Accounting Policies of ESAF Small Finance Bank Ltd. Company

Mar 31, 2025

4 Significant Accounting Policies

4.1 Revenue Recognition

Revenue is recognised to the extent that it is probable

that the economic benefits will flow to the Bank and

the revenue can be reliably measured.

i. Interest Income is recognised in the Profit and
Loss Account on accrualbasis, except in the
case of Non-Performing Assets (NPAs). Interest
on Non-Performing Assets (NPAs) is recognised
on realisation basis as per the prudential norms
issued by the RBI. Interest is not charged on the
delayed remittances for the overdue period on
microloans.

ii. Profit or Loss on sale of investments is
recognised in the Profit and Loss Account.
However, the profit on sale of investments in
the ''Held to Maturity'' category is appropriated
(net of applicable taxes and amount required to
be transferred to statutory reserve) to ''Capital
Reserve''.

iii Income on non-coupon bearing discounted
instruments is recognised over the tenure of
the instrument on a straight line basis. In case
of coupon bearing discounted instruments,
discount income is recognised over the tenure of
the instrument on yield basis.

iv Dividend on investments in shares and units of
mutual funds are accounted when the Bank''s
right to receive the dividend is established.

v Processing fee/ upfront fee, handling charges
and similar charges collected at the time of
sanctioning or renewalof loan/ facility is
recognised at the inception/ renewal of loan on
upfront basis.

vi Other fees and commission income (including
commission income on third-party products) are
recognised when due, except in cases where the
Bank is uncertain of ultimate collection and in
case of Non-Performing Assets.

vii Interest income on deposits with banks and other
financial institutions are recognised on a time
proportion accrual basis taking into account the
amounts outstanding and the rates applicable.

viii Guarantee commission is recognised on a
straight line basis over the period of contract.

ix Locker rent is recognised on realisation
basis.

x. For a securitisation or direct assignment
transaction, the Bank recognises profit upon
receipt of the funds and loss at the time of sale.
The unrealised gains, associated with expected
future margin income is recognised in Profit and
Loss account on receipt of cash, after absorbing
losses, if any.

xi. Fees received on sale of priority sector lending
certificates is considered as Miscellaneous
Income, while fees paid for purchase is expended
as other expenditure in accordance with the
guidelines issued by RBI on the date of purchase/
sale on upfront basis.

4.2 Investments

Effective April 1, 2024, investments, are accounted
in accordance with RBI guidelines: Master Direction -
Classification, Valuation and Operation of Investment
Portfolio of CommercialBanks (Directions) 2023
("Master Directions"), which are briefly as follows:

i. Categorisation of Investments:

The Bank classifies its investment portfolio under
the following three categories:

Held to Maturity (HTM)- The securities that are
acquired with the intention and objective of
holding it to maturity and the contractual terms
of the security give rise to cashflows that are
Solely Payments of Principal and Interest (SPPI
criteria) on principal outstanding on specified
dates.

Available for Sale (AFS) - The securities that are
acquired with the objective of both collecting
contractual cash flows and selling securities and
the contractual terms of the securities meet the
SPPI criteria. In case of equity instruments, the
Bank may make an irrevocable election to classify
an equity instrument that is not held with the
objective of trading under AFS.

Debt Securities that are held for Asset Liability
Management (ALM) purposes that meet the SPPI
criterion are also classified under AFS.

Fair Value through Profit and Loss (FVTPL)- The
securities that do not qualify for inclusion in HTM
or AFS shall be classified under FVTPL.

Held for Trading (HFT), which is a sub-category
of FVTPL, consists of all instruments meeting
the specifications prescribed by Master
Directions.

ii. Presentation of Investments in the Balance
Sheet

Investments are presented in the Balance Sheet
under six groups vis., (i) Government Securities,
(ii) Other Approved Securities, (iii) Shares, (iv)
Debentures and Bonds, (v) Investments in
Subsidiaries, Associates and Joint Ventures and
(vi) Other Investments

iii. Recognition and Measurement

a) Initial Recognition and Measurement

All investments are measured at fair value
on initialrecognition. Unless facts and
circumstances suggest that the fair value
is materially different from the acquisition,
cost is presumed to be fair value. Broken
period interest in debt instruments and
government securities is treated as revenue
item.

Where the securities are quoted or the
fair value can be determined based on
market observable inputs (such as yield
curve, credit spread, etc.) any Day 1 gain/
loss is recognised in the Profit and Loss
Account, under Schedule 14: ''Other Income''
within the subhead ''Profit on revaluation
of investments'' or ''Loss on revaluation of
investments'', as the case may be.

Any Day 1 loss arising from Level3
investments is recognised immediately.

Any Day 1 gains arising from Level3
investments is deferred. In the case of debt
instruments, the Day 1 gains are amortised
on a straight-line basis up to the maturity
date (or earliest calldate for perpetual
instruments), while for unquoted equity
instruments, the gain is set aside as a liability
until the security is listed or derecognised.

b) Subsequent Measurement

HTM - Securities held in HTM are carried
at cost. Any discount or premium on the
securities under HTM are amortised over

the remaining life of the instrument. Any
profit or loss on the sale of investments in
HTM is recognised in the Profit and Loss
Account and is appropriated to the ''Capital
Reserve Account'' after adjustments of taxes
and transfer to Statutory Reserve.

AFS - The securities held in AFS are
fair-valued at least on a quarterly basis. Any
discount or premium on the acquisition of
debt securities under AFS are amortised
over the remaining life of the instrument.
The net appreciation or depreciation are
directly credited or debited to AFS-Reserve.
Upon sale or maturity of a debt instrument
in AFS category, the accumulated gain/
loss for that security in the AFS-Reserve
is transferred from the AFS-Reserve and
recognised in the Profit and Loss Account.
In the case of equity instruments designated
under AFS at the time of initial recognition,
any gain or loss on sale of such investments
is not transferred from AFS-Reserve to the
Profit and Loss Account. Instead, such gain
or loss is transferred from AFS-Reserve to
the Capital Reserve.

FVTPL- The securities held in FVTPL are
fair-valued and the net gain or loss arising
on such valuation are directly credited or
debited to the Profit and Loss Account.
Securities that are classified under the HFT
sub-category within FVTPL are fair-valued on
a daily basis, whereas securities in FVTPL are
fair-valued on quarterly basis. Any discount
or premium on the acquisition of debt
securities under FVTPL are amortised over
the remaining life of the instrument.

iv. Investment Fluctuation Reserve (IFR)

RBI advised the Bank to create IFR with effect from
2018-19. As per RBI guidelines, transfer to IFR will
be lower of the following (i) net profit on sale of
investments during the year or (ii) net profit for
the year less mandatory appropriations, until the
amount of IFR is at least 2 % of the AFS and FVTPL
(including HFT) portfolio, on a continuing basis.

v. Reclassifications Between Categories

Reclassification of investments between
categories is carried out with approval of Board
of Directors and prior approval of Department
of Supervision (DoS), RBI. Any reclassification is

applied prospectively from reclassification date
and the accounting treatment is in accordance
with the RBI guidelines.

vi. Valuation of Investments

The fair value for the purpose of initial recognition
and periodical valuation of investments shall be
determined as per the valuation norms laid down
in accordance with RBI guidelines.

1. Quoted Securities - The fair value for
the quoted securities shall be the prices
declared by the Financial Benchmarks India
Private Ltd. (FBIL) in accordance with RBI
circular FMRD.DIRD.7/14.03.025/2017-18
dated March 31, 2018, as amended from
time to time. For securities whose prices are
not published by FBIL, the fair value of the
quoted security shall be based upon quoted
price as available from the trades/ quotes
on recognised stock exchanges, reporting
platforms or trading platforms authorised
by RBI/SEBI or prices declared by the Fixed
Income Money Market and Derivatives
Association of India (FIMMDA).

2. Unquoted SLR Securities

• Treasury Bills shall be valued at carrying
cost.

