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Notes to Accounts of IDFC Bank Ltd.

Mar 31, 2016

1 NOTES FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2016

Amounts in notes forming part of the financial statements for the year ended March 31, 2016 are denominated in Rs,crore to conform with the extant RBI guidelines.

2 IDFC Bank Limited (''''the Bank”) was incorporated as a Company under the Companies Act, 2013 on October 21, 2014. The Bank commenced its Banking operations on October 1, 2015, post receipt of final banking license by the RBI. Accordingly, figures for the previous period / year is not comparable since Banking operations were not carried out during the previous period / year. In addition, RBI guidelines on Disclosure in Financial Statements - ''Notes to Accounts'' is not applicable for the period / year ended March 31, 2015.

Pursuant to the Scheme of Arrangement, the Financing Undertaking of IDFC Limited was demerged in the Bank with effect from October 1, 2015. Accordingly assets amounting to Rs,66,237.46 crore and liabilities amounting to Rs,60,002.90 crore resulting in net assets amounting toRs,6,234.56 crore along with contingent liabilities of Rs,285.63 crore, capital commitment of Rs,840.05 crore and notional principal of derivative contract of Rs,13,903.57 crore pertaining to the Financing Undertaking were transferred from IDFC Limited to the Bank and in consideration, equity shares of the Bank, in the ratio of 1:1 have been issued to the shareholders of IDFC Limited equivalent to 47% of the equity shareholding of IDFC Bank Limited. In addition, shares were issued to the Non-operative Financial Holding Company, IDFC Financial Holding Company Limited in compliance with RBI Guidelines for Licensing of New Banks in the Private Sector

3 DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES QUALITATIVE DISCLOSURES :

a. Structure and organization for management of risk in derivatives trading, the scope and nature of risk measurement, risk reporting and risk monitoring systems, policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigates :

i The Bank undertakes transactions in FX and derivatives for the purpose of hedging the Balance Sheet, support customer FX and Derivatives hedging / business requirements and takes proprietary positions. Bank deals in various kinds of products viz. FX spot and forwards, INR and CCY Swaps and Foreign currency options. The Bank undertakes trading positions FX Spot, Forward, Swaps and Futures. Bank does not run Option book as of now. All the Option products are offered to the clients on a back to back basis.

ii Treasury Sale Desk is a customer centric desk that caters to customers'' requirements in FX and Derivatives products subject to regulatory and internal requirements. Product offering to the clients is based on Suitability and Appropriateness policy of the Bank as well as by the extant RBI guidelines. The policy ensures that the product being offered by the Bank are in sync with the nature of the underlying, risk sought to be hedged giving due regard to the risk appetite of the customer and understanding of the risk by the customer. Market Risk exposures of clients arising out of FX and Derivative transactions are monitored by the Bank on a daily basis through current exposure method. Exposures are independently monitored and reported.

iii The Bank recognizes all derivative contracts (other than those designated as hedges) at fair value. The mark to market movement on the positions is monitored on a daily basis. Changes in the fair value of derivatives other than those designated as hedges are recognized in the Profit and Loss Account. Hedge transactions are accounted for on an accrual basis. Hedging transactions are undertaken by the Bank to protect the variability in the fair value or the cash flow of the underlying Balance Sheet item.

iv All the derivative transactions are governed by the FX & Derivative policy, Market Risk Management policy and Limit Management Framework of the Bank. Limit Management Framework details various types of market risk limits which are monitored on a daily basis and breaches, if any, are reported promptly. Risk assessment of the portfolio is undertaken periodically and presented to the Market Risk Committee / Asset Liability Committee. These limits are set up taking into account market volatility, risk appetite, business strategy and management experience. The Bank has a clear functional segregation of Treasury operations between Front Office, Market Risk and Back Office.

b. Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation :

Interest rate swaps are booked with the objective of managing the interest rate risk on liabilities. Interest rate swaps in the nature of hedge are recorded on accrual basis and these transactions are not marked-to-market. Any resultant profit or loss on termination of the hedge swaps is amortized over the life of the swap or underlying liability, whichever is shorter

Currency interest rate swaps in the nature of hedge, booked with the objective of managing the currency and interest rate risk on foreign currency liabilities are recorded on accrual basis and these transactions are not marked-to-market. Any resultant profit or loss on termination of hedge swaps is amortized over the life of swap or underlying liability, whichever is shorter. The foreign currency balances on account of principal of currency interest rate swaps outstanding as at the balance sheet date are revalued using the closing rate.

