2.16 Provisions and Contingent Liabilities
Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.
Contingent liabilities are disclosed when there is a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company or a present obligation that arises from past events where it is either not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount cannot be made.
2.17 Financial Instruments a). Financial Assets
Financial assets are recognised when the Company becomes a party to the contractual provisions of the instrument. On initial recognition, a financial asset is recognised at fair value, in case of Financial assets which are recognised at fair value through profit and loss (FVTPL), its transaction cost are recognised in the statement of profit and loss. In other cases, the transaction cost are attributed to the acquisition
value of the financial asset. Financial assets are subsequently classified and measured at
• amortised cost
• fair value through profit and loss (FVTPL).
Other equity investments
All other equity investments are measured at fair value, with value changes recognised in Statement of Profit and Loss, except for those equity investments for which the Company has elected to present the value changes in ‘Other Comprehensive Income’.
Impairment of financial assets
In accordance with Ind AS 109, the Company uses ‘Expected Credit Loss’ (ECL) model, for evaluating impairment of financial assets other than those measured at fair value through profit and loss (FVTPL).
Financial assets where no significant increase in credit risk has been observed are considered to be in 'stage I’ and for which a 12 month ECL is recognised. Financial assets that are considered to have significant increase in credit risk are considered to be in ‘stage 2’ and those which are in default or for which there is an objective evidence of impairment are considered to be in ‘stage 3’. Lifetime ECL is recognised for stage 2 and stage 3 financial assets.
At initial recognition, allowance (or provision in the case of loan commitments) is required for ECL towards default events that are possible in the next 12 months, or less, where the remaining life is less than 12 months.
In the event of a significant increase in credit risk, allowance (or provision) is required for ECL towards all possible default events over the expected life of the financial instrument (‘lifetime ECL’).
Financial assets (and the related impairment loss allowances) are written off in full, when there is no realistic prospect of recovery.
Treatment of the different stages of financial assets and the methodology of determination of ECI.
(i) Credit impaired (stage 3)
The Company recognises a financial asset to be credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:
- Contractual payments of either principal or interest are past due for more than 90 days;
-The loan is otherwise considered to be in default.
Restructured loans, where repayment terms are renegotiated as compared to the original contracted terms due to significant credit distress of the borrower, are classified as credit impaired. Such loans continue to be in stage 3 until they exhibit regular payment of renegotiated principal and interest over a minimum observation period, typically 12 months- post renegotiation, and there are no other indicators of impairment. Having satisfied the conditions of timely payment over the observation period these loans could be transferred to stage I or 2 and a fresh assessment of the risk of default be done for such loans
Interest income is recognised by applying the EIR to the net amortised cost amount i.e. gross carrying amount less ECL allowance.
(ii) ’Significant increase in credit risk (stage 21
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default of the loan exposure. However, unless identified at an earlier stage, 30 days past due is considered as an indication of financial assets to have suffered a significant increase in credit risk. Based on other indications such as borrower’s frequently delaying payments beyond due dates though not 30 days past due are included in stage 2 for mortgage loans.
The measurement of risk of defaults under stage 2 is computed on homogenous portfolios, generally by nature of loans, tenors, underlying collateral, geographies and borrower profiles. The default risk is assessed using PD (probability- of default) derived from past behavioural trends of default across the identified homogenous portfolios. These past trends factor in the past customer behavioural trends, credit transition probabilities and macroeconomic conditions. The assessed PDs are then aligned considering future economic conditions that are determined to have a bearing on ECL
('") 'Without significant increase in credit risk since initial recognition fstage 1)
ECL resulting from default events that are possible in the next 12 months are recognised for financialinstruments in stage 1. The Company has ascertained default possibilities on past behavioural trends witnessed for each homogenous portfolio using application/behaviourial score cards and other performance indicators, determined statistically.
(iv) 'Measurement of ECI.
The assessment of credit risk and estimation of ECL are unbiased and probability weighted. It incorporates all information that is relevant including information about past events, current conditions and reasonable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL takes into account the time value of money. Forward looking economic scenarios determined with reference to external forecasts of economic parameters that have demonstrated a linkage to the performance of our portfolios over a period of time have been applied to determine impact of macro economic factors.
The Company has calculated ECL using three main components: a probability of default (PD), a loss given default (LGD) and the exposure at default (EAD). ECL is calculated by multiplying the PD, LGD and EAD and adjusted for time value of money using a rate which is a reasonable approximation of EIR
- Determination of PD is covered above for each stages of ECL
- EAD represents the expected balance at default, taking into account the repayment of principal and interest from the Balance Sheet date to the date of default together with any expected drawdowns of committed facilities.
- LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.
b). Financial Liabilities
Financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial liabilities are initially measured at the amortised cost unless at initial recognition, they are classified as fair value through profit and loss.
Financial liabilities are subsequently measured at amortised cost using the Effective Interest Rate (EIR) method Financial liabilities carried at fair value through profit or loss are measured at fair value with all changes in fair value recognised in the Statement of Profit and Loss.
A financial liability is derecognised when the obligation specified in the.contract is discharged, cancelled or expires.
2.18 Derivative financial instruments
Derivative financial instruments such as forward contracts, option contracts and cross currency swaps, to hedge its foreign currency risks are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value with changes in fair value recognised in the Statement of Profit and Loss in the period when they arise.
37 Financial risk management
The Company s business activities are exposed to a variety of financial risks, namely liquidity risk, market risks and credit risk. The Company’s senior management has the overall responsibility for establishing and governing the Company’s risk management framework. The Company has constituted a Risk Management Committee, which is responsible for developing and monitoring the Company’s risk management policies. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set and monitor appropriate risk limits and controls, periodically review the changes in market conditions and reflect the changes in the policy accordingly. The key risks and mitigating actions are also placed before the Audit Committee of the Company.
Management of liquidity and funding risk
Liquidity risk arises from mismatches in the timing of cash flows.
Funding risk arises:
- when long term assets cannot be funded at the expected term resulting in cashflow mismatches;
- amidst volatile market conditions impacting sourcing of funds from banks and money markets.
Liquidity and funding risk is measured by identifying gaps in the structural and dynamic liquidity statements.
Liquidity and funding risk is monitered by :
- assessment of the gap between visibility ot funds and the near term liabilities given current liquidity conditions and evolving regulatory directions for NBFCs.
- a constant calibration of sources of funds in line with emerging market conditions in banking and money markets.
- periodic reviews by risk management committee relating to the liquidity position and stress tests assuming varied ‘what if scenarios and comparing probable gaps with the liquidity buffers maintained by the Company.
Management of market risk
Market risk is the risk that the fair value of future cash flow of financial instruments will fluctuate due to changes in the market variables such as interest rates, foreign exchange rates and equity prices. The Company do not have any exposure to foreign exchange rate and eauitv Drice risk.
Management of credit risk
Credit risk is the risk of financial loss arising out of a customer or counterparty failing to meet their repayment obligations to the Company. It has a diversified lending model and focuses on six broad categories viz: (i) consumer lending, (ii) SME lending, (iii) rural lending, (iv) mortgages, (v) loan against securities, and (vi) commercial lending. The Company assesses the credit quality of all financial instruments that are subject to credit risk.
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a). Classification of financial assets under various stages
The Company classifies its financial assets in three stages having the following characteristics:
Stage 1
Unimpaired and without significant increase in credit risk since initial recognition on which a 12 month allowance for ECL is recognised’
Stage 2:
A significant increase in credit risk since initial recognition on which a lifetime ECL is recognised;
Stage 3:
Objective evidence of impairment, and are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due (DPD) and are accordingly transferred from stage 1 to stage 2. For stage 1 an ECL allowance is calculated based on a 12 month Point in Time (PIT) probability weighted probability of default (PD). For stage 2 and 3 assets a life time ECL is calculated based on a lifetime PD.
nancial instruments other than loans were subjected to simplified ECL approach under Ind AS 109 'Financial Instruments' and accordingly were not subject to sensitivity of future economic conditions.
38 ^ tHe PreVi°US year haVe bCen reStated’ re8rouPecl and reclassified wherever required to comply with the requirement of Ind AS and Schedule 111, Division III,
39 All amounts in the financial statements are rounded off to the nearest amount in Indian Rupees '000, unless stated otherwise.
40 Note I to 39 are annexed to and form an integral part of the Balance Sheet as at 31st Mar 2024. Statement of Profit and Loss, statement of cash flows and statement of changes in equity for the year ended as on that date.
For Sanjay K Singhal & Co For and on behalf of the Board
(Chartered , F Mec International Financial Services Limited
.........
(Apo\rve Bansal) (Renuka Chouhan)
( anjay ku,. / Managing Director Director .\u c , . ,
Partner DIN-08052540 DIN-09547785 ‘ •
M. No: 503475
Place: Delhi
Date: 29/05/2024 \ (Mahiirta Jain) (R^nika Dhall)
Chief Financial Officer Company Secretary
PAN:APJPJ2796N & Compliance Officer
Membership No:A39463
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