• Unquoted Central / State Government
securities shall be valued on the basis
of the prices/ YTM rates published by
the FBIL.

• Other approved securities shallbe

valued applying the YTM method

by marking them up by 25 basis
points above the yields of the Central
Government Securities of equivalent
maturity put out by FBIL.

3. Unquoted Non-SLR Securities

• Equity shares for which current

quotations are not available i.e., which
are classified as illiquid or which are
not listed on a recognised exchange,
the fair value for the purposes of
these directions shallbe the break¬
up value (without considering
''revaluation reserves'', if any) which is
to be ascertained from the company''s
latest audited balance sheet. In case
the latest audited balance sheet is not
available or is more than 18 months

old, the shares shall be valued at '' 1
per company.

• For other unquoted Non-SLR
securities, fair valuation shall be
based on the RBI Master Direction-
Classification, Valuation and Operation
of Investment Portfolio of Commercial
Bank (Directions), 2023.

4. In accordance with the RBI guidelines,
repurchase and reverse repurchase
transactions in government securities and
corporate debt securities are reflected
as borrowing and lending transactions
respectively.

5. Borrowing cost on repo transactions is
accounted for as interest expense and
revenue on reverse repo transactions are
accounted for as interest income.

vii. Fair Value Measurement

"Fair value" means the price that would be
received to sell an asset or paid to transfer
a liability in an orderly transaction between
market participants on the measurement
date. The Bank classifies its investment portfolio
into three fair value hierarchies vis. Level 1, Level
2, and Level 3 to signify the context of inputs
used for valuation of a financial instrument.,
described as follows:

"Level 1 investments" are fair-valued based on
quoted prices (unadjusted) in active markets for
identical instruments that the Bank can access at
the measurement date.

"Level 2 investments" are fair-valued based on are
those inputs, other than quoted prices included
within Level 1, that are observable for the asset
or liability, either directly or indirectly.

"Level3 investments" are fair-valued at
unobservable inputs such as valuation of equity
shares in an unlisted company where break-up
value has to be ascertained from the company''s
latest audited balance sheet. However,
net revaluation gain in Level 3 instruments
recognised in the Profit and Loss Account or
in the AFS Reserve will be deducted from CET1
Capital.

viii. Provision for Non-Performing Investments

The criteria for classification and recognition
of Non-Performing Investments are as per
the guidelines used to classify an asset as

Non-Performing Asset (NPA) as per the extant
Prudential Norms on Income Recognition, Asset
Classification and Provisioning (IRACP) pertaining
to Advances.

ix. Short Sales

The short sale transactions in Central
Government dated securities undertaken by
the Bank shall be accounted in accordance with
RBI guidelines. The short position is categorised
under HFT- FVTPL category and netted off from
investments in the Balance Sheet.

4.3 Advances

i. Advances are classified into Performing Assets
("Standard") and Non-Performing Assets ("NPA")
as per the RBI guidelines and are stated net of
unrealised interest/charges in suspense for
Non-Performing Advances and provisions made
towards NPAs and principal portion of advance
prepaid by customer, if any. Interest/ other
charges on Non-Performing Advances is not
recognised in Profit and Loss Account and is
transferred to an unrealised interest suspense
account till the actual realisation. Interest portion
of advance prepaid by the customer is disclosed
as other liability and recognised to Profit and
Loss account on due basis. Further, NPAs are
classified into sub-standard, doubtful and loss
assets based on the criteria stipulated by the
RBI. Provisions for NPAs are made at /or above
the minimum required level in accordance with
the provisioning policy adopted by the Bank and
as per the guidelines and circulars of the RBI on
matters relating to prudential norms.

ii. Provision for standard advances is made as per
the extant RBI guidelines. Additional provision
on standard assets is made as per the policy
decided by the Board.

iii. The Bank transfers advances through
interbank participation with and without risk.
In accordance with the RBI guidelines, in the
case of participation with risk, the aggregate
amount of the participation issued by the
Bank is reduced from advances and where the
Bank is participating; the aggregate amount of
participation is classified under advances. In the
case of participation without risk, the aggregate
amount of participation issued by the Bank
is classified under borrowings and where the
Bank is participating, the aggregate amount of
participation is shown as due from banks under
advances.

iv Non-Performing Advances are written-off as per
the Bank''s policy. Amounts recovered against
debts written-off/ technically written-off are
recognised in the Profit and Loss account and
included under "Other Income".

v. The Bank considers a restructured account as one
where the Bank, for economic or legal reasons
relating to the borrower''s financialdifficulty,
grants to the borrower concessions that the Bank
would not otherwise consider. Restructuring
would normally involve modification of terms of
the advances/ securities, which would generally
include, among others, alteration of repayment
period/ repayable amount/ the amount of
instalments/ rate of interest (due to reasons
other than competitive reasons). Restructured
accounts are classified as such by the Bank
only upon approval and implementation of the
restructuring package. Necessary provision for
diminution in the fair value of a restructured
account is made and classification thereof is as
per the extant RBI guidelines, as amended from
time to time. In accordance with RBI guidelines
on the prudential framework for restructuring of
stressed assets and the resolution framework for
Covid 19 related stress, the Bank, in accordance
with its Board-approved policy, carried out
one-time restructuring of eligible borrowers.
The asset classification and necessary provisions
thereon are done in accordance with the said RBI
guidelines.

vi. Priority Sector Lending Certificate (PSLC): The
Bank enters into transactions for the sale and/ or
Purchase of Priority Sector Lending Certificates
(PSLC). In case of a sale transaction, the Bank
sells the fulfillment of priority sector obligations
and in the case of a purchase transaction, the
Bank buys the fulfillment of priority sector
obligations through the RBI trading platform.
There is no transfer of loan assets or risks. The
fees received for the sale of PSLC is recorded as
other income and fees paid for purchase of PSLC
is recorded as other expenditure in Profit and
Loss account.

vii. Securitisation Transaction and Direct
Assignments:

The Bank transfers its loan receivables through
Direct Assignment route as well as transfer to
Special Purpose Vehicle (SPV).

The transferred loans and such securitised receivables
are de-recognised as and when these are sold (true
sale criteria being fully met) and the consideration
has been received by the Bank. Sales/ transfer that
do not meet true sale criteria are accounted for as
borrowings. For a Securitisation or Direct Assignment
Transaction, the Bank recognises profit upon receipt
of that funds and loss is recognised at the time of sale.
The unrealised gains, associated with expected future
margin income is recognised in Profit and Loss
account on receipt of cash, after absorbing losses, if
any.

On sale of stressed assets, if the sale is at a price
below the net book value (i.e., funded outstanding
less specific provisions held), the shortfall is charged
to the Profit and Loss Account and if the sale is for
a value higher than the net book value, the excess
provision is credited to the Profit and Loss Account
in the year when the sum of cash received by way of
initial consideration and / or redemption or transfer
of security receipts issued by SC / RC exceeds the net
book value of the loan at the time of transfer.

In respect of stressed assets sold under an asset
securitisation, where the investment by the Bank in
Security Receipts (SRs) backed by the assets sold by
it is more than 10 % of such SRs, provisions held are
higher of the provisions required in terms of net asset
value declared by the Securitisation Company (''SC'') /
Reconstruction Company (''RC'') and provisions as per
the extant norms applicable to the underlying loans,
notionally treating the book value of these SRs as the
corresponding stressed loans assuming the loans
remained in the books of the Bank.

Investments in Pass Through Certificates (PTCs)
issued by other SpecialPurpose Vehicles (SPVs),
are accounted at acquisition cost and are classified
as investments. Loans bought through the Direct
Assignment route which are classified as advances
and are carried at acquisition cost unless it is more
than the face value, in which case the premium is
amortised based on effective interest rate method.

4.4 Fixed Assets (Property Plant & Equipment
and Intangible Assets) and Depreciation /
Amortisation

Fixed Assets have been stated at cost less accumulated
depreciation and amortisation, and adjusted for
impairment, if any.