4 DISCLOSURES ON REMUNERATION

Qualitative disclosures

a Information relating to the composition and mandate of the Remuneration Committee :

The Board nomination and remuneration committee comprised of the following members :

Mr. Ajay Sondhi Chairman

Mr. Anil Baijal Member

Ms. Veena Mankar Member

Mr. Vinod Rai Member

The functions of the Committee include :

i Evaluate performance of the Whole Time Directors (WTDs) (including the Managing Director & CEO) against predetermined parameters

ii Make recommendations on remuneration (including performance bonus and perquisites) of Whole Time Directors

iii Approve policy and quantum of variable pay, bonus, stock options and increments for the employees of the Bank

iv Frame guidelines for the Employees Stock Option Scheme (ESOS) and recommend grants of the Bank''s stock options to Whole Time Directors of the Bank

b Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy:

The Bank has under the guidance of the Board and the Nomination and Remuneration Committee, follows compensation practices intended to drive pay for performance within the framework of prudent risk management.

Specific principles and objectives of IDFC Bank remuneration policy and design include :

i Help attract and retain employees :

- Pay elements and structure to be market competitive

- Flexibility and agility in approach to design / review structure

- Differentiate market through benefit programs that build and reinforce organization values and loyalty

- Reward meritocracy, with differentiation based on performance

ii Foster a culture of authentic service and prudent risk taking :

- Reward programs to be designed to incentivize

- Superior and consistent customer service and

Specifically discourage miss-selling, thereby help build trust and faith of customers

- Rewards not just based on quantitative (financial) parameters alone; but also on how performance is achieved, including process adopted, prudent judgment and controls exercised

- Reward good behavior and organizational stewardship, that conserves franchise reputation

- Revenue producers will not determine compensation for risk managers and other control functions

- Compensation programs to be overlaid with requisite conformity to the RBI guidelines.

iii Emphasize alignment with our stated Bank Values of Balance, Collaboration, Drive and Honesty :

- Compensation program design to promote, measure and reward excellence on these key organization values

- Short term and long term incentives, and staff recognition framework to specifically incorporate metrics on these

iv Evaluate and Reward Performance over Time

- Program design to ensure balance between short term versus long term financial performance and health of the organization

- Drive long term commitment and ownership for decisions through LTI and/or equity awards with deferred vesting schedule

v Balance between market competitiveness and internal alignment

- Pay levels to be referenced to the 66th percentile of Indian Private Sector banks

Aspire to stay best-in-class within competitive cost parameters; balance between basic and lifestyle benefits

- Internal pay parity for roles staffed with employees with similar skills and seasoning

c Description of the ways in which current and future risks are taken into account in the remuneration process including the nature and type of the key measures used to take account of these risks :

The Board approves the risk framework for the Bank and the business activities of the Bank are undertaken within this framework to achieve the financial plan. The risk framework includes the Bank''s risk appetite, limits framework and policies and procedures governing various types of risk. The performance evaluation framework of Whole Time Directors, equivalent positions and senior management personnel in material risk taker roles incorporates these risk and control aspects as detailed by the Board. These factors include (but are not limited to) elements such as consistency in asset quality, rating slippage of existing loans, RORWA, operational risk parameters and quality of systems. The performance management framework of the Bank will evolve over time and get more sophisticated and mature. As regards linkage to remuneration, the compensation for Whole Time Director''s, etc is paid in fixed pay, performance linked variable pay and stock options which is approved by the NRC. Furthermore, material risk takers will not be put on any guaranteed bonus framework. Performance evaluation of individuals in Credit and Risk, and Control functions will have requisite line of independence to revenue making senior management personnel.

d Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration :

While the bank is yet to have a first performance review cycle having started its operations only on October 1, 2015, performance and its linkage to levels of remuneration will be guided by the objectives / principles as spelt out in Item babove. Annual Remuneration package will comprise of a combination of fixed salary, cash bonus and ESOPs, in a mix that ensures appropriate alignment with RBI guidelines and long term value creation and stability of the Bank. Further, total pay levels will be referenced against 66th percentile of Indian private sector banks.

e Bank’s policy on deferral and vesting of variable remuneration and a discussion of the bank’s policy and criteria for adjusting deferred remuneration before vesting and after vesting :

As outlined in Item (d) above, deferral structures will be incorporated and published to the staff over the next 12 months.

For senior levels and material risk taker roles, remuneration package will represent a mix of fixed pay, cash bonus and ESOP in a manner that ensures deferred vesting schedule of ESOPs. Further, the deferred / unvested portions will be subject to “malus” provision in conformity with RBI guidelines.

f Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms.

The bank at this juncture primarily has an annual cash bonus process and ESOPs. The ESOP scheme has been designed with a view to ensure an appropriate risk balanced remuneration architecture. Further, for junior roles in front-line sales where quarterly formulae based incentive programs get rolled-out, there will be requisite emphasis on risk and control parameters. We are piloting the first such quarterly plan for junior roles in a specific business area (Bharat Banking), where there is adequate emphasis on risk / collections and compliance to set-out processes.

5 LIQUIDITY COVERAGE RATIO

Qualitative disclosure

Liquidity risk management of the Bank is undertaken by the Balance Sheet Management Group (BSMG) under the central oversight of the Asset Liability Management Committee (ALCO) in accordance with the Board approved policies and ALCO approved funding plans. The Bank has adopted the Basel III framework on liquidity standards as prescribed by RBI for reporting of the Liquidity Coverage Ratio (LCR).

The mandated regulatory threshold as per the transition plan is embedded into the Limit Management Framework of the Bank with appropriate cushion to ensure maintenance of adequate liquidity buffers. Risk department computes the LCR and reports the same to the Asset Liability Management Committee (ALCO), Risk Management Committee of the Board and Board for oversight and periodical review. The Bank has been submitting LCR reports to RBI from January 2016.

Currently the Liquidity Coverage Ratio is significantly higher than minimum regulatory threshold. As a strategy, the Bank is highly invested into GOI Bonds and corporate bonds which has resulted in a high level of HQLA. The Bank follows the criteria laid down by the RBI for month-end calculation of High Quality Liquid Assets (HQLA), gross outflows and inflows within the next 30 day period. HQLA predominantly comprises Government securities in excess of minimum SLR requirement viz. Treasury Bills, Central and State Government securities and corporate bonds in form of CP, CD and Bonds rated AA- and above with mandated haircuts applied thereto.

Bank is predominantly funded through long term borrowings viz Bonds and ECBs. Further the reliance on retail deposits and CASA is minimal as of now. All significant outflows and inflows determined in accordance with RBI guidelines are included in the prescribed LCR computation. Bank expects the LCR to reduce in the coming quarters primarily on account of growth in advances and increased focus on raising retail deposits.

The Risk department measures and monitors the liquidity profile of the Bank with reference to the Board approved limits on a static as well as on a dynamic basis by using the gap analysis technique supplemented by monitoring of key liquidity ratios and periodical liquidity stress testing. The Bank assesses the impact on short term liquidity gaps dynamically under various scenarios covering business projections under normal as well as varying market conditions. Periodical reports are placed before the Bank''s ALCO for perusal and review.

6 RELATED PARTY DISCLOSURE :

As per AS-18, Related Party Disclosure, the Bank''s related parties are disclosed below :

A. ULTIMATE HOLDING COMPANY

IDFC Limited

B. HOLDING COMPANY

IDFC Financial Holding Company Limited

C. FELLOW SUBSIDIARIES

IDFC Alternatives Limited

IDFC Asset Management Company Limited

IDFC AMC Trustee Company Limited

IDFC Finance Limited

IDFC Foundation

IDFC Infra Debt Fund Limited

IDFC Projects Limited

IDFC Securities Limited

IDFC Trustee Company Limited

IDFC Capital (USA) Inc.

