Key Audit Matters

How our audit addressed the Key Audit Matters

(i) Classification of Advances, identification of non

-performing advances, Income Recognition, and

provisioning on Advances as per IRACP Norms of Reserve Bank of India (Refer Schedule 9, Note 3 of Schedule 17 and Note 4 of Schedule 18A to the standalone financial statements)

Advances include Bills purchased and discounted,

Our audit approach/procedures included the

Cash credits, Overdrafts, Loans repayable on demand

following:

and Term loans. These are further categorized as

- Understanding and considering the Bank's

secured by Tangible assets (including advances

accounting policies for NPA identification and

against Book Debts), covered by Bank/Government

provisioning and assessing compliance with the

Guarantees and Unsecured advances;

prudential norms prescribed by the RBI (IRACP

RBI prescribes the prudential norms for Income

Norms) including the additional provisions made

Recognition, Asset Classification and Provisioning

on advances and asset classification benefits

of non-performing assets (IRACP Norms) and

applicable to certain category of advances such

prescribes the minimum provision required to be

as restructured accounts

created for such assets in the Financial Statements.

- Understanding, evaluation and testing the design

The identification of performing and non-performing

and operating effectiveness of key controls

advances (including advances restructured

(including application controls and logic applied

accounts under applicable IRACP Norms) involves

for system driven identification of NPAs) over

establishment of proper systems, control mechanism,

approval, recording, monitoring and recovery of

and the bank is required to apply significant degree

loans, monitoring overdue/stressed accounts,

of judgement to identify and determine the amount

identification of NPA, computation of provision

of provision required against each Non-Performing

for NPA, valuation of security and collateral

Asset ('NPA') applying both quantitative as well as

and identification and provisioning of impaired

qualitative factors prescribed by the regulations. The

accounts based on the extant guidelines on

risk of identification of NPAs is affected by factors

IRACP laid down by the RBI. Further obtained

like stress and liquidity concerns in certain sectors.

an understanding of the contingency provision

The provision on NPA is estimated based on ageing

carried by the Bank and verified the underlying

and classification of NPAs, recovery estimates,

assumptions used by the Bank for such estimate.

nature of loan product, value of security and other

- Testing of application controls on sample basis

qualitative factors and is subject to the minimum

including testing of automated and manual

provisioning norms specified by RBI and approved

controls, reports and system reconciliations,

policy of the Bank in this regard.

in relation to income recognition, asset

The Management of the Bank also makes an

classification, provisioning pertaining to

assessment of the impact on borrowers' accounts

advances and investments and compliances of

which were restructured as per RBI Circulars issued

other regulatory guidelines issued by the RBI.

to provide relief to the borrowers.

- Testing on sample basis the accuracy of the

Significant judgements and estimates for NPA identification and provisioning could give rise to material misstatements on:

data input in the system for income recognition, classification into performing and non-performing advances and provisioning in accordance with the IRACP norms.

- Completeness and timing of recognition of non-

performing assets in accordance with criteria as

- Selection of the sample borrowers based on

per IRACP norms.

quantitative and qualitative risk factors for their assessment of appropriate classification as NPA

- Measurement of the provision for non-performing assets based on loan exposure, ageing and classification of the loan, realizable value of security;

- Appropriate reversal of unrealized income on the

including computation of overdue ageing to assess its correct classification and provision amount as per extant IRACP norms and the Bank policy.

NPAs

Key Audit Matters

How our audit addressed the Key Audit Matters

Since the identification of NPAs and provisioning of advances requires proper mechanism, controls and significant level of estimation and given its significance to the overall audit process, including possible observation by RBI which could result into disclosures in the financial statements, we have ascertained identification of NPAs and provisioning against such NPAs as a Key Audit Matter.

- Performing other procedures including substantive audit procedures covering the identification of NPAs by the Bank. These procedures included:

(a) Considering testing of the exception reports generated from the application software and the systems where the advances have been recorded;

(b) Considering the accounts reported by the Bank and other banks as Special Mention Accounts ("SMA") in RBI's central repository of information on large credits (CRILC) to identify stress;

(c) Considering and reviewing the accounts reported with Early Warning Signals by the Bank with reference to the documents related to such advances.

(d) Reviewing account statements, appraisal note, audited financial statements, stock and receivable audit report, credit audit report, drawing power calculation, security and other related documents including valuation report of the collaterals and information of the sample borrowers selected based on quantitative and qualitative risk factors including the advances selected from accounts with Early Warning Signals;

(e) Reading of minutes of management committee and credit committee meetings and performing inquiries with the credit and risk departments to ascertain if there were indicators of stress or an occurrence of an event of default in a loan account or any product;

(f) Considering reports of Internal Audit, Systems Audit, Credit Audit, Concurrent Audit, Stock and Receivable audit and credit appraisal as per the policies and procedures of the Bank;

(g) Considering the Inspection reports of RBI on the Bank, the bank's response to the observations and other communication with RBI during the year;

- For NPAs identified, we, based on our sample factors including stressed sectors and account materiality, tested the asset classification dates, value of available security and computation of the provision as per IRACP norms. We recomputed the provision for NPA after considering the key input factors and compared our measurement outcome to that of system-generated reports and statements prepared by management.