Cost includes cost of purchase inclusive of freight,
duties, incidental expenses and all expenditure like

site preparation, installation costs and professional
fees incurred on the asset before it is ready to put to
use.

Gains or losses arising from the retirement or disposal
of Fixed Assets are determined as the difference
between the net disposal proceeds and the carrying
amount of assets and recognised as income or
expense in the Profit and Loss Account.

Depreciation is charged over the estimated useful
life of the Fxed Asset on a straight-line basis. The
management believes that the useful life of assets
assessed by the Bank, pursuant to the Companies Act,
2013, taking into account changes in environment,
changes in technology, the utility and efficacy of the
asset in use, fairly reflects its estimate of useful lives
of the Fixed Assets. The estimated useful lives of key
Fixed Assets, based on technical evaluation done by
the management are given below:

An Intangible Asset is recognised only when its cost
can be measured reliably and it is probable that
the expected future economic benefits that are
attributable to it will flow to the Bank.

Intangible Assets acquired separately are measured on
initial recognition at cost. The cost of an Intangible Asset
comprises its purchase price including after deducting
trade discounts and rebates, any directly attributable
cost of bringing the item to its working condition for its
intended use following initial recognition. Intangible
Assets are carried at cost less any accumulated
amortisation and any accumulated impairment losses.
Intangible assets comprising of software is amortised
on straight-line basis over a period of 4 years, unless
it has a shorter useful life.

For assets purchased/ sold during the year,
depreciation is being provided on pro rata basis by
the Bank.

Capitalwork-in-progress includes costs incurred
towards creation of Fixed Assets that are not ready for
their intended use and also includes advances paid to
acquire Fixed Assets.

4.5 Impairment of Assets

The carrying amounts of assets are reviewed at
each Balance Sheet date to determine if there is any
indication of impairment based on internal/external
factors. An impairment loss is recognised wherever the
carrying amount of an asset exceeds its recoverable
amount, which is the greater of the asset''s net selling
price and value in use. In assessing the value in use,
the estimated future cash flows are discounted to
their present value using pre-tax discount rate that
reflects current market assessment of the time value
of money and risks specific to the asset.

After impairment, depreciation is provided on the
revised carrying amount of the asset over its remaining
useful life.

4.6 Retirement and Employee Benefits

i. Short-Term Employee Benefit

The undiscounted amount of short-term
employee benefits, which are expected to be
paid in exchange for the services rendered by
employees, are recognised during the year when
the employee renders the service.

ii. Long-Term Employee Benefit

a. Defined Contribution Plan:

Provident Fund: In accordance with law,
all employees of the Bank are entitled to
receive benefits under the provident fund, a
defined contribution plan in which both the
employee and the Bank contribute monthly
at a pre-determined rate. Contribution to
provident fund is recognised as expense as
and when the services are rendered. The
Bank has no liability for future provident fund
benefits other than its fixed contribution.

b. Defined Benefit Plan:

Gratuity: The Bank provides for Gratuity,
covering employees in accordance with the
Payment of Gratuity Act, 1972. The Bank''s
liability is actuarially determined (using
Projected Unit Credit Method) as at the
Balance Sheet date. The actuarial gain or
loss arising during the year is recognised in
the Profit and Loss Account.

Compensated Absences: The Bank accrues
the liability for compensated absences
based on the actuarialvaluation as at
the Balance Sheet date conducted by
an independent actuary which includes
assumptions about demographics, early
retirement, salary increases, interest rates
and leave utilisation. The net present
value of the Bank''s obligation is actuarially
determined using the Projected Unit Credit
Method as at the Balance Sheet date.
Actuarial gains / losses are recognised in the
Profit and Loss Account in the year in which
they arise.

4.7 Share Issue Expenses

Share issue expenses are adjusted from Share
Premium Account as permitted by Section 52 of the
Companies Act, 2013 on issue of underlying securities
pending which is recognised as "other assets" in
Balance sheet.

4.8 Income Taxes

Tax expense comprises current and deferred tax.
Current income tax is measured at the amount
expected to be paid to the tax authorities in
accordance with the Income Tax Act, 1961. Deferred
tax assets and liabilities are recognised for the
future tax consequences of timing differences being
the difference between the taxable income and the
accounting income that originate in one year and
are capable of reversal in one or more subsequent
year(s).

Deferred tax assets on account of timing differences
are recognised only to the extent there is reasonable
certainty that sufficient future taxable income will
be available against which such deferred tax assets
can be realised. In case of carry forward losses
and unabsorbed depreciation, under tax laws, the
deferred tax assets are recognised only to the extent
there is virtualcertainty supported by convincing
evidence that sufficient future taxable income will be
available against which such deferred tax assets can
be realised.

At each reporting date, the Bank re-assesses
unrecognised deferred tax assets. It recognises
unrecognised deferred tax assets to the extent that
it has become reasonably certain or virtually certain,
as the case may be, that sufficient future taxable
income will be available against which such deferred
tax assets can be realised.

Deferred tax assets and deferred tax liabilities are
offset, if a legally enforceable right exists to set-off
current tax assets against current tax liabilities and the
deferred tax assets and deferred tax liabilities relate
to the same taxable entity and the same taxation
authority.

The carrying amount of deferred tax assets is
reviewed at each reporting date. The Bank writes
down the carrying amount of deferred tax assets to
the extent that it is no longer reasonably certain or
virtually certain, as the case may be, that sufficient
future taxable income will be available against which
deferred tax asset can be realised. Any such write¬
down is reversed to the extent that it becomes
reasonably certain or virtually certain, as the case
may be, that sufficient future taxable income will be
available.

Deferred tax assets and liabilities are measured
using tax rates and tax laws that have been enacted
or substantively enacted at the Balance Sheet date.
Changes in deferred tax assets / liabilities on account
of changes in enacted tax rates are given effect to in
the Profit and Loss Account in the year of change.

4.9 Cash and Cash Equivalent

Cash and cash equivalents include cash in hand,
balances with RBI, balances with other banks and
money at call and short notice with an original
maturity of three months or less (including the effect
of changes in exchange rates on cash and cash
equivalents in foreign currency).

4.10 Segment Information

In accordance with guidelines issued by RBI and
Accounting Standard 17 (AS-17) on "Segment
Reporting", the Bank''s business has been segregated
into Treasury, Wholesale Banking, RetailBanking
Segments and Other Banking Operations:

a) Treasury: The Treasury segment revenue
primarily consists of interest earnings on
investments portfolio of the Bank, gains or
losses on investment operations and earnings
from foreign exchange business. The principal
expenses of the segment consist of interest
expense allocated on funds borrowed/ deposits
received and other expenses. Treasury segment
liability includes allocation on deposits received
from customers.

b) Wholesale Banking: The Wholesale Banking
segment provides loans to corporate segment
identified on the basis of RBI guidelines.

Revenues of this segment consist of interest
earned on loans made to corporate customers
and the charges/fees earned from other banking
services. The principal expenses of the segment
consist of interest expense allocated on funds
borrowed/deposits received and other expenses.

c) RetailBanking: The RetailBanking segment
provides loans to non-corporate customers
identified on the basis of RBI guidelines and also
includes deposits from customers. Revenues
of this segment consist of interest earned on
loans made to non-corporate customers and the
charges/fees earned from other banking services.
The principal expenses of the segment consist of
interest expense allocated on funds borrowed/
deposits received and other expenses.

d) Other Banking Operations: This segment includes
income from parabanking activities such as
debit cards, third-party product distribution and
associated costs.

Segment revenues consist of earnings from external
customers and other allocated revenues. Segment
expenses consist of allocated interest expenses,
operating expenses and provisions. Segment results
are net of segment revenues and segment expenses.
Segment assets include assets related to segments
and exclude tax-related assets. Segment liabilities
include liabilities related to the segment excluding net
worth.

Unallocated: All items which are reckoned at an
enterprise level are classified under this segment.
This includes capital, reserves and other unallocable
assets and liabilities such as fixed assets, deferred tax,
tax paid in advance and income tax provision, etc.

