SCHEDULE 1 - PRINCIPAL ACCOUNTING POLICIES APPENDED TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH, 2015 BASIS OF brPARATION The Financial Statements have been brpared in accordance with the requirements brscribed under the "Third Schedule" of the Banking Regulation Act, 1949. The accounting and reporting policies used in the brparation of these financial statements conform in all material aspects to Generally Accepted Accounting Principles in India (Indian GAAP), the guidelines issued by Reserve Bank of India (RBI) from time to time, the Accounting Standards (AS) notified under Sec. 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules 2014 to the extent applicable and practices generally brvalent in the banking industry in India. The bank follows the accrual method of accounting and the historical cost convention except where otherwise stated. The Accounting policies adopted by the bank are consistent with the brvious year except as disclosed otherwise. USE OF ESTIMATES The brparation of Financial Statements requires the management to make estimates and assumptions 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. Management believes that the estimates and assumptions used in brparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. SIGNIFICANT ACCOUNTING POLICIES 1. Revenue recognition a) Interest income from loans and advances, investments (including deposits placed with banks and other institutions) are recognized over the period of the loans and advances, Investments, Deposits etc. on accrual basis. However interest accrued and other dues in the nature of non interest income relating to Advances/ Investments, classified as Non-performing Advances/ Investments under RBI guidelines, are recognised only on realisation. b) Dividend on investments in shares and units of mutual funds are accounted on accrual basis when the bank's right to receive the dividend is established. c) Insurance claims, Locker Rent, Interest on Income Tax refund, Commission from Distribution of Insurance/ Mutual Fund products and Commission from Depository services are accounted on receipt basis. d) Commission income on issuance of Bank Guarantee/Letter of Credit and Discount on Bill Discounted is collected upfront and is recognised over the period of the underlying liability. e) Processing fee/ upfront fee, handling charges or income of similar nature collected at the time of sanctioning or renewal of loan/ facility is recognised in the year of receipt without sbrading it over the period of loan/ facility. f) All other amounts collected from customers as Non interest income or recovery of expenses towards provision of various services/ facilities are accounted/ recognised on receipt basis. 2. EXPENSES RECOGNITION A) Interest Expenses: All interest expenses relating to deposits accepted and borrowings are recognised on accrual basis. Interest on unclaimed matured deposits is provided as per RBI directives. B) Employee benefits The liability on employee benefits are recognized in accordance with Accounting Standard 15 (revised) specified in under Sec. 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules 2014. a) Provident Fund The contribution made by the bank to Dhanlaxmi Bank Ltd. Employees Provident Fund, administered by the trustees is charged to Profit & Loss account. b) Pension Fund The contribution towards Dhanlaxmi Bank Ltd. Employees' Pension Fund, managed by trustees, is determined on actuarial basis on projected unit credit method as on the Balance Sheet date and is recognized in the accounts. c) Gratuity: The Bank makes annual contribution to Dhanlaxmi Bank Ltd. Employees' Gratuity Trust Fund administered and managed by the trustees. The net brsent value of the Banks obligation towards the same is actuarially determined based on the projected unit credit method as at the balance sheet date. d) Compensation for absence on Privilege / Sick / Casual Leave The employees of the bank are entitled to compensated absence on account of privilege/ sick/ casual leave as per the leave rules. The bank measures the long term expected cost of compensated absence as a result of the unused entitlement that has accumulated at the balance sheet date based on actuarial valuation and such costs are recognised in the accounts. C) Other operating Expenses are generally accounted on accrual basis. In the case of Rent where rent agreement is expired, rent is accounted on the basis of expired agreement till new rent agreement is signed. 3. NET PROFIT Net Profit is arrived at after provisions for contingencies, which include Provision for: i) Debrciation on Investments; ii) Standard Assets, Restructured Advances and Non-Performing Advances and Investments; iii) Taxation in accordance with statutory requirements. 4. ADVANCES A) Valuation / Measurement a) Advances are classified into Standard, Sub-standard, Doubtful and Loss assets in accordance with the Reserve Bank of India guidelines and are stated net of provisions made towards non performing advances. b) Provision for non performing advances comprising Sub-standard, Doubtful and Loss assets is made in accordance with the Reserve Bank of India guidelines. c) In addition, general provision in respect of standard assets/ restructured assets is created as per Reserve Bank of India guidelines from time to time. B) Recording / Presentation Provisions created against individual accounts as per RBI guidelines are not netted in the individual account. For brsentation in financial statements, provision created for NPA is netted against gross amount of advance without adjusting the same at individual account level. Provision held against an individual account is adjusted against individual account's balance only at the time of write off of the account. 5. INVESTMENTS A) Classification (a) In accordance with the RBI guidelines, investments are categorised in to "Held for Trading", "Available for Sale" and "Held to Maturity" and further classified under