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IDFC First Bank Ltd.

BSE: 539437 | NSE: IDFCFIRSTB |

Represents Equity.Intra - day transactions are permissible and normal trading is done in this category
Series: EQ | ISIN: INE092T01019 | SECTOR: Banks - Private Sector

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Annual Report

For Year :
2021 2019 2018 2017 2016 2015

Auditor's Report

To the Members of IDFC FIRST Bank Limited

Report on the audit of the Standalone Financial

Statements

Opinion

We have audited the standalone financial statements of IDFC FIRST Bank Limited (the ‘Bank’), which comprise the standalone balance sheet as at 31 March 2021, the standalone profit and loss account, the standalone cash flow statement for the year then ended, and notes to the standalone financial statements, including a summary of the significant 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 standalone financial statements give the information required by the Banking Regulation Act, 1949 as well as the Companies Act, 2013 (the ‘Act’) in the manner so required for banking companies and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Bank as at 31 March 2021, and its profit, and its cash flows for the year ended on that date.

Basis of 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 Standalone 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 together with the ethical requirements that are relevant to our audit of the standalone 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 we have obtained, is sufficient and appropriate to provide a basis for our opinion on the standalone financial statements.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance 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 financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter How the matter was addressed in our audit

Provisions on advances

P/L Charge (Including provision on Non Performing Advances (NPA), Identified Standard Advances, restructured advances, COVID provisions and Write-off): Rs. 3,888 crore for year ended 31 March 2021

Provision on Advances (Including provision on Non Performing Advances, Identified Standard Advances and Restructured Advances): Rs. 3,173 crore as at 31 March 2021

Refer to the accounting policies in “Note 17.02 to the Standalone Financial Statements: Significant Accounting Policies -Advances, “Schedule 9 to the Standalone Financial Statements: Advances, “Note 18.12(d) to the Standalone Financial Statements: COVID-19 Regulatory Package - Asset Classification and Provisioning and “Note 18.29 to the Standalone Financial Statements: Provisions and Contingencies

Subjective estimate

Our key audit procedures included:

Provisions in respect of non-performing and restructured

Design / controls

advances are made based on management’s assessment

- Assessing the design, implementation and operating

of the degree of impairment of the advances subject to the

effectiveness of key internal financial controls over

minimum provisioning levels prescribed under the Prudential

monitoring of watch list loans, including monitoring

Norms on Income Recognition, Asset Classification &

process of overdue loans (and those which became

Provisioning, prescribed by the RBI from time to time.

overdue subsequent to the reporting date), measurement

The provision on non-performing assets (NPAs) are also

of provision, identification of NPA accounts, assessing

based on the valuation of the security available. In case of

the reliability of management information, which included

restructured accounts, provision is made in accordance with

overdue reports. Also, assessing how management

the RBI guidelines.

has evaluated the impact of stress in the overall

We identified provision on non-performing advances as a key audit matter because of-

economic environment arising from COVID-19 in its NPA assessment.

1) the management judgement involved in determining the provision;

- Understanding management’s approach, interpretation, systems and controls implemented in relation to NPA computation.

2) any regulator mandated provision that may be needed for the portfolio of loans;

- For corporate loans, testing controls over the monitoring of the credit watch list, credit file review processes,

3) the dependency on the valuation of the security available

approval of external collateral valuation vendors and

on NPAs; and

review controls over the approval of significant individual

4) because of its significance to the financial results of the

impairments.

Bank.

- Evaluating the design, implementation and operating

effectiveness of key internal controls over the valuation of the securities for the NPAs and watch list cases.

- Testing of review controls over measurement of provisions

and disclosures in financial statements.

- Involving information system specialist to gain comfort

over data integrity and calculations, including system reconciliations.

- Testing key controls operating over the information

technology in relation to NPA systems, including system access and system change management, program development and computer operations.

- Testing Bank’s controls relating to implementing

and actioning any RBI mandated specific provision requirement.