The RBI vide its Circular dated April 7, 2022 on
establishments of Digital Banking Units (DBUs) has
prescribed reporting of Digital Banking Segments as
a sub segment of Retail Banking Segment (RBS). The
Bank has not set up any DBU so far and hence DBU
has not been disclosed as a seperate segment as per
Accounting Standard 17 (Segment Reporting).

Geographical Segment

Since the business operations of the Bank are
primarily concentrated in India, the Bank is considered
to operate only in the domestic segment.

1.11 Earnings Per Share

Basic earnings per share are calculated by dividing the
net profit or loss for the year attributable to equity
shareholders (after deducting attributable taxes)

by the weighted average number of equity shares
outstanding during the year. The weighted average
number of equity shares outstanding during the year
is adjusted for events of bonus issue, bonus element
in a rights issue to existing shareholders and share
split.

For the purpose of calculating diluted earnings per
share, the net profit or loss for the year attributable
to equity shareholders and the weighted average
number of shares outstanding during the year
are adjusted for the effects of all dilutive potential
equity shares. Diluted earnings per share reflect the
potentialdilution that could occur if securities or
other contracts to issue equity shares were exercised
or converted during the year.

---

Mar 31, 2024

4 Significant Accounting Policies

4.1 Revenue Recognition

Revenue is recognised to the extent that it is probable

that the economic benefits will flow to the Bank and

the revenue can be reliably measured.

i. Interest Income is recognised in the Profit and Loss Account on accrual basis, except in the case of non-performing assets. Interest on non-performing assets is recognised on realisation basis as per the prudential norms issued by the RBI. Interest is not charged on the delayed remittances for the overdue period on microloans.

ii. Profit or Loss on sale of investments is recognised in the Profit and Loss Account. However, the profit on sale of investments in the ''Held to Maturity'' category is appropriated (net of applicable taxes and amount required to be transferred to statutory reserve) to ''Capital Reserve''.

iii. Income on non-coupon bearing discounted instruments is recognised over the tenure of the instrument on a straight line basis. In case of coupon bearing discounted instruments, discount income is recognised over the tenure of the instrument on yield basis.

iv. Dividend on Investments in shares and units of Mutual Funds are accounted when the Bank''s right to receive the dividend is established.

v. Processing Fee/ upfront fee, handling charges and similar charges collected at the time of sanctioning or renewal of loan/ facility is recognised at the inception/ renewal of loan on upfront basis.

vi. Other fees and Commission income (including commission income on third party products) are recognised when due, except in cases where the Bank is uncertain of ultimate collection and in case of Non performing assets.

vii. Interest income on deposits with banks and other financial institutions are recognised on a time proportion accrual basis taking into account the amounts outstanding and the rates applicable.

viii. Guarantee commission is recognised on a straight line basis over the period of contract.

ix. Locker rent is recognised on realisation basis.

x. For a securitisation or direct assignment transaction, the Bank recognises profit upon receipt of the funds and loss is recognised at the time of sale. The unrealised gains, associated with expected future margin income is recognised in Profit and Loss account on receipt of cash, after absorbing losses, if any.

xi. Fees received on sale of priority sector lending certificates is considered as Miscellaneous Income, while fees paid for purchase is expended as other expenditure in accordance with the guidelines issued by RBI on the date of purchase/ sale on upfront basis.

4.2 Investments

i. Classification:

Investments are classified into three categories, viz Held to Maturity ("HTM"), Available for Sale ("AFS") and Held for Trading ("HFT") at the time of purchase as per the guidelines issued by RBI. However for disclosure in the Balance Sheet, Investments in India are classified under six groups - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Others.

Purchase and sale transactions in securities are recorded under ''Settlement Date'' accounting.

ii. Basis of classification

Investments that the Bank intends to hold till maturity are classified as HTM category. Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category.

Investments which are not classified in either of the above two categories are classified under AFS category.

iii. Acquisition Cost :

The cost of investments is determined on weighted average basis. Broken period interest

in debt instruments and government securities is treated as a revenue item. The transaction cost including brokerage commission etc. paid at the time of acquisition of investments is charged to the Profit and Loss account.

iv. Disposal of investments:

Investments classified as HFT or AFS - Profit or loss on sale or redemption is recognised in the Profit and Loss Account. Investments classified as HTM - Profit on sale or redemption of investments is recognised in the Profit and Loss Account and is appropriated to Capital Reserve after adjustments for tax and transfer to Statutory Reserve. Loss on sale or redemption is recognised in the Profit and Loss Account.

v. Valuation:

HTM securities are carried at their acquisition cost. Any premium on acquisition of government securities are amortised over the remaining maturity of the security on a straight line basis. Any diminution, other than temporary, in the value of such securities is provided for.

AFS and HFT securities are valued periodically as per RBI guidelines.

The market/ fair value for the purpose of periodical valuation of quoted investments included in the AFS and HFT categories is measured with respect to the market price of the scrip as available from the trades/ quotes on the stock exchanges, SGL account transactions, price list of RBI or prices periodically declared by Financial Benchmark India Pvt. Ltd. [FBIL], based on relevant RBI circular.

The valuation of non-SLR securities, other than those quoted on the stock exchanges, wherever linked to the YTM rates, shall be with a mark-up (reflecting associated credit risk) over the YTM rates for government securities put out by FBIL. Securities are valued scrip wise and depreciation/ appreciation aggregated for each category. Net appreciation in each basket if any, being unrealised, is ignored, while net depreciation is provided for.

Treasury bills and Certificate of Deposits being discounted instruments, are valued at carrying cost.

Non Performing investments are identified and valued based on RBI guidelines.

vi. Repo Reverse Repo transactions

In accordance with the RBI guidelines repo and reverse repo transactions in government securities are reflected as borrowings and lending transactions respectively. Borrowing cost on repo transaction is accounted for as interest expense and revenue on reverse repo is accounted for as interest income.

vii. Investment Fluctuation Reserve ("IFR")

With a view to building up of adequate reserves to protect against increase in yields in accordance with RBI guideline bank started to create an IFR with effect from the Financial Year 2018-19. Amount appropriated from Net Profit to IFR is not less than lower of the following:

(i) net profit on sale of investments during the year or

(ii) net profit for the year less mandatory appropriations, until the amount of IFR is at least 2 percent of the HFT and AFS portfolio, on a continuing basis.

The amount held in the IFR shall be utilised by way of draw down, in accordance with the provisions of the Reserve Bank of India guidelines

viii. Short Sales

The short sale transactions in Central Government dated securities undertaken by the Bank shall be accounted in the following manner in accordance with RBI guidelines.

- The short position is categorised under HFT category and netted off from investments in the Balance Sheet.

- The short position is marked to market at periodical intervals and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored.

- Profit / Loss on settlement of the short position is recognised in the Profit and Loss Account

ix. Transfer of Securities between Categories:

The transfer/shifting of securities between categories of investments is accounted in accordance with the RBI guidelines.

