We have audited the financial statements of Fedbank Financial Services Limited (the "Company") which comprise the balance sheet as at 31 March 2024, and the statement of profit and loss (including other comprehensive income), statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including material accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements give the information required by the Companies Act, 2013 ("Act") in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at 31 March 2024, and its profit and other comprehensive income, changes in equity and its cash flows for the year ended on that date.
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 are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India together with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our opinion on the financial statements.
KEY AUDIT MATTER(S)
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
LOSS ALLOWANCE FOR EXPECTED CREDIT LOSS (ECL) ON LOANS AND ADVANCES
Refer to the accounting policies in "Note 3 to the Financial Statements"
Charge to the Statement of Profit and Loss: Rs 646 Lakhs
Loss allowance for Expected Credit Loss (ECL) as at 31 March 2024: Rs 9,387 Lakhs
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The key audit matter
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How the matter was addressed in our audit
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Subjective estimate
Loans represent significant portion of the Company’s assets.
Recognition and measurement of loss allowance for ECL on loans and advances involves significant management judgement.
Under Ind AS 109, Financial Instruments, loss allowance on loans is determined using ECL model. The Company’s loss allowance is derived from estimates including consideration of the historical default and loss ratios and forward-looking risk variables. The Company exercises judgements in determining the quantum of loss based on a range of other factors.
The most significant factors are:
• Segmentation of loan book
• Determination of exposure at default
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In view of the significance of the matter we applied the following audit procedures in this area, among others to obtain sufficient appropriate audit evidence:
Design / controls
• Performed walkthroughs and assessed the design and implementation of controls in respect of the Company’s loss allowance process such as the timely recognition of impairment loss, the completeness and accuracy of reports used in the impairment allowance process and management review processes over the measurement of loss allowance and the related disclosures on credit risk management.
• Evaluation of the impairment principles used by management based on the requirements of Ind AS 109, business understanding and industry practice, including an assessment of management’s rationale for rebutting staging principles as per Ind AS 109 for its gold loan portfolio.
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The key audit matter
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How the matter was addressed in our audit
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• Loan staging criteria
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• Understanding and testing the processes, systems
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• Calculation of probability of default / loss given default
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and controls implemented in relation to impairment allowance process.
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• Consideration of probability weighted scenarios and
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• Testing the controls over 'Governance Framework’ in line
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forward looking macro-economic factors
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with the RBI guidance and with Company’s laid down policy
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The application of ECL model reguires several data inputs,
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• Assessing the design and implementation of key internal
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including estimation of 12-month ECL for a pool of loans
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financial controls over identification, classification, and
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and lifetime for other pool of loans. This increases the risk of
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measurement of impairment charge, including for loans
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completeness and accuracy of the data that has been used to
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which were restructured.
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create assumptions in the model.
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• Testing of key review controls over measurement of loss
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Further, basis the nature and characteristics of its gold loan portfolio, the Company has elected to rebut the 90 days past due criteria for classification of an exposure as Stage 3, basis the manner in which the Company subsequently monitors default and potential loss as per its credit risk management policy.
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allowances and disclosures in financial statements.
• Assessed sufficiency of the disclosures on key judgements, assumptions and quantitative data with respect to loss allowance in the financial statements.
Involvement of specialists
We involved financial risk modelling specialists for the
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The underlying forecasts and assumptions used in the estimates of impairment loss allowance are subject to
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following:
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uncertainties which are often outside the control of the
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• Evaluating the appropriateness of the Company’s Ind AS
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Company. Given the size of loan portfolio relative to the
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109 impairment methodologies and reasonableness of
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balance sheet and the impact of impairment allowance on the
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assumptions used.
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financial statements, we have considered this as a key audit
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Substantive tests
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matter.
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• Assessing management’s rationale for determination of
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Disclosures:
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criteria for SICR.
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The disclosures regarding the Company’s application of Ind
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• Reviewing management’s assessment of rebuttal of 90 days past due norm on classification of exposure
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AS 109 are important in explaining the key judgements and material inputs to the Ind AS 109 ECL results.
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as Stage 3 in its gold loan portfolio, including reviewing management’s basis of conclusion of not considering a loan as restructured when facilities are rolled over or collaterals are repledged.
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• Tested through independent check, Company’s assessment of restructured pool impacts on segments of its loan portfolio and the resultant loss allowance.
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• Verifying application of accounting principles, validating completeness and accuracy of the data and reasonableness of assumptions used in the model.
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• Test of details over of calculation of loss allowance for assessing the completeness, accuracy, and relevance of data.
• For model derived outputs, verifying the calculations through re-computation where practicable.
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• Checking data for assessing reasonableness of judgments made in respect of calculation methodologies, segmentation, economic factors, the period of historical loss rates used and the valuation of recovery assets and collateral (including collateral in the form of gold).
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• Assessing the factual accuracy of the financial statements disclosures made by the Company.
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The key audit matter
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How the matter was addressed in our audit
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The Company’s key financial accounting and reporting processes are highly dependent on information systems including automated controls, such that there exists a risk that gaps in the IT control environment could result in the financial accounting and reporting records being misstated. The Company uses multiple systems for its overall financial reporting process.
We have identified 'Information Technology systems’ as key audit matter because of the significant level of automation, the various layers and elements of the IT architecture.
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Our audit procedures to assess the IT system management included the following:
We involved our IT Specialist to:
Understand General IT Controls (GITC) i.e., Access Controls, Program/ System Change, Computer Operations (i.e., Job Processing, Data/System Backup) over key financial accounting and reporting systems and supporting control systems (referred to as in-scope systems).
Understand IT infrastructure i.e., operating systems and databases supporting the in-scope systems.
Test the General IT Controls for design and operating effectiveness for the audit period over the in-scope systems.
