1. We have audited the accompanying financial statements of M/s. TAMILNAD MERCANTILE BANK LIMITED ("the Bank"), which comprise the Balance Sheet as at March 31, 2024, the Statement of Profit and Loss, and the statement of Cash Flows for the year then ended, and notes to the financial statements including a summary of significant accounting policies and other explanatory information. Incorporated in these financial statements are the returns of Head Office, 20 branches, Integrated Treasury & International Banking Division audited by us and 532 branches audited by statutory branch auditors located across India.
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements read with notes thereon, give the information required by the Banking Regulation Act, 1949 as well as the Companies Act, 2013 ('the Act'), as amended and circulars and guidelines issued by the Reserve Bank of India ('RBI'), in the manner so required for the banking companies and are in conformity with the accounting principles generally accepted in India including the Accounting Standards prescribed under section 133 of the Act read with Companies (Accounting Standards) Rules, 2021, give a true and fair of the state of affairs of the Bank as at March 31, 2024, and its profit, and its cash flows for the year ended on that date.
BASIC FOR OPINION
2. We conducted our audit of the Bank including its branches in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Act. Our responsibilities under those Standards are further described in the 'Auditor's Responsibilities for the Audit of the Financial Statements' section of our report. We are independent of the Bank in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India (ICAI) together with the ethical
requirements that are relevant to our audit of the financial statements in accordance with the accounting principles generally accepted in India, including the Accounting Standards prescribed under section 133 of the Act read with Companies (Accounting Standards) Rules, 2021, provisions of section 29 of the Banking Regulation Act, 1949, circulars and guidelines issued by RBI from time to time and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
KEY AUDIT MATTERS
3. Key audit matters are those matters that, in our professional judgement, and based on the consideration of the reports of the statutory branch auditors as referred to paragraph 4 below, were of most significance in our audit of the financial statements for the financial year ended March 31, 2024. 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. For each matter below, our description of how our audit addressed the matter is provided in that context.
4. We have determined the matters described below to be the key audit matters to be communicated in our report. We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.
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Key Audit Matter
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How to key audit matter was addressed
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A. Identification of Non-performing advances (NPA) and provisioning on advances:
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Our approach and procedures for auditing the classification of advances, identification of non-performing advances, income recognition, and provision on advances included the following steps:
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Advances include Bills purchased and discounted, Cash credits, Overdrafts, Loans repayable on demand and Term loans. These are further categorised as secured by Tangible assets (including advances against Book Debts), covered by Bank/Government Guarantees and Unsecured advances.
The Reserve Bank of India ('RBI') has prescribed the 'Prudential Norms on Income Recognition, Asset Classification and Provisioning' in respect of advances for banks ('IRACP Norms').
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1. We examined and assessed the bank's accounting policies for identifying non-performing assets (NPAs) and making provisions, ensuring compliance with the IRACP norms prescribed by the Reserve Bank of India (RBI).
2. We reviewed and tested the design and effectiveness of key controls, including system-based automated controls, for identifying and provisioning NPA accounts, based on the extant guidelines on IRACP laid down by the RBI.
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The identification of performing and non-performing advances (including advances restructured under applicable IRACP Norms) involves establishment of proper mechanism and the Bank is required to apply significant degree of judgement to identify and determine the amount of provision required against each advance applying both quantitative as well as qualitative factors prescribed by the regulations.
Significant judgements and estimates for NPA identification and provisioning could give rise to material misstatements on:
• Completeness and timing of recognition of non-performing assets in accordance with criteria as per IRACP norms;
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3. We conducted additional procedures to identify NPAs, which included:
a) Testing exception reports generated by the bank's application systems where advances are recorded.
b) Analyzing accounts reported by the bank and other banks as Special Mention Accounts (SMA) in RBI's central repository of information on large credits (CRILC) to identify potential stress.
c) Reviewing borrower account statements, drawing power calculations, security details, and other relevant information based on quantitative and qualitative risk factors.
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• Measurement of the provision for non-performing assets based on loan exposure, ageing and classification of the loan, realizable value of security;
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d) Examining minutes of management committee and credit committee meetings, and conducting inquiries with the credit and risk departments to identify indicators of stress or default events in loan accounts or products.
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• Appropriate reversal of unrealized income on the NPAs. Since the classification of advances, identification of NPAs and creation of provision on advances (including additional provisions on restructured advances under applicable IRACP Norms) and income recognition on advances:
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e) Considering audit reports and memorandum of changes issued by statutory branch auditors.
f) Reviewing internal audit, systems audit, credit audit, and concurrent audit reports in accordance with the bank's policies
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• Requires proper control mechanism and significant level of estimation by the Bank;
•Has significant impact on the overall financial statements of the Bank;
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and procedures.
g) Analyzing the RBI Annual Financial Inspection report on the bank, the bank's responses to observations, and other communications with the RBI throughout the year.
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we have ascertained this area as a Key Audit Matter.
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h) Examining a sample of advances, including stressed or restructured advances, to assess compliance with the RBI's Master Circulars/Guidelines.