Key audit matter

How the matter was addressed in our audit

Further, we have identified the impact of, and uncertainty related to the COVID-19 pandemic as a key event and consideration for recognition and measurement of NPAs on account of greater levels of management judgement and therefore increased levels of audit focus in the Bank’s estimation of provision for NPAs.

Management has assessed the impact of COVID-19 on the loan portfolio in evaluating the need for recording additional provisions on loans at 31 March 2021.

Substantive tests

- Test of details over of calculation of NPA provisions, including provisions on restructured loans, as at the year-end for assessing the completeness, accuracy and relevance of data and to ensure that the same is in compliance with the Prudential Norms on Income Recognition, Asset Classification & Provisioning, Bank’s policy and the Resolution Framework for COVID-19 related stress announced by the RBI.

- Select a sample of corporate loans to test potential cases of loans repaid and disbursed to the same customer during the period and fresh disbursement(s) to stressed customers.

- Testing a sample (based on quantitative and qualitative thresholds) of large sized corporate clients where impairment indicators had been identified by management. Obtaining management’s assessment of the recoverability of these exposures (including individual provisions calculations) and challenging whether individual impairment provisions, or lack of, were appropriate.

This included the following procedures:

• evaluating the statement of accounts, approval process, committee meeting minutes, credit review of customers, review of SMA reports and other related documents to assess recoverability and the classification of the facility; and

• assessing external collateral valuer’s work and the results and comparing external valuations to values used in management’s assessment.

- For a selection of corporate loans not identified as displaying indicators of impairment by management, independently challenging their assessment by reviewing the historical performance of the customer and formed our own view whether any impairment indicators were present.

- Evaluating management’s rationale for making additional provision on account of COVID-19 and testing the computation.

- Assessing the factual accuracy and appropriateness of the financial statements disclosures made by the Bank in context of impact of COVID-19 and restructured loans.

Key audit matter How the matter was addressed in our audit

Assessment of the realizability of deferred tax assets Deferred tax asset (net): Rs. 1,999 crore as at 31 March 2021

Refer to the accounting policies in “Note 17.08 to the Standalone Financial Statements: Significant Accounting Policies -Income Tax and “Note 18.28 to the Standalone Financial Statements: Deferred Tax

Significant estimate and judgement involved

Recognition of deferred tax assets require a determination of future taxable income based on the Bank’s expectations. The assessment of realizability of deferred tax assets is based on a virtual or reasonable certainty test, depending on the composition of the deferred tax assets.

Given the Bank’s recent financial performance and uncertainty in business growth on account of COVID-19, we identified recognition of deferred tax assets as a key audit matter because of the significant management judgement and assumptions involved in estimating the future taxable income based on the income forecasts approved by the Bank’s Board of Directors.

Our key audit procedures included:

• Assessing the design, implementation and operating effectiveness of management’s key internal financial controls over the recognition of deferred tax assets.

• Obtained details of different components of deferred tax assets and details of estimates of taxable incomes for future periods as approved by the Board of Directors.

• Obtained confirmation where the future forecasts were approved in the meetings of the Board of Directors.

• Evaluating management assessment relating to the amendment in Income Tax Act and its consequential impact on items that qualify for recognition of deferred tax assets.

• Evaluating management assessment for estimating availability of future taxable profits for determination of recognition of deferred tax assets.

• Evaluated management’s considerations involved in forecasting future taxable profits due to the uncertainty on account of COVID-19.

• Assessed the period over which the deferred tax assets would be recovered against future taxable income.

• Evaluated the Bank’s actual performance vis-a-vis the budgets for the current and past years and discussed with management their basis and assumptions in respect of evidence to support that there will be sufficient taxable income to absorb the deferred tax asset.

• Performed sensitivity analysis over the Bank’s expectations of the future taxable income.