4.3 Advances

i. Advances are classified into performing assets ("Standard") and non-performing assets ("NPA") as per the RBI guidelines and are stated net of

unrealised interest/charges in suspense for non performing advances and provisions made towards NPAs and principal portion of advance prepaid by customer, if any. Interest/ other charges on Non-performing advances is not recognised in Profit and Loss Account and is transferred to an unrealised interest suspense account till the actual realisation. Interest portion of advance prepaid by the customer is disclosed as other liability and recognised to Profit and Loss account on due basis. Further, NPAs are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by the RBI. Provisions for NPAs are made at /or above the minimum required level in accordance with the provisioning policy adopted by the Bank and as per the guidelines and circulars of the RBI on matters relating to prudential norms.

ii. Provision for standard advances is made as per the extant RBI guidelines. Additional Provision on standard assets is made as per the policy decided by the Board.

iii. The Bank transfers advances through interbank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating; the aggregate amount of participation is classified under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances.

iv. Non Performing Advances are written off as per the Bank''s policy. Amounts recovered against debts written off/ technically written off are recognised in the Profit and Loss account and included under "Other Income".

v. The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrower''s financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances/ securities, which would generally include, among others, alteration of repayment period/ repayable amount/ the amount of

instalments/ rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made and classification thereof is as per the extant RBI guidelines, as amended from time to time. In accordance with RBI guidelines on the prudential framework for restructure of stressed assets and the resolution framework for Covid 19 related stress, the Bank in accordance with its Board approved policy, carried out one time restructuring of eligible borrowers. The asset classification and necessary provisions thereon are done in accordance with the said RBI guidelines.

vi. Priority Sector Lending Certificate (PSLC): The Bank enters into transactions for the sale and/ or purchase of priority sector lending certificates (PSLC). In case of a sale transaction, the Bank sells the fulfillment of priority sector obligations and in the case of a purchase transaction, the Bank buys the fulfillment of priority sector obligations through the RBI trading platform. There is no transfer of loan assets or risks. The fees received for the sale of PSLC is recorded as other income and fees paid for purchase of PSLC is recorded as other expenditure in Profit and Loss account.

vii. Securitisation Transaction and Direct Assignments:

The Bank transfers its loan receivables through Direct Assignment route as well as transfer to Special Purpose Vehicle (SPV).

The transferred loans and such securitised receivables are de-recognised as and when these are sold (true sale criteria being fully met) and the consideration has been received by the Bank. Sales/ transfer that do not meet true sale criteria are accounted for as borrowings. For a securitisation or direct assignment transaction, the Bank recognises profit upon receipt of that funds and loss is recognised at the time of sale. The unrealised gains, associated with expected future margin income is recognised in Profit and Loss account on receipt of cash, after absorbing losses, if any.

On sale of stressed assets, if the sale is at a price below the net book value (i.e., funded outstanding less specific provisions held), the shortfall is charged to the Profit and Loss Account and if the sale is for

a value higher than the net book value, the excess provision is credited to the Profit and Loss Account in the year when the sum of cash received by way of initial consideration and / or redemption or transfer of security receipts issued by SC / RC exceeds the net book value of the loan at the time of transfer.

In respect of stressed assets sold under an asset securitisation, where the investment by the bank in security receipts (SRs) backed by the assets sold by it is more than 10 percent of such SRs, provisions held are higher of the provisions required in terms of net asset value declared by the Securitisation Company (''SC'') / Reconstruction Company (''RC'') and provisions as per the extant norms applicable to the underlying loans, notionally treating the book value of these SRs as the corresponding stressed loans assuming the loans remained in the books of the Bank.

Investments in Pass Through Certificates (PTCs) issued by other Special Purpose Vehicles (SPVs), are accounted at acquisition cost and are classified as investments. loans bought through the direct assignment route which are classified as advances and are carried at acquisition cost unless it is more than the face value, in which case the premium is amortised based on effective interest rate method.

4.4 Fixed Assets (Property Plant & Equipment and Intangible Assets) and Depreciation / Amortisation

Fixed Assets have been stated at cost less accumulated depreciation and amortisation and adjusted for impairment, if any.

Cost includes cost of purchase inclusive of freight, duties, incidental expenses and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to put to use.

Gains or losses arising from the retirement or disposal of Fixed Assets are determined as the difference between the net disposal proceeds and the carrying amount of assets and recognised as income or expense in the Profit and Loss Account.

Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. The management believes that the useful life of assets assessed by the Bank, pursuant to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets. The estimated useful lives of key

fixed assets, based on technical evaluation done by the management are given below:

Class of Asset (Tangible and Intangible)	Estimated Useful Life as assessed by the Bank (in Years)	Estimated Useful Life specified under Schedule II of the Companies Act, 2013. (in Years)
Office Equipments	4-5	5
Computers	2- 3	3
Furniture &	9-10	10
Fixtures
Motor Vehicles	2-5	8
Servers	5	6

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of an intangible asset comprises its purchase price including after deducting trade discounts and rebates, any directly attributable cost of bringing the item to its working condition for its intended use following initial recognition. Intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

Intangible assets comprising of software is amortised on straight line basis over a period of 4 years, unless it has a shorter useful life.

For assets purchased/ sold during the Year, depreciation is being provided on prorata basis by the Bank.

Capital work-in-progress includes costs incurred towards creation of fixed assets that are not ready for their intended use and also includes advances paid to acquire fixed assets.

4.5 Impairment of Assets

The carrying amounts of assets are reviewed at each Balance Sheet date to determine if there is any indication of impairment based on internal/external factors. An impairment loss is recognised wherever the carrying amount of an asset exceeds its recoverable amount which is the greater of the asset''s net selling price and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that

reflects current market assessment of the time value of money and risks specific to the asset.

After impairment, depreciation is provided on the revised carrying amount of the asset over its remaining useful life.

4.6 Retirement and employee benefits

i. Short Term Employee Benefit

The undiscounted amount of short-term employee benefits which are expected to be paid in exchange for the services rendered by employees are recognised during the Year when the employee renders the service.

ii. Long term Employee Benefit

a. Defined contribution Plan:

Provident Fund: In accordance with law, all employees of the Bank are entitled to receive benefits under the provident fund, a defined contribution plan in which both the employee and the Bank contribute monthly at a pre-determined rate. Contribution to provident fund are recognised as expense as and when the services are rendered. The Bank has no liability for future provident fund benefits other than its fixed contribution.

b. Defined Benefit Plan:

Gratuity: The Bank provides for Gratuity, covering employees in accordance with the Payment of Gratuity Act, 1972. The Bank''s liability is actuarially determined (using Projected Unit Credit Method) as at the Balance Sheet date. The actuarial gain or loss arising during the Year is recognised in the Profit and Loss Account.

Compensated Absences: The Bank accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilisation. The net present value of the Bank''s obligation is actuarially determined using the Projected Unit Credit Method as at the Balance Sheet date. Actuarial gains / losses are recognised in the Profit and Loss Account in the Year in which they arise.

4.7 Share issue expenses

Share issue expenses are adjusted from Share Premium Account as permitted by Section 52 of the

Companies Act, 2013 on issue of underlying securities pending which is recognised as "other assets" in Balance sheet.

4.8 Income Taxes

Tax expense comprises current and deferred tax. Current income tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one Year and are capable of reversal in one or more subsequent Year(s).

Deferred tax assets on account of timing differences are recognised only to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. In case of carry forward losses and unabsorbed depreciation, under tax laws, the deferred tax assets are recognised only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.

At each reporting date, the Bank re-assesses unrecognised deferred tax assets. It recognises unrecognised deferred tax asset to the extent that it has become reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which such deferred tax assets can be realised.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set-off current tax assets against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to the same taxable entity and the same taxation authority.

The carrying amount of deferred tax assets is reviewed at each reporting date. The Bank writes-down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which deferred tax asset can be realised. Any such write-down is reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available.

l

Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the Year of change.

4.9 Cash and Cash equivalent

Cash and cash equivalents include cash in hand, balances with RBI, balances with other banks and money at call and short notice with an original maturity of three months or less (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency).

4.10 Segment Information

In accordance with guidelines issued by RBI and Accounting Standard 17 (AS-17) on "Segment Reporting", the Bank''s business has been segregated into Treasury, Wholesale Banking, Retail Banking Segments and Other Banking Operations:

a) Treasury: The treasury segment revenue primarily consists of interest earnings on investments portfolio of the bank, gains or losses on investment operations and earnings from foreign exchange business. The principal expenses of the segment consist of interest expense allocated on funds borrowed/ deposits received and other expenses. Treasury segment liability includes allocation on deposits received from customers.

b) Whole sale Banking: Whole sale Banking segment provides loans to corporate segment identified on the basis of RBI guidelines. Revenues of this segment consist of interest earned on Loans made to corporate customers and the charges/ fees earned from other banking services. The principal expenses of the segment consist of interest expense allocated on funds borrowed/ deposits received and other expenses.

c) Retail banking: The Retail Banking segment provides loans to non-corporate customers identified on the basis of RBI guidelines and also include deposits from customers. Revenues of this segment consist of interest earned on Loans made to non-corporate customers and the charges/fees earned from other banking services. The principal expenses of the segment consist of interest expense allocated on funds borrowed/ deposits received and other expenses.

d) Other Banking Operations: This segment includes income from para banking activities such as debit cards, third party product distribution and associated costs.