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i) Conducting branch visits and examining documentation and records related to advances.
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For identified non-performing advances, we conducted sample-based testing of asset classification dates, reversal of unrealized interest, valuation of available security, and provisioning as per the IRACP norms. We recalculated the provision for NPAs on these samples, considering key factors,
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and compared our findings with the management's measurements.
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B. Information Technology ("IT")
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Systems and Controls
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As part of our audit procedures for reviewing the Bank's IT systems and related controls for financial reporting, we undertook the following actions:
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The Bank highly relies on information systems, including
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• We conducted testing to evaluate the design and
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automated controls, for its key financial accounting and
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effectiveness of the Bank's IT access controls over critical
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reporting processes. However, this dependence poses a risk that deficiencies in the IT control environment could lead to
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information systems used for financial reporting.
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significant misstatements in the financial accounting and
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• We performed sample testing of IT general controls, including
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reporting records.
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logical access, change management, and aspects of IT operational controls. This involved reviewing and authorizing
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Given the Bank's use of multiple systems for overall financial
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access requests to systems and inspecting requests for
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reporting and the high volume of daily transactions recorded
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changes to systems for approval and authorization. We also
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across various locations, protecting the integrity of the Bank's
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considered the control environment related to interfaces,
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systems and data has become increasingly challenging.
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configuration, and other application layer controls that were
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Cybersecurity risks have emerged as a significant concern in recent periods.
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identified as crucial for our audit.
• We examined the Bank's controls pertaining to the prevention
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Considering the pervasive and intricate nature of the IT
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of unauthorized opening and operations in internal/office
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environment, as well as its critical role in ensuring accurate and timely financial reporting, we have identified this area as
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accounts.
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a Key Audit Matter.
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• Furthermore, we tested the design and operating effectiveness of specific automated controls that were identified as key internal financial controls for financial reporting. Whenever deficiencies were identified, we sought explanations regarding compensating controls or performed alternative audit procedures. Additionally, we took into account any changes made to the IT landscape during the audit period that had a significant impact on financial reporting and conducted testing accordingly.
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5. WE DRAW ATTENTION TO
a) Note No.14.k. of the accompanying financial statements where the Bank, as required under law, has pre-deposited the penalty before the Appellate Tribunal amounting to Rs.16.99 crores levied by Directorate of Enforcement, for recording share transfers during 2007, 2011 and 2012, in violation of the regulation 4 of Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000.
Our opinion is not modified in respect of the above matters.
6. INFORMATION OTHER THAN THE FINANCIAL STATEMENTS AND THE AUDITOR'S REPORT THEREON
The Bank's Board of Directors are responsible for other information. The other information comprises the Corporate Overview, Directors' Report including annexures to Directors' Report, Management Discussion and Analysis, Basel lll - Pillar 3 disclosures and Corporate Governance report included in the Annual Report, but does not include the financial statements and our auditor's report thereon. The other information 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 Pillar 3 disclosure under the Basel III Disclosure and we do 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.
When we read the other information identified above, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance as required under SA 720 'The Auditor's responsibilities Relating to Other Information'
We have nothing to report in this regard.
RESPONSIBILITIES OF MANAGEMENT & THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS
7. The Bank's Board of Directors is responsible for the matters stated in Section 134(5) of the Act, with respect to the preparation and presentation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Bank in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act read with read with Companies (Accounting Standards) Rules, 2021 in so far as they apply to the Bank and provision of Sec.29 of the Banking Regulation Act 1949 and circulars and guidelines issued by the RBI from time to time. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Bank 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 the 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 Board of Directors is responsible for assessing the Bank'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 Bank or to cease operations, or has no realistic alternative but to do so.
Those Board of Directors are also responsible for overseeing the Bank's financial reporting process.
AUDITOR'S RESPONSIBILITY FOR THE AUDIT OF THE FINANCIAL STATEMENTS
8. 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 Companies Act, 2013, we are also responsible for expressing our opinion on whether the Bank has adequate internal financial controls system 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 management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank'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 Bank 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.
• Obtain sufficient appropriate audit evidenceregarding the financial information of the Bank to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the audit of the financial information of the Bank and such branches included in the financial statements, of which we are the independent auditors. For the other branches included in the financial statements, which have been audited by statutory branch auditors, such branch auditors remain responsible for the direction, supervision and performance of the audits carried out by them. We remain solely responsible for our audit opinion.
Materiality is the magnitude of misstatements in the Financial Statements that, individually or in aggregate, makes it probable that the economic decisions of a reasonably knowledgeable user of Financial
Statements may be influenced. We consider quantitative materiality and qualitative factors in (i) planning the scope of our Audit work and evaluating the results of our work; and (ii) to evaluate the effect of identified misstatements in the Financial Statements.
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 for the financial year ended March 31, 2024 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.