Key audit matter

How the matter was addressed in our audit

Valuation of Investments

Net Value of Investments: Rs. 45,412 crore as at 31 March 2021

Provision on depreciation on investments (including the

amount related to standard identified investments):

Rs. (820) crore for year ended 31 March 2021

Refer to the accounting policies in “Note 17.01 to the Standalone Financial Statements: Significant Accounting Policies-Investments Classification, “Schedule 8 to the Standalone Financial Statements: Investments and “Schedule 18.29 to the

Standalone Financial Statements: Provision and Contingencies

Subjective estimates and judgment involved

Our key audit procedures included:

Investments

Test of design / controls

Investments are classified into ‘Held for Trading’ (‘HFT’),

-

Assessed the design, implementation and operating

‘Available for Sale’ (‘AFS’) and ‘Held to Maturity’ (‘HTM’)

effectiveness of management’s key internal financial

categories at the time of purchase. Investments, which

controls over specific provisions on certain investments.

the Bank intends to hold till maturity are classified as HTM investments.

-

Evaluated controls relating to creation and reversal of provisions

Investments classified as HTM are carried at amortised cost. Where, in the opinion of management, a diminution other than temporary, in the value of investments has taken place, appropriate provisions are required to be made.

Substantive tests

- For a selection of investments, we re-performed the valuation computation. For cases where no directly observable inputs were used, we examined and re-

Investments classified as AFS and HFT are marked- to-

performed the calculation basis the cashflows by using a

market on a periodic basis as per the relevant RBI guidelines.

discounted cashflow method to compare the results with

We identified valuation of investments as a key audit matter because of the:

that of the Bank’s which was computed in accordance with the relevant RBI guidelines.

- management judgement and external data involved in-

-

We verified the management assessment of specific provisions against certain investments and evaluated the

• determining the value of certain investments like

appropriateness of the provisions made and rationale

security receipts, venture capital units, pass through

put forward by the Bank for reversal of such specific

certificates and unquoted equity securities,

provision.

• creation and reversal of specific provisions on certain

-

Assessed whether the financial statement disclosures

identified investments; and

appropriately reflect the Bank’s exposure to investments

• the overall significance of investments to the financial statements of the Bank.

with reference to the requirements of the prevailing RBI guidelines.

We verified that the specific provision are netted off from the carrying value of such investments in line with the accounting policy of the Bank.

Key audit matter

How the matter was addressed in our audit

Information technology

Information Technology (IT) systems and controls

The Bank’s key financial accounting and reporting processes are highly dependent on information systems including automated controls in systems, such that there exists a risk that gaps in the IT control environment could result in the financial accounting and reporting records being misstated. Amongst its multiple IT systems, we scoped in systems that are key for the overall financial reporting.

The Bank has also undertaken few data migration projects post the merger in the last financial year.

Further, the prevailing COVID-19 situation has caused the required IT applications to be made accessible on a remote basis.

We have identified ‘IT systems and controls’ as a key audit matter because of the high level of automation, significant number of systems being used by management and the complexity of the IT architecture.

Our key IT audit procedures included:

- We focused on user access management, change management, segregation of duties, system interface controls, system application controls and Information Produced by entity (IPE) controls over key financial accounting and reporting systems.

- We tested a sample of key controls for data migration operating over the information technology in relation to financial accounting and reporting systems, including analysis of strategy documents, review of data mapping sheets and reconciliation confirmations from operations team, user acceptance test (UAT) sign offs, incidents monitoring and approvals for pre and post migration.

- We tested the design and operating effectiveness of key controls over user access management which include new user creation and granting access rights, removal of user rights, user access review and preventive controls designed to enforce segregation of duties.

- For a selected group of key controls over financial and reporting systems, we independently performed procedures to determine that these controls remained unchanged during the year or were changed following the standard change management process.

- Other areas that were assessed included password policies, security configurations, controls over changes to applications and databases and controls to ensure that developers and production support did not have access to change applications, the operating system or databases in the production environment.

- Performed inquiry for data security controls in the context of a large population of staff working from remote location at the year end.