Segment revenues consist of earnings from external customers and other allocated revenues. Segment expenses consist of allocated interest expenses, operating expenses and provisions. Segment results are net of segment revenues and segment expenses.

Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth.

Unallocated: All items which are reckoned at an enterprise level are classified under this segment. This includes capital, reserves and other un allocable assets and liabilities such as fixed assets, deferred tax, tax paid in advance and income tax provision etc.

Geographical Segment

Since the business operations of the Bank

are primarily concentrated in India, the Bank

is considered to operate only in the domestic

segment.

4.11 Earnings per Share

Basic earnings per share are calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the year. The weighted average number of equity shares outstanding during the Year is adjusted for events of bonus issue, bonus element in a rights issue to existing shareholders and share split.

For the purpose of calculating diluted earnings per share, the net profit or loss for the Year attributable to equity shareholders and the weighted average number of shares outstanding during the Year are adjusted for the effects of all dilutive potential equity shares. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the Year.

---

Mar 31, 2023

SIGNIFICANT ACCOUNTING POLICY

POLICIES APPENDED TO AND FORMING PART OF THE FINANCIAL STATEMENTS

1 Background

ESAF Small Finance Bank Limited ("the Bank") is a
public limited company incorporated on 5 May 2016
in India, after receiving in principal approval from
the Reserve Bank of India ("RBI") to establish a small
finance bank in the private sector under section
22 of the Banking Regulation Act, 1949 on 16
September 2015. The Bank received the license from
the Reserve Bank of India on 18 November 2016
and commenced its banking operations from 10
March 2017. As per RBI Approval, the name of the
Bank is included in the Second Schedule to the Reserve
Bank of India Act, 1934 w. e. f. 12 November 2018.The
Bank provides micro, retail and corporate banking,
para banking activities such as debit card, third party
financial product distribution, in addition to treasury
and permitted foreign exchange business.

In order to get the shares listed in stock exchange,
the Bank is in the process of filing of Draft Red
herring prospectus.

2 Basis of Preparation

The financial statements have been prepared in
accordance with the requirements prescribed under
the Banking Regulation Act, 1949. The accounting and
reporting policies of the Bank used in the preparation
of these financial statements conform in all material
aspects with Generally Accepted Accounting
Principles in India ("Indian GAAP"), the circulars
and guidelines issued by RBI from time to time and
Accounting Standards prescribed under Section 133
of the Companies Act, 2013, read with the Companies
(Accounts) Rules, 2014 to the extent applicable and
other relevant provisions of the Companies Act, 2013
("Act") and current practices prevailing within the
Banking industry in India. The Bank follows historical
cost convention and accrual basis of accounting in
the preparation of the financial statements, except
otherwise stated. The accounting policies adopted
in the presentation of financial statements are
consistent with those followed in the previous year.

3 Use of Estimation

The preparation of financial statements requires the
management to make estimates and assumptions
considered in the reported amounts of assets and
liabilities (including contingent liabilities) as of the
date of the financial statements and the reported
income and expenses during the reporting period.
The Bank''s Management believes that the estimates
used in the preparation of the financial statements
are prudent and reasonable. Actual results could
differ from these estimates. Any revision to
accounting estimates is recognized prospectively in
current and future periods.

4 Significant Accounting Policies

4.1 Revenue Recognition

Revenue is recognized to the extent that it is probable
that the economic benefits will flow to the Bank and
the revenue can be reliably measured.

i. Interest Income is recognized in the Profit
and Loss Account on accrual basis, except
in the case of non-performing assets.
Interest on non-performing assets is recognized
on realization basis as per the prudential
norms issued by the RBI. Interest is not charged
on the delayed remittances for the overdue
period on microloans.

ii. Profit or Loss on sale of investments is
recognised in the Profit and Loss Account.
However, the profit on sale of investments in
the ''Held to Maturity'' category is appropriated
(net of applicable taxes and amount required
to be transferred to statutory reserve) to
''Capital Reserve''.

iii Income on non-coupon bearing discounted
instruments is recognized over the tenure of
the instrument on a straight line basis. In case
of coupon bearing discounted instruments,
discount income is recognized over the tenure
of the instrument on yield basis.

iv Dividend on Investments in shares and units of
Mutual Funds are accounted when the Bank''s
right to receive the dividend is established.

v Processing fee/ upfront fee, handling charges
and similar charges collected at the time of
sanctioning or renewal of loan/ facility are
recognised at the inception/ renewal of loan
on upfront basis.

vi Other fees and Commission income (including
commission income on third party products) are
recognised when due, except in cases where the
Bank is uncertain of ultimate collection and in
case of Non performing assets.

vii Interest income on deposits with banks and
other financial institutions are recognised on
a time proportion accrual basis taking into
account the amounts outstanding and the
rates applicable.

viii Guarantee commission is recognised on a
straight line basis over the period of contract.

ix Locker rent is recognised on realisation basis.

x. For a securitization or direct assignment
transaction, the Bank recognizes profit upon
receipt of the funds and loss is recognized at the
time of sale. The unrealised gains, associated
with expected future margin income is
recognised in profit and loss account on receipt
of cash, after absorbing losses, if any.

xi. Fee received on sale of priority sector lending
certificates is considered as Miscellaneous
Income, while fee paid for purchase is expended
as other expenditure in accordance with the
guidelines issued by RBI on the date of purchase/
sale on an upfront basis.

4.2 Investments

i. Classification:

Investments are classified into three categories, viz
Held to Maturity ("HTM"), Available for Sale ("AFS")
and Held for Trading ("HFT") at the time of purchase
as per the guidelines issued by RBI.

However for disclosure in the Balance Sheet,
Investments in India are classified under six groups
- Government Securities, Other Approved Securities,
Shares, Debentures and Bonds, Investments in
Subsidiaries / Joint Ventures and Others.

Purchase and sale transactions in securities are
recorded under ''Settlement Date'' accounting.

ii. Basis of classification

Investments that the Bank intends to hold till
maturity are classified as HTM category.

Investments that are held principally for resale within
90 days from the date of purchase are classified
under HFT category.

Investments which are not classified in either
of the above two categories are classified
under AFS category.

iii. Acquisition Cost :

The cost of investments is determined on weighted
average basis. Broken period interest in debt
instruments and government securities is treated
as a revenue item. The transaction cost including
brokerage commission etc. paid at the time of
acquisition of investments is charged to the Profit
and Loss account.

iv. Disposal of investments:

Investments classified as HFT or AFS - Profit or loss
on sale or redemption is recognised in the Profit and
Loss Account. Investments classified as HTM - Profit
on sale or redemption of investments is recognised
in the Profit and Loss Account and is appropriated to
Capital Reserve after adjustments for tax and transfer
to Statutory Reserve. Loss on sale or redemption is
recognised in the Profit and Loss Account.

v. Valuation:

HTM securities are carried at their acquisition
cost. Any premium on acquisition of government
securities is amortised over the remaining
maturity of the security on a straight line basis.
Any diminution, other than temporary, in the value
of such securities is provided for.

AFS and HFT securities are valued periodically as per
RBI guidelines.

The market/ fair value for the purpose of periodical
valuation of quoted investments included in the
AFS and HFT categories is measured with respect to
the market price of the scrip as available from the
trades/ quotes on the stock exchanges, SGL account
transactions, price list of RBI or prices periodically
declared by Financial Benchmark India Pvt. Ltd. [FBIL],
based on relevant RBI circular.