Key Audit Matters

How our audit addressed the Key Audit Matters

(ii)

Classification and Valuation of Investments, Identification of and provisioning for Non-Performing Investments (Refer Schedule 8, Note 2 of Schedule 17 and Note 3 of Schedule 18A to the standalone financial statements)

Investments include investments made by the Bank in Our audit approach/procedures included the various Government Securities, Bonds, Debentures, following:

^Shares, ^{Security receipts and other approved} - We evaluated and understood the Bank's internal ^securities. ^{These are} g^{overned b}y ^{the circulars and} control system to comply with relevant RBI ^{directives of the RBI}. ^{These directions of RBI}, ^inter- guidelines regarding valuation, classification, ^alia ^{cover valuation of investments, classification} identification of NPIs and provisioning/ ^{of identification of non-}p^erforming depreciation related to investments; investments (NPI), non-recognition of income and

- We assessed and evaluated the process adopted

provisioning against NPI.

for collection of information from various ^{Investments are classified into Held for Trading} sources for determining market value of these ('HFT'), 'Available for Sale' ('AFS') and 'Held to i_nvestm_ents-Maturity' ('HTM') categories at the time of purchase.

- For the selected sample of investments in hand,

Investments, which the Bank intends to hold till

we tested accuracy and compliance with the RBI

maturity are classified as HTM investments.

Master Circulars and directions by re-performing ^{|nvestments classified as HTM are carried at} valuation for each category of the security. ^{amortised cost}. ^{Where in the o}p^inion of ^manag^ement, Samples were selected after ensuring that all the ^{a diminution}, ^{other than temporary}, ^{in the value of} categories of investments (based on nature of ^{investments has taken} p^lac^ ^app^rop^riate p^rovisions security) were covered in the sample;

^{are made}. - We assessed and evaluated the process of ^{|nvestments classified as AFS and HFT are marked-} identification of NPIs and corresponding reversal ^{to-market on a} p^{eriodic basis as} p^{er the relevant RB|} of income and creation of provision; ^guidelines. - We carried out substantive audit procedures to

^{The valuation of each category (type) of the} recompute independently the provision to be ^{aforesaid securities is to be done as per the method} maintained in accordance with the circulars and

prescribed in circulars and directives issued by the directives of the RBI. Accordingly, we selected ^{RB| which involves collection of data/information} samples from the investments of each category ^{from various sources such as FB|L /F|MMDA rates}, and tested for NPIs as per the RBI guidelines ^{rates quoted on BSE/NSE}, ^{financial statements of} and recomputed the provision to be maintained ^{unlisted companies etc.} in accordance with the RBI Circular for those Considering the complexities and extent of judgement selected sample of NPIs;

^{involved in the valuation, volume of transactions,} - We tested the mapping of investments between

^{investments on hand and de}g^{ree of re}g^ulatory ^focus, the Investment application software and the

^{this has been determined as a Key Audit Matter.} financial statement preparation software to

Accordingly, our audit was focused on valuation of ensure compliance with the presentation and investments, classification, identification of NPI and disclosure requirements as per the aforesaid RBI provisioning related to investments. Circular/directions.

Key Audit Matters

How our audit addressed the Key Audit Matters

(iii)

Assessment of Provision for Taxation (including Deferred Tax Assets) (Refer Note 15 of Schedule 17 and Note 3 of Schedule 18B to the standalone financial statements)

This matter has been identified as a Key Audit Our audit approach/procedures included the Matter due to the significant level of management following:

j^{udgement re}q^{uired in the estimation of} p^{rovision for} a. Obtaining an understanding of the Bank's process ^{liability towards income tax including any write back} and respective internal controls for determining ^{of provisions}, ^{due to the following factors} tax liabilities, tax provisions, deferred tax assets

a. The Bank's assessment of provision is based on and contingent liabilities in respect of the major facts of matter, existence of multiple uncertain tax litigations in order to design our audit procedures positions leading to multiple disputes / litigations that are appropriate in the circumstances;

b. Provision for tax involves interpretation of various b. Understanding the current status of the rules and law. It also involves consideration of litigations/ tax assessments in respect of each the complex issues in on-going disputes and matter for different years;

^{disclosures of related contingencies}. c. Discussion with appropriate senior management Further, significant judgements are also involved personnel, independently assessment of in Assessment of Liability, Adequacy of provisions management's estimate of the possible outcome and Adequacy of disclosures for measuring such of the disputed cases; and evaluation of the obligations. Management's underlying key assumptions in

estimating the tax provisions.

d. Considering legal precedence and other judicial pronouncements in evaluating management's position on these uncertain tax positions, the provisions made, and/or write back of the provisions

e. Review of the reconciliation of the underlying tax balances to supporting documentation and workings, including correspondence with tax authorities.