IDFC Capital (Singapore) Pte. Ltd.

IDFC Investment Advisors Limited

IDFC Investment Managers (Mauritius) Limited

IDFC Securities Singapore Pte. Limited

D. ASSOCIATES

i Direct

Feedback Infra Private Limited Millennium City Expressway Private Limited

ii Indirect (through fellow subsidiaries)

Jetpur Somnath Tollways Private Limited

Delhi Integrated Multi-Modal Transit System Limited Infrastructure Development Corporation (Karnataka) Limited Uttarakhand Infrastructure Development Company Limited India PPP Capacity Building Trust

E. KEY MANAGEMENT PERSONNEL

Dr. Rajiv B. Lall (Founder Managing Director & Chief Executive Officer)

F. RELATIVES OF KEY MANAGEMENT PERSONNEL:

Tara Lall, Ambika Lall, Indrani Gangadhar, Kishen Behari Lall, Bunty Chand, Reena Khanna

In accordance with paragraph 5 and 6 of AS - 18, the Bank has not disclosed certain transactions with relatives of key management personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2016 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category:

- Interest Expense :

IDFC LimitedRs,2.11 crore (Previous Year Nil); IDFC Financial Holding Company LimitedRs,1.58 crore (Previous Year Nil); IDFC Finance LimitedRs,0.46 crore (Previous Year Nil).

- Interest income earned :

Feedback Infra Private LimitedRs,3.96 crore (Previous Year Nil); Millennium City Expressways Private LimitedRs,20.03 crore (Previous Year Nil).

- Receiving of services :

IDFC Securities LimitedRs,5.92 crore (Previous Year Nil); IDFC Alternatives LimitedRs,1.77 crore (Previous Year Nil).

- Rendering of services :

IDFC Securities LimitedRs,6.55 crore (Previous Year Nil); IDFC Asset Management Company LimitedRs,0.91 crore (Previous Year Nil).

- Managerial Remuneration :

Rajiv B. LallRs,1.92 crore (Previous Year Nil).

- Sale of investments :

IDFC Infra Debt Fund LimitedRs,108.83 crore (Previous Year Nil).

- Profit on sale of Investments :

IDFC Infra Debt Fund LimitedRs,1.03 crore (Previous Year Nil).

- Purchase of fixed assets :

IDFC Securities LimitedRs,0.34 crore (Previous Year Nil).

- Placement of security deposits :

IDFC Alternatives LimitedRs,1.77 crore (Previous Year Nil).

- Advance repaid :

Millennium City Expressways Private LimitedRs,8.26 crore (Previous Year Nil).

- Sell down of loans :

IDFC Infra Debt Fund LimitedRs,125.21 crore (Previous Year Nil).

- Deposits with the Bank :

IDFC LimitedRs,218.97 crore (Previous Year Nil); IDFC Financial Holding Company LimitedRs,44.23 crore (Previous Year Nil); IDFC Infra Debt Fund LimitedRs,102.39 crore (Previous Year Nil).

- Investment of related party in the Bank :

IDFC Financial Holding Company LimitedRs,7,030.07 crore (Previous Year Nil).

- Other receivables (net) :

IDFC Securities LimitedRs,0.75 crore (Previous Year Nil).

- Other payables (net) :

IDFC Securities LimitedRs,1.18 crore (Previous Year Nil).

7 EARNING PER SHARE (‘EPS’)

Basic and diluted earnings per equity share are computed in accordance with AS 20 - Earnings per share. Basic earnings per equity share are computed by dividing net profit after tax attributable to equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per equity share is computed by dividing net profit after tax attributable to equity shareholders by the weighted average number of equity shares and weighted average number of dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. Dilution of equity is on account of stock options granted to employees by the Bank.

8 SMALL AND MICRO INDUSTRIES

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments.