The valuation of non-SLR securities, other than those
quoted on the stock exchanges, wherever linked to
the YTM rates, shall be with a mark-up (reflecting
associated credit risk) over the YTM rates for
government securities put out by FBIL. Securities are
valued scrip wise and depreciation/appreciation
aggregated for each category. Net appreciation in
each basket if any, being unrealised, is ignored, while
net depreciation is provided for.

Treasury bills and Certificate of Deposits being
discounted instruments, are valued at carrying cost.

Non Performing investments are identified and
valued based on RBI guidelines.

vi. Repo Reverse Repo transactions

In accordance with the RBI guidelines repo and
reverse repo transactions in government securities
are reflected as borrowings and lending transactions
respectively. Borrowing cost on repo transaction is
accounted for as interest expense and revenue on
reverse repo is accounted for as interest income.

vii. Investment Fluctuation Reserve ("IFR")

With a view to building up of adequate reserves to
protect against increase in yields in accordance with
RBI guideline bank started to create an IFR with effect
from the Financial Year 2018-19.

Amount appropriated from Net Profit to IFR is not
less than lower of the following:

(i) Net profit on sale of investments
during the year or

(ii) Net profit for the year less mandatory
appropriations, until the amount of IFR is at
least 2 per cent of the HFT and AFS portfolio, on
a continuing basis.

The amount held in the IFR shall be utilized by way of
draw down, in accordance with the provisions of the
Reserve Bank of India guidelines

viii. Short Sales

The short sale transactions in Central Government
dated securities undertaken by the Bank shall be
accounted in the following manner in accordance
with RBI guidelines.

- The short position is categorised under HFT
category and netted off from investments in
the Balance Sheet.

- The short position is marked to market at
periodical intervals and loss, if any, is charged
to the Profit and Loss Account while gain, if
any, is ignored.

- Profit / Loss on settlement of the short position
is recognised in the Profit and Loss Account

ix. Transfer of Securities between Categories:

The transfer/shifting of securities between categories
of investments is accounted in accordance with the
RBI guidelines.

4.3 Advances

i. Advances are classified into performing assets
("Standard") and non-performing assets ("NPA")
as per the RBI guidelines and are stated net
of unrealised interest/charges in suspense for
non performing advances and provisions made
towards NPAs and principal portion of advance
prepaid by customer, if any. Interest/ other
charges on Non-performing advances are not
recognised in Profit and Loss Account and is
transferred to an unrealised interest suspense
account till the actual realisation. Interest portion
of advance prepaid by the customer is disclosed

as other liability and recognised to profit and
loss account on due basis. Further, NPAs are
classified into sub-standard, doubtful and loss
assets based on the criteria stipulated by the
RBI. Provisions for NPAs are made at /or above
the minimum required level in accordance with
the provisioning policy adopted by the Bank and
as per the guidelines and circulars of the RBI on
matters relating to prudential norms.

ii. Provision for standard advances is made as per
the extant RBI guidelines. Additional Provision
on standard assets is made as per the policy
decided by the Board.

iii. The Bank transfers advances through
interbank participation with and without risk.
In accordance with the RBI guidelines, in the
case of participation with risk, the aggregate
amount of the participation issued by the
Bank is reduced from advances and where the
Bank is participating; the aggregate amount of
participation is classified under advances. In the
case of participation without risk, the aggregate
amount of participation issued by the Bank
is classified under borrowings and where the
Bank is participating, the aggregate amount
of participation is shown as due from banks
under advances.

iv Non Performing Advances are written off as per
the Bank''s policy. Amounts recovered against
debts written off/ technically written off are
recognised in the Profit and Loss account and
included under "Other Income".

v. The Bank considers a restructured account
as one where the Bank, for economic or legal
reasons relating to the borrower''s financial
difficulty, grants to the borrower concessions
that the Bank would not otherwise consider.
Restructuring would normally involve
modification of terms of the advances/
securities, which would generally include,
among others, alteration of repayment period/
repayable amount/ the amount of instalments/
rate of interest (due to reasons other than
competitive reasons). Restructured accounts
are classified as such by the Bank only
upon approval and implementation of the
restructuring package. Necessary provision for
diminution in the fair value of a restructured
account is made and classification thereof is as
per the extant RBI guidelines, as amended from
time to time. In accordance with RBI guidelines
on the prudential framework for restructure of

stressed assets and the resolution framework for
Covid 19 related stress, the Bank in accordance
with its Board approved policy, carried out
one time restructuring of eligible borrowers.
The asset classification and necessary provisions
thereon are done in accordance with the said
RBI guidelines.

vi. Priority Sector Lending Certificate (PSLC): The
Bank enters into transactions for the sale and/
or purchase of priority sector lending certificates
(PSLC). In case of a sale transaction, the Bank sells
the fulfillment of priority sector obligations and
in the case of a purchase transaction, the Bank
buys the fulfillment of priority sector obligations
through the RBI trading platform. There is no
transfer of loan assets or risks. The fees received
for the sale of PSLC is recorded as other income
and fees paid for purchase of PSLC is recorded
as other expenditure in profit and loss account.

vii. Securitisation Transaction and Direct
Assignments:

The Bank transfers its loan receivables through
Direct Assignment route as well as transfer to
Special Purpose Vehicle (SPV).

The transferred loans and such securitised
receivables are de-recognised as and when
these are sold (true sale criteria being fully met)
and the consideration has been received by the
Bank. Sales/ transfer that do not meet true sale
criteria are accounted for as borrowings. For a
securitization or direct assignment transaction,
the Bank recognizes profit upon receipt of that
funds and loss is recognized at the time of sale.

The unrealised gains, associated with expected
future margin income are recognised in profit
and loss account on receipt of cash, after
absorbing losses, if any.

On sale of stressed assets, if the sale is at a
price below the net book value (i.e., funded
outstanding less specific provisions held),
the shortfall is charged to the Profit and Loss
Account and if the sale is for a value higher
than the net book value, the excess provision
is credited to the Profit and Loss Account in
the year when the sum of cash received by way
of initial consideration and / or redemption or
transfer of security receipts issued by SC / RC
exceeds the net book value of the loan at the
time of transfer.

In respect of stressed assets sold under an
asset securitisation, where the investment by
the bank in security receipts (SRs) backed by
the assets sold by it is more than 10 per cent
of such SRs, provisions held are higher of
the provisions required in terms of net asset
value declared by the Securitisation Company
(''SC'') / Reconstruction Company (''RC'') and
provisions as per the extant norms applicable
to the underlying loans, notionally treating the
book value of these SRs as the corresponding
stressed loans assuming the loans remained in
the books of the Bank.

Investments in Pass Through Certificates (PTCs)
issued by other Special Purpose Vehicles (SPVs),
are accounted at acquisition cost and are
classified as investments. loans bought through
the direct assignment route which are classified
as advances and are carried at acquisition cost
unless it is more than the face value, in which
case the premium is amortised based on
effective interest rate method.

4.4 Fixed Assets (Property Plant & Equipment
and Intangible Assets) and Depreciation /
Amortization

Fixed Assets have been stated at cost less
accumulated depreciation and amortisation and
adjusted for impairment, if any.

Cost includes cost of purchase inclusive of freight,
duties, incidental expenses and all expenditures
like site preparation, installation costs and
professional fees incurred on the asset before it is
ready to put to use.

Gains or losses arising from the retirement or
disposal of Fixed Assets are determined as the
difference between the net disposal proceeds and
the carrying amount of assets and recognised as
income or expense in the Profit and Loss Account.

Depreciation is charged over the estimated useful
life of the fixed asset on a straight-line basis.
The management believes that the useful life
of assets assessed by the Bank, pursuant to the
Companies Act, 2013, taking into account changes
in environment, changes in technology, the utility
and efficacy of the asset in use, fairly reflects
its estimate of useful lives of the fixed assets.
The estimated useful lives of key fixed assets, based
on technical evaluation done by the management
are given below:

An intangible asset is recognised only when its cost
can be measured reliably and it is probable that
the expected future economic benefits that are
attributable to it will flow to the Bank.

