the accounting principles generally accepted inIndia including the Accounting Standards prescribed under section 133 of the Act readwith rule 7 of the Companies (Accounts) Rules 2014 (as amended) and provisions of section29 of the Banking Regulation Act 1949 and circulars and guidelines issued by Reserve Bankof India ('RBI') from time to time. This responsibility also includes maintenance ofadequate accounting records in accordance with the provisions of the Act for safeguardingof the assets of the Bank and for preventing and detecting frauds and otherirregularities; selection and application of appropriate accounting policies; makingjudgments and estimates that are reasonable and prudent; and design implementation andmaintenance of adequate internal financial controls that were operating effectively forensuring the accuracy and completeness of the accounting records relevant to thepreparation and presentation of the standalone financial statements that give a true andfair view and are free from material misstatement whether due to fraud or error.
9. In preparing the standalone financial statements management is responsible forassessing the Bank's ability to continue as a going concern disclosing as applicablematters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Bank or to cease operations or has norealistic alternative but to do so.
10. Those Board of Directors is also responsible for overseeing the Banks's financialreporting process.
Auditor's Responsibilities for the Audit of the Standalone Financial Statements
11. 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 Standards on Auditing 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.
12. As part of an audit in accordance with Standards on Auditing we exerciseprofessional judgment and maintain 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 explaining our opinion on whether the Bank hasadequate internal financial controls system in place and the operating effectiveness ofsuch 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 standalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Bank to cease tocontinue as a going concern.
Evaluate the overall presentation structure and content of the standalonefinancial statements including the disclosures and whether the standalone financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.
13. We communicate with those charged with governance regarding among other mattersthe planned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.
14. We also provide those charged with governance with a statement that we havecomplied with relevant ethical requirements regarding independence and to communicatewith them all relationships and other matters that may reasonably be thought to bear onour independence and where applicable related safeguards.
15. From the matters communicated with those charged with governance we determinethose matters that were of most significance in the audit of the standalone financialstatements of the current period and are therefore the key audit matters. We describethese matters in our auditor's report unless law or regulation precludes public disclosureabout the matter or when in extremely rare circumstances we determine that a mattershould not be communicated in our report because the adverse consequences of doing sowould reasonably be expected to outweigh the public interest benefits of suchcommunication.
16. The standalone financial statements of the Bank for the year ended 31 March 2019were audited by the predecessor auditor who have expressed an unmodified opinion on thosestandalone financial statements vide their audit report dated 30 April 2019.
Report on Other Legal and Regulatory Requirements
17. 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 and section 133 ofthe Act read with rule 7 of the Companies (Rules) 2014 (as amended).
18. As required by sub-section (3) of section 30 of the Banking Regulation Act 1949we report 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) the transactions of the Bank which have come to our notice have been within thepowers of the Bank;
c) we have visited 117 branches to examine the books of account and other recordsmaintained at the branch for the purpose of our audit. Since the key operations of theBank are automated with the key applications integrated to the core banking system theaudit is carried out at centrally as all the necessary records and data required for thepurposes of our audit are available therein.
19. With respect to the matter to be included in the auditor's report under section197(16) of the Act we report that since the Bank is a banking company as defined underthe Banking Regulation Act 1949; the reporting under section 197(16) in relation towhether the remuneration paid by the Bank is in accordance with the provisions of section197 of the Act and whether any excess remuneration has been paid in accordance with theaforesaid section is not applicable.
20. Further as required by section 143 (3) of the Act based on our audit we reportto the extent applicable that:
a) we have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purpose of our audit;
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 financial statements dealt with by this report are in agreement withthe books of account;
d) in our opinion the aforesaid standalone financial statements comply with AccountingStandards prescribed under section 133 of the Act read with rule 7 of the Companies(Accounts) Rules 2014 (as amended) to the extent they are not inconsistent with theaccounting policies prescribed by RBI;
e) on the basis of the written representations received from the directors and taken onrecord by the Board of Directors none of the directors is disqualified as on 31 March2020 from being appointed as a director in terms of section 164(2) of the Act;
f) we have also audited the internal financial controls over financial reporting(IFCoFR) of the Bank as on 31 March 2020 in conjunction with our audit of the standalonefinancial statements of the Bank for the year ended on that date and our report dated 13May 2020 as per Annexure I expressed unmodified opinion; and
g) 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 (as amended) inour opinion and to the best of our information and according to the explanations given tous:
i. the Bank as detailed in refer Schedule 12.I Schedule 17C(13) and Schedule 18B Note15(1) in to the standalone financial statements has disclosed the impact of pendinglitigations on its financial position as at 31 March 2020;
ii. the Bank as detailed in refer Schedule 12.II Schedule 17C - Note 11 Schedule 17C- Note 13 and Schedule 18B - Note 11 and Note 15 to the standalone financial statementshas made provision as at 31 March 2020 as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts;
iii. there has been no delay in transferring amounts required to be transferred tothe Investor Education and Protection Fund by the Bank during the year ended 31 March2020; and
iv. the disclosure requirements relating to holdings as well as dealings in specifiedbank notes were applicable for the period from 8 November 2016 to 30 December 2016 whichare not relevant to these standalone financial statements. Hence reporting under thisclause is not applicable.