f. Evaluating the merit of the issues and subject matter under consideration with reference to the grounds presented therein and available independent legal/tax advice including opinion of our internal legal/tax experts;

g. Evaluating the components of deferred tax assets and estimates of taxable incomes for future periods as determined by the management and approved by the Board of Directors.

h. Verifying the disclosures related to significant litigations and taxation matters in the standalone financial statements

Key Audit Matters

How our audit addressed the Key Audit Matters

(iv)

Litigation, Claims and Contingent Liabilities (Refer Schedule 12, Note 16 of Schedule 17 and note 14 of Schedule 18B to the standalone financial statements)

Assessment of provisions and Contingent liabilities Our audit approach/procedures included the in respect of certain litigations including Indirect following:

^Taxes, ^{various claims filed by other parties not} - Testing the design and operating effectiveness ^acknowledg^{ed as debt and other matters under} of the Bank's key controls over the estimation, ^{dispute which involve significant} j^{udgement to} monitoring and disclosure of provisions and determine the possible outcome of these disputes. _conting_ent li_abiliti_es

^There i^{s a high level of judgement required in} - Obtaining an understanding of internal controls in

^{estimating the level of provisioning for the above.} relation to creation of provisions and Contingent

The Bank's assessment is supported by the facts liabilities in respect of the major litigations

^{of matter, their own judgement, interpretation and} before various judicial forums including Indirect

analysis of the complex issues under dispute, past Taxes, various claims filed by other parties not experience and orders of the judicial authorities acknowledged as debts relevant to audit in

^{on identical issues, and advice from legal and} order to design our audit procedures that are

^indep^{endent tax consultants wherever necessar}y. appropriate in the circumstances;

Accordingly, unexpected adverse outcomes may

- Understanding the current status of the

significantly impact the Bank's reported profit and

litigations in respect of each matter for different

state of affairs presented in the Balance Sheet.

^r years;

We determined the above area as a Key Audit Matter

- Examining recent orders/communications received

in view of associated uncertainty relating to the

from various authorities/judicial forums, judicial

outcome of these matters which requires application

pronouncements and follow up action thereon;

of judgement in interpretation of law. Accordingly,

our audit was focused on analyzing the facts of ^{- Evaluating the merit of the issues and subject} subject matter of each dispute, issue and matter ^{matter under consideration with reference to} under consideration and judgements/ interpretation ^{the grounds presented therein and available}

_{of law involved.} independent legal/ tax advice including opinion

of our internal legal/tax experts;

- Review and analysis of evaluation of the contentions of the Bank through discussions, collections of details of the subject matter under consideration, the likely outcome and consequent potential outflows on those issues; and

- Verification of disclosures related to significant litigations and indirect taxation matters.

Key Audit Matters

How our audit addressed the Key Audit Matters

(v)

Information Technology ('IT') Systems and Internal Controls for financial reporting

IT systems and controls followed by the bank are Our audit approach/procedures included the material from a financial reporting perspective, following:

^{due to the pervasive nature and complexity of the} - Obtaining a comprehensive understanding of IT ^{IT environment}, ^{the large volume of} t^ransactions applications landscape implemented at the Bank,

^{processed in numerous locations daily and the} followed by process understanding, mapping of ^{reliance on automated and IT dependent manual} applications to the processes related to financial

^controls. ^{Therefore on account of these factors, there} reporting and understanding financial risks ^{exists a risk that} g^ap^{s in the IT contro| environment} posed by people-process and technology. could result in the financial accounting and reporting

- Testing the design and operating effectiveness

records being materially misstated.

of the Bank's IT access controls over the

^{Our areas of audit focus included user access} information systems that are critical to financial

^management, ^{developer access to the production} reporting. We tested IT general controls (logical

^{environment and changes to the IT environment,} access, changes management and aspects of IT

^{existence and completeness of an Audit Trail (Edit} operational controls) We have also verified the ^{Log) of the Core Banking Solution (CBS) and the} Audit Trail (Edit Log) on test check basis for the IT ^{other IT systems and applications having financial} systems and identified accounting applications. impact linked to the CBS. Appropriate IT general

- Testing the design and operating effectiveness

controls and application controls are required to

of certain automated controls that were

ensure that such IT systems are able to process

considered as key internal system controls over

the data, as required, completely, accurately, and

financial reporting using various techniques such

consistently for reliable financial reporting.

as inquiry, review of documentation/record/

^{In addition, there are increasing challenges to} _{reports, observation, and re-performance.} protect the integrity of the Bank's systems and data

- Evaluating deficiencies and mismatches that

since cyber security has become a more significant

were identified and, testing compensating

risk in recent periods. These are key to ensure that

controls or performed alternate procedures.

IT dependent and application-based controls are

operating effectively. - Obtaining management representation which

included IS audit, and also the testing of the

Due to the pervasive nature and complexity of the

automated system driven controls conducted

IT environment as well as its importance in relation

by the Management including matching of the

to accurate and timely financial reporting, we have

business logic with the system logic.

ascertained IT systems and controls as a Key Audit Matter.