Intangible assets acquired separately are measured
on initial recognition at cost. The cost of an intangible
asset comprises its purchase price including after
deducting trade discounts and rebates, any directly
attributable cost of bringing the item to its working
condition for its intended use following initial
recognition. Intangible assets are carried at cost less
any accumulated amortisation and any accumulated
impairment losses.

Intangible assets comprising software are amortised
on straight line basis over a period of 4 years, unless
it has a shorter useful life.

For assets purchased/ sold during the Year,
depreciation is being provided on prorata
basis by the Bank.

Capital work-in-progress includes costs incurred
towards creation of fixed assets that are not ready
for their intended use and also includes advances
paid to acquire fixed assets.

4.5 Impairment of Assets

The carrying amounts of assets are reviewed at
each Balance Sheet date to determine if there is any
indication of impairment based on internal/external
factors. An impairment loss isrecognised wherever the
carrying amount of an asset exceeds its recoverable
amount which is the greater of the asset''s net selling
price and value in use. In assessing the value in use,
the estimated future cash flows are discounted to
their present value using pre-tax discount rate that
reflects current market assessment of the time value
of money and risks specific to the asset.

After impairment, depreciation is provided on
the revised carrying amount of the asset over its
remaining useful life.

4.6 Retirement and Employee Benefits

i. Short Term Employee Benefit

The undiscounted amount of short-term employee
benefits which are expected to be paid in exchange
for the services rendered by employees are
recognised during the Year when the employee
renders the service.

ii. Long Term Employee Benefit

a. Defined contribution Plan:

Provident Fund: In accordance with law,
all employees of the Bank are entitled to
receive benefits under the provident fund, a
defined contribution plan in which both the
employee and the Bank contribute monthly at a
pre-determined rate. Contribution to provident
fund are recognized as expense as and when the
services are rendered. The Bank has no liability
for future provident fund benefits other than its
fixed contribution.

b. Defined Benefit Plan:

Gratuity: The Bank provides for Gratuity,
covering employees in accordance with the
Payment of Gratuity Act, 1972. The Bank''s liability
is actuarially determined (using Projected Unit
Credit Method) as at the Balance Sheet date.
The actuarial gain or loss arising during the Year
is recognised in the Profit and Loss Account.

Compensated Absences: The Bank accrues the
liability for compensated absences based on the
actuarial valuation as at the Balance Sheet date
conducted by an independent actuary which
includes assumptions about demographics,
early retirement, salary increases, interest rates
and leave utilisation. The net present value of
the Bank''s obligation is actuarially determined
using the Projected Unit Credit Method as at the
Balance Sheet date. Actuarial gains / losses are
recognised in the Profit and Loss Account in the
Year in which they arise.

4.7 Share issue expenses

Share issue expenses are adjusted from Share
Premium Account as permitted by Section 52 of
the Companies Act, 2013 on issue of underlying
securities pending which is recognised as "other
assets" in Balance sheet.

4.8 Income Taxes

Tax expense comprises current and deferred tax.
Current income tax is measured at the amount
expected to be paid to the tax authorities in
accordance with the Income Tax Act, 1961.
Deferred tax assets and liabilities are recognised for
the future tax consequences of timing differences
being the difference between the taxable income
and the accounting income that originate in one
Year and are capable of reversal in one or more
subsequent Year(s).

Deferred tax assets on account of timing differences
are recognised only to the extent there is reasonable
certainty that sufficient future taxable income will
be available against which such deferred tax assets
can be realised. In case of carry forward losses
and unabsorbed depreciation, under tax laws, the
deferred tax assets are recognised only to the extent
there is virtual certainty supported by convincing
evidence that sufficient future taxable income will
be available against which such deferred tax assets
can be realised.

At each reporting date, the Bank re-assesses
unrecognized deferred tax assets. It recognizes
unrecognized deferred tax asset to the extent that
it has become reasonably certain or virtually certain,
as the case may be, that sufficient future taxable
income will be available against which such deferred
tax assets can be realized.

Deferred tax assets and deferred tax liabilities are
offset, if a legally enforceable right exists to set-off
current tax assets against current tax liabilities and
the deferred tax assets and deferred tax liabilities
relate to the same taxable entity and the same
taxation authority.

The carrying amount of deferred tax assets
is reviewed at each reporting date. The Bank
writes-down the carrying amount of deferred tax
asset to the extent that it is no longer reasonably
certain or virtually certain, as the case may be, that
sufficient future taxable income will be available
against which deferred tax asset can be realized.
Any such write-down is reversed to the extent that
it becomes reasonably certain or virtually certain,
as the case may be, that sufficient future taxable
income will be available.

Deferred tax assets and liabilities are measured
using tax rates and tax laws that have been enacted
or substantively enacted at the Balance Sheet date.
Changes in deferred tax assets / liabilities on account

of changes in enacted tax rates are given effect to in
the Profit and Loss Account in the Year of change.

4.9 Cash and Cash equivalent

Cash and cash equivalents include cash in hand,
balances with RBI, balances with other banks and
money at call and short notice with an original
maturity of three months or less (including the effect
of changes in exchange rates on cash and cash
equivalents in foreign currency).

4.10 Segment Information

In accordance with guidelines issued by RBI and
Accounting Standard 17 (AS-17) on "Segment
Reporting", the Bank''s business has been segregated
into Treasury, Wholesale Banking, Retail Banking
Segments and Other Banking Operations:

a) Treasury: The treasury segment revenue
primarily consists of interest earnings on
investments portfolio of the bank, gains or
losses on investment operations and earnings
from foreign exchange business. The principal
expenses of the segment consist of interest
expense allocated on funds borrowed/ deposits
received and other expenses. Treasury segment
liability includes allocation on deposits received
from customers.

b) Wholesale Banking: Wholesale Banking segment
provides loans to corporate segment identified
on the basis of RBI guidelines. Revenues of this
segment consist of interest earned on Loans
made to corporate customers and the charges/
fees earned from other banking services.
The principal expenses of the segment consist of
interest expense allocated on funds borrowed/
deposits received and other expenses.

c) Retail Banking: The Retail Banking segment
provides loans to non-corporate customers
identified on the basis of RBI guidelines
and also include deposits from customers.
Revenues of this segment consist of interest
earned on Loans made to non-corporate
customers and the charges/fees earned from
other banking services. The principal expenses
of the segment consist of interest expense
allocated on funds borrowed/ deposits received
and other expenses.

d) Other Banking Operations: This segment
includes income from para banking activities
such as debit cards, third party product
distribution and associated costs.

Segment revenues consist of earnings from
external customers and other allocated revenues.
Segment expenses consist of allocated interest
expenses, operating expenses and provisions.
Segment results are net of segment revenues and
segment expenses.

Segmentassetsincludeassetsrelatedtosegmentsand
exclude tax related assets. Segment liabilities include
liabilities related to the segment excluding net worth.

Unallocated: All items which are reckoned at an
enterprise level are classified under this segment.
This includes capital, reserves and other un allocable
assets and liabilities such as fixed assets, deferred
tax, tax paid in advance and income tax provision etc.

Geographical Segment

Since the business operations of the Bank are
primarily concentrated in India, the Bank is
considered to operate only in the domestic segment."

4.11 Earnings per Share

Basic earnings per share are calculated by dividing
the net profit or loss for the Year attributable to
equity shareholders (after deducting attributable
taxes) by the weighted average number of equity
shares outstanding during the Year. The weighted
average number of equity shares outstanding during
the Year is adjusted for events of bonus issue, bonus
element in a rights issue to existing shareholders
and share split.

For the purpose of calculating diluted earnings per
share, the net profit or loss for the Year attributable
to equity shareholders and the weighted average
number of shares outstanding during the Year
are adjusted for the effects of all dilutive potential
equity shares. Diluted earnings per share reflect the
potential dilution that could occur if securities or
other contracts to issue equity shares were exercised
or converted during the Year.