Information Other than the Standalone Financial Statements and Auditors’ Report Thereon

The Bank’s management and Board of Directors are responsible for the other information. The other information comprises the information included in the Bank’s Annual report, but does not include the standalone financial statements and our auditor’s report thereon. The Bank’s Annual report 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 information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the standalone 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 standalone financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

When we read the Bank’s Annual Report, if we conclude that there is a material misstatement therein, we are required to

communicate the matter to those charged with governance.

Management’s and Board of Director’s Responsibility for the Standalone Financial Statements

The Bank’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 standalone financial statements that give a true and fair view of the state of affairs, profit 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, provisions of Section 29 of the Banking Regulation Act, 1949 and the circulars and guidelines issued by Reserve Bank of India (‘RBI’) from time to time. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act, for safeguarding of 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 design, implementation and maintenance of adequate internal financial controls that were operating effectively for ensuring the accuracy and completeness

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 standalone 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 a Bank to cease to continue as a going concern.

• evaluate the overall presentation, structure and content of the standalone financial statements, including the disclosures, and whether the standalone 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 standalone 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

The standalone balance sheet and the standalone profit and loss account have been drawn up in accordance with the provisions of Section 29 of the Banking Regulation Act, 1949 and Section 133 of the Act.

A. As required by sub-section (3) of Section 30 of the Banking Regulation Act, 1949, 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) read with the matter discussed in Note 18.01 of standalone financial statements, transactions of the Bank, which have come to our notice, have been within the powers of the Bank; and

(c) since the key operations of the Bank are automated with the key applications integrated to the core banking systems, the audit is carried out centrally as all the necessary records and data required

of the accounting records, relevant to the preparation and presentation of the standalone financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

In preparing the standalone financial statements, the Management and Board of Directors are 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 Management and Board of Directors either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

The Board of Directors are also responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Standalone Financial Statements

Our objectives are to obtain reasonable assurance about whether the standalone 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 standalone 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 standalone 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 bank 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 in the standalone financial statements 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 and, based on the audit evidence

for the purposes of our audit are available therein. However, during the course of our audit we have visited 27 branches.

B. Further, as required by Section 143(3) of the Act, we report that:

(a) we have sought and obtained all the information and explanations which to the 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 Bank so far as it appears from our examination of those books;

(c) the standalone balance sheet, the standalone profit and loss account, and the standalone cash flow statement dealt with by this Report are in agreement with the books of account;

(d) in our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, to the extent they are not inconsistent with the accounting policies prescribed by RBI;

(e) on the basis of the written representations received from the directors as on 31 March 2021 taken on record by the Board of Directors, none of the directors is disqualified as on 31 March 2021 from being appointed as a director in terms of Section 164 (2) of the Act; and

(f) with respect to the adequacy of the internal financial controls with reference to standalone financial statements of the Bank and the operating effectiveness of such controls, refer to our separate Report in ‘Annexure A’.

C. 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:

i. the Bank has disclosed the impact of pending

litigations as at 31 March 2021 on its financial position in its standalone financial statements - Refer Schedule 12 and Note 18.58 to the standalone 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 derivative contracts - Refer Schedule 12 and Note 18.58 to the standalone financial statements;

iii. there has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Bank; and

iv. The disclosures required on holdings as well as dealing in Specified bank notes during the period from 8 November 2016 to 30 December 2016 as envisaged in notification G.S.R. 308(E) dated 30 March 2017 issued by the Ministry of Corporate Affairs is not applicable to the Bank.

D. With respect to the other matters to be included in the Auditors’ Report in accordance with the requirements of Section 197(16) of the Act, as amended:

In our opinion and to the best of our information and according to the explanations given to us, being a banking company, Section 35B (2A) of the Banking Regulation Act, 1949 regarding managerial remuneration applies to the Bank and Section 197 (16) of the Act is not applicable.

For B S R & Co. LLP

Chartered Accountants ICAI Firm Registration No: 101248W/W-100022

Manoj Kumar Vijai

Partner

Membership No:046882

UDIN: 21046882AAAAAG4376

Place: Mumbai

Date: 8 May 2021