OTHER MATTERS
9. We did not audit the financial statements / information of 532 branches included in the financial statements of the bank whose financial statements / financial information reflect total assets of Rs.35,543.78 Crores as at March 31, 2024 and the total revenue of Rs.3,446.43 Crores for the year ended on that date, as considered in the financial statements. These branches cover 83.70% of Advances, 81.13% of Deposits and 67.22% of Non-Performing assets as at March 31, 2024 and 62.74% of revenue for the year ended March 31, 2024. The Financial Statements / Information of these branches have been audited by the branch auditors whose reports have been furnished to us, and our opinion in so far as it relates to the amounts and disclosures included in respect of branches, is solely based on the report of such branch auditors.
Our report is not modified in respect of these matters.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
10. The Balance Sheet and the Profit and Loss Account have been drawn up in accordance with the provisions of Section 29 of the Banking Regulation Act, 1949 and Accounting Standards as per section 133 of the Act read with Companies (Accounting Standards) Rules, 2021.
Being a Banking Company, the Companies (Auditor's Report) Order, 2020 ("the Order") issued by the Central Government of India in terms of the powers conferred by subsection (11) of section 143 of the Companies Act, 2013, is not applicable.
11. As required by Sub Section 3 of Section 30 of the Banking Regulation Act 1949, and on the consideration of the reports of the statutory branch auditors as referred in paragraph 9 above we report that:
(a) We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purpose of our audit and have found them to be satisfactory;
(b) The transactions of the Bank, which have come to our notice, have been within the powers of the Bank;
(c) The returns received from the offices and branches of the Bank have been found adequate for the purposes of our audit; and
(d) The Profit and Loss account shows a true balance of profit for the year then ended.
12. Further, as required by Section 143 (3) of the Act, we report to the extent applicable 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 accounts as required by law have been kept by the Bank so far as it appears from our examination of those books and proper returns adequate for the purpose of our audit have been received from branches not visited by us.
(c) The reports on the accounts of the branches audited by branch auditors of the bank under section 143(8) of the Companies Act, 2013 have been sent to us and have been properly dealt with by us in preparing this report.
(d) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement dealt with by this Report are in agreement with the books of accounts and with the audited returns from the branches.
(e) In our opinion, the aforesaid financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with read with Companies (Accounting Standards) Rules, 2021 to the extent they are not inconsistent with the Accounting Policies prescribed by the Reserve Bank of India.
(f) On the basis of the written representations received from the directors and taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2024 from being appointed as a director in terms of Section 164 (2) of the Companies Act.
(g) With respect to adequacy of the Internal Financials controls over Financial Reporting of the Bank and the operating effectiveness of such controls, refer to our separate report in Annexure - I, and
(h) The entity being a banking company as defined under Banking Regulation Act, 1949, the remuneration to its directors during the year ended March 31, 2024 has been paid/provided by the Bank in accordance with the provisions of Section 35B(1) of the Banking Regulation Act, 1949
(i) With respect to other matters to be included in the Auditors report in accordance with rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our knowledge and belief and according to the information and explanations given to us:
i. The Bank has disclosed the impact of pending litigations on its financial position in its financial statements - Refer Note No. 15.13 to the financial statements;
ii. The Bank has made provision as required under the applicable law or accounting standards, for material foreseeable losses, if any, on long-term contracts including forward derivative contracts - Refer Schedule 12 to the financial statements.
iii. There has been delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Bank and the details are disclosed in its financial statements - Refer Note No. 14.1. to the financial statements.
iv. (a) The Management has represented that, to the best of its knowledge and belief, other than as disclosed in the Notes to the Accounts, 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 Bank 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, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Bank ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
(b) The Management has represented, that, to the best of its knowledge and belief, other than as disclosed in the Notes to the Accounts, no funds have been received by the Bank from any person(s) or entity(ies),
including foreign entity ("Funding Parties"), with the understanding, whether recorded in writing or otherwise, that the Bank shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party ("Ultimate Beneficiaries") of provide any guarantee, security or the like on behalf of the Ultimate beneficiaries; and
(c) Based on the audit procedures that have been considered reasonable and appropriate by us in the circumstances, nothing has come to our notice that has caused us to believe that the representations under sub-clause (a) and (b) above, contain any material misstatement.
v. The dividend paid by the Bank during the year is in compliance with section 123 of the Companies Act 2013.
vi. As stated in Note No. 15.16 to the financial statements, the Board of Directors of the Company have declared and paid dividend during the financial year and the same is in accordance with section 123 of the Act to the extent it applies to declaration of dividend.
vii. Based on our examination which included test checks, the bank has used an accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the software. Further, during the course of our audit we did not come across any instance of audit trail feature being tampered with.
For Suri & Co For Abarna & Ananthan
Chartered Accountants Chartered Accountants
FRN-004283S FRN-000003S
Sd/- Sd/-
CA P Prasanna CA Mohan Rao
Partner Partner
M No 228180 M No. 203737
UDIN: 24228180BKEPNF4469 UDIN: 24203737BKHAGE7240
Place: Thoothukudi Date: April 22, 2024
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