9 DISCLOSURE ON FACTORING

As per the RBI circular Ref No. DBR.No.FSD.BC.32/24.01.007/2015-16 dated July 30, 2015, banks are required to disclose factoring exposures. Receivables acquired under factoring are treated as part of loans and advances and reported under the head ''Bills Purchased and Discounted'' in Schedule 9 of the Balance Sheet. The Bank has factoring exposure ofRs,200.25 crore and outstanding ofRs,200.21 crore as on March 31, 2016 (Previous Year Nil).

10 DESCRIPTION OF CONTINGENT LIABILITIES

i Claims against the Bank not acknowledged as debts

The Bank is a party to taxation matters which are in dispute and are under appeal. The demands have been partly paid/ adjusted and will be received as refund if the matters are decided in favour of the Bank.

ii Liability for partly paid investments

This represents amounts remaining unpaid towards liability for partly paid investments. These payment obligations of the Bank do not have any profit / loss impact.

iii Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, currency options, forward rate agreements, currency swaps and interest rate swaps with inter-bank participants on its own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by way of interest / principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. Interest rate futures are standardized, exchange-traded contracts that represent a pledge to undertake a certain interest rate transaction at a specified price, on a specified future date. Forward rate agreements are agreements to pay or receive a certain sum based on a differential interest rate on a notional amount for an agreed period. A foreign currency option is an agreement between two parties in which one grants to the other the right to buy or sell a specified amount of currency at a specific price within a specified time period or at a specified future time. An exchange traded currency option contract is a standardized foreign exchange derivative contract, which gives the owner the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date on the date of expiry. Currency Futures contract is a standardized, exchange-traded contract, to buy or sell a certain underlying currency at a certain date in the future, at a specified price.

iv Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

v Acceptances, endorsements and other obligations

These includes documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank''s customers that are accepted or endorsed by the Bank.

vi Other items

Other items represent estimated amount of contracts remaining to be executed on capital account.


Mar 31, 2015

1.IDFC Bank Limited ('the Company') is a public company, incorporated in India on October 21, 2014. The Company is a wholly owned subsidary of IDFC Financial Holding Company Limited.

(b) Terms / rights attached to equity shares

* The Company has only one class of equity shares having a par value of ' 10 per share. Each holder of equity shares is entitled to one vote per share.

* In the event of liquidation of the Company, the holders of equity shares will be entitled to receive any of the remaining assets of the Company, after distribution of all preferential amounts. However, no such preferential amounts exists currently. The distribution will be in proportion to the number of equity shares held by the Shareholders.

2. Provisions & Contingencies

a. There are no litigations claims made by the Company or pending on the Company.

b. Provisions for onerous contracts are recognised when the expected benefits to be derived by the Company from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognises any impairment loss on the assets associated with that contract.

3. The Company is yet to commence its commercial operations. Accordingly, there are no separate reportable segments as per Accounting Standard 17 on 'Segment Reporting' as specified u/s 133 of Companies Act, 2013 read with rule 7 of the Companies (Accounts) Rules, 2014.

4. As per Accounting Standard 18 on 'Related Party Disclosures' as specified u/s 133 of Companies Act, 2013 read with rule 7 of the Companies (Accounts) Rules, 2014.

Holding Company:

IDFC Limited (Upto December 25, 2014)

IDFC Financial Holding Company Limited (w.e.f. December 26, 2014)

5. In accordance with Accounting Standard 20 on 'Earnings Per Share' as specified u/s 133 of Companies Act, 2013 read with rule 7 of the Companies (Accounts) Rules, 2014.

6. The Company has a negative net worth as at March 31,2015 however, the accounts of the Company have been prepared on going concern basis, since the ultimate parent company IDFC Limited has committed to infusion of funds and other support as necessary in accordance with the corporate restructuring plan for the IDFC group approved by the Board of Directors of IDFC Limited in the meeting dated October 30, 2014. This demonstrates the ability and intention of the Company to continue as a going concern.

7. Since the Company was incorporated on October 21, 2014 this is the first accounting period of the Company. Accordingly there are no comparative figures.