Understand IT application controls covering:
• user access and roles, segregation of duties; and
• reports and system configuration.
Test the IT application controls for design and operating effectiveness for the audit period.
Test the automated controls supporting financial reporting process to determine whether these controls remained unchanged during the audit period or were changed following the standard change management process.
Test the controls over the IT infrastructure covering user access (including privilege users), and system changes; and
Enquiry on data security controls in the context of staff working from remote location during the year.
Based on procedures performed above, wherever required, we extended our audit procedures over other IT application controls, periodic reconciliations, manual approval processes, tests on identified key changes and additional substantive testing.
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OTHER INFORMATION
The Company’s Management and Board of Directors are responsible for the other information. The other information comprises the information included in the Company’s Annual Report, but does not include the financial statements and auditor’s report(s) thereon. The Company’s Annual Report is expected to be made available to us after the date of this auditor’s report.
Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
MANAGEMENT'S AND BOARD OF DIRECTORS' RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
The Company’s Management and Board of Directors are responsible for the matters stated in Section 134(5) of the Act with respect to the preparation of these financial statements
that give a true and fair view of the state of affairs, profit/ loss and other comprehensive income, changes in equity and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Indian Accounting Standards (Ind AS) specified under Section 133 of the Act. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Management and Board of Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
The Board of Directors is also responsible for overseeing the Company’s financial reporting process.
AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design 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 company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management and Board of Directors.
• Conclude on the appropriateness of the Management and Board of Directors use of the going concern basis of accounting in preparation of financial statements and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
1. As required by the Companies (Auditor’s Report) Order, 2020 ("the Order") issued by the Central Government of India in terms of Section 143(11) of the Act, we give in the "Annexure A" a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable.
2 A. 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 best of 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 the Company so far as it appears from our examination of those books except for the matters stated in the paragraph 2(B)(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.
c. The balance sheet, the statement of profit and loss (including other comprehensive income), the statement of changes in equity and the statement of cash flows dealt with by this Report are in agreement with the books of account.
d. In our opinion, the aforesaid financial statements comply with the Ind AS specified under Section 133 of the Act.
e. On the basis of the written representations received from the directors between 1 April 2024 to 12 April 2024, taken on record by the Board of Directors, none of the directors is disqualified as on 31 March 2024 from being appointed as a director in terms of Section 164(2) of the Act.
f. The modification relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph 2(A)(b) above on reporting under Section 143(3)(b) and paragraph 2(B)(f) below on reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.
g. With respect to the adequacy of the internal financial controls with reference to financial statements of the Company and the operating effectiveness of such controls, refer to our separate Report in "Annexure B".
B. With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:
a. The Company has disclosed the impact of pending litigations as at 31 March 2024 on its financial position in its financial statements - Refer Note 53 to the financial statements.
b. The Company did not have any long-term contracts including derivative contracts for which there were any material foreseeable losses.
c. There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company.
d (i) The management has represented that, to the best of its knowledge and belief, as disclosed in the Note 56(1) to the financial statements, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or in any other person(s) or entity(ies), including foreign entities ("Intermediaries"), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Company ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
(ii) The management has represented that, to the best of its knowledge and belief, as disclosed in the Note 56(2) to the financial statements, no funds have been received by the Company from any person(s) or entity(ies), including foreign entities ("Funding Parties"), with the understanding, whether recorded in writing or otherwise, that the Company shall directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Parties ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
(iii) Based on the audit procedures performed that have been considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the representations under subclause (i) and (ii) of Rule 11(e), as provided under (i) and (ii) above, contain any material misstatement.
e. The Company has neither declared nor paid any dividend during the year.
f. Based on our examination which included test checks, except for the instances mentioned below, the Company has used accounting softwares for maintaining its books of account which, along with access management tool, as applicable, have a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the respective softwares:
• In the absence of an independent auditor’s report in relation to controls at a service organisation for an accounting software used for maintaining the books of account relating to property, plant and equipment, which is operated by a third-party software service provider, we are unable to comment whether audit trail feature for the said software was enabled and operated throughout the year for all relevant transactions recorded in the software.
• In the absence of sufficient and appropriate reporting on compliance with the audit trail requirements in the independent auditor’s report of a service organisation for an accounting software used for maintaining the books of account relating to leases, we are unable to comment whether audit trail
feature for the said software was enabled and operated throughout the year for all relevant transactions recorded in the software.
• In the absence of an independent auditor’s report from 1 January 2024 to 31 March 2024 in relation to controls at a service organisation for an accounting software used for maintaining the books of account relating to payroll records, which is operated by a third-party software service provider, we are unable to comment whether audit trail feature for the said software was enabled and operated from 1 January 2024 to 31 March 2024 for all relevant transactions recorded in the software.
• In case of an accounting software used for maintaining the books of account relating to loans, we are unable to comment whether the feature of recording audit trail (edit log) facility was enabled throughout the year at the application level for certain tables (relating to income on loans).
Further, for the periods where audit trail (edit log) facility was enabled and operated for the respective accounting softwares, we did not come across any instance of the audit trail feature being tampered with.
C. With respect to the matter to be included in the Auditor’s Report under Section 197(16) of the Act:
I n our opinion and according to the information and explanations given to us, the remuneration paid by the Company to its directors during the current year is in accordance with the provisions of Section 197 of the Act. The remuneration paid to any director is not in excess of the limit laid down under Section 197 of the Act. The Ministry of Corporate Affairs has not prescribed other details under Section 197(16) of the Act which are required to be commented upon by us.
For B S R & Co. LLP
Chartered Accountants Firm’s Registration No.:101248W/W-100022
Ashwin Suvarna
Partner
Place: Mumbai Membership No.: 109503
Date: 29 April 2024 ICAI UDIN:24109503BKCSJV6939
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