|For Walker Chandiok & Co LLP |
|Chartered Accountants |
|Firm's Registration No.: 001076N/N500013 |
|Sudhir N. Pillai |
|Membership No. 105782 |
|UDIN No:20105782AAAADM1250 |
|Place: Mumbai |
|Date: 13 May 2020 |
Annexure I to the Independent Auditor's Report of even date to the members of KotakMahindra Bank Limited on the standalone financial statements for the year ended 31 March2020
Independent Auditor's Report on the Internal Financial Controls under Clause (i) ofSub-section 3 of Section 143 of the Companies
Act 2013 ('the Act')
1. In conjunction with our audit of the standalone financial statements of KotakMahindra Bank Limited ('the Bank') as at and for the year ended 31 March 2020 we haveaudited the internal financial controls over financial reporting ('IFCoFR') of the Bank asat that date.
Responsibilities of Management and Those Charged with Governance for Internal FinancialControls
2. The Bank's Board of Directors is responsible for establishing and maintaininginternal financial controls based on internal control over financial reporting 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. These responsibilities include thedesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the orderly and efficient conduct of the Bank'sbusiness including adherence to the Bank's policies the safeguarding of its assets theprevention and detection of frauds and errors the accuracy and completeness of theaccounting records and the timely preparation of reliable financial information asrequired under the Act.
Auditor's Responsibility for the Audit of the Internal Financial Controls
3. Our responsibility is to express an opinion on the Bank's IFCoFR based on our audit.We conducted our audit in accordance with the Standards on Auditing issued by theInstitute of Chartered Accountants of India ('ICAI') prescribed under Section 143(10) ofthe Act to the extent applicable to an audit of IFCoFR and the Guidance Note on Audit ofInternal Financial Controls Over Financial Reporting ('the Guidance Note') issued by theICAI. Those Standards and the Guidance Note require that we comply with ethicalrequirements and plan and perform the audit to obtain reasonable assurance about whetheradequate IFCoFR were established and maintained and if such controls operated effectivelyin all material respects.
4. Our audit involves performing procedures to obtain audit evidence about the adequacyof the IFCoFR and their operating effectiveness. Our audit of IFCoFR includes obtaining anunderstanding of IFCoFR assessing the risk that a material weakness exists and testingand evaluating the design and operating effectiveness of internal control based on theassessed risk. The procedures selected depend on the auditor's judgement including theassessment of the risks of material misstatement of the financial statements whether dueto fraud or error.
5. We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the Bank's IFCoFR.
Meaning of Internal Financial Controls over Financial Reporting
6. A Bank's IFCoFR is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. A Bank'sIFCoFR include those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Bank; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles and that receipts and expenditures of the Bankare being made only in accordance with authorisations of management and directors of theBank; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorised acquisition use or disposition of the Bank's assets that could have amaterial effect on the financial statements.
Inherent Limitations of Internal Financial Controls over Financial Reporting
7. Because of the inherent limitations of IFCoFR including the possibility ofcollusion or improper management override of controls material misstatements due to erroror fraud may occur and not be detected. Also projections of any evaluation of the IFCoFRto future periods are subject to the risk that the IFCoFR may become inadequate because ofchanges in conditions or that the degree of compliance with the policies or proceduresmay deteriorate.
8. In our opinion the Bank has in all material respects adequate internal financialcontrols over financial reporting and such controls were operating effectively as at 31March 2020 based on internal control over financial reporting 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.
|For Walker Chandiok & Co LLP |
|Chartered Accountants |
|Firm's Registration No.: 001076N/N500013 |
|Sudhir N. Pillai |
|Membership No. 105782 |
|UDIN No:20105782AAAADM1250 |
|Place: Mumbai |
|Date: 13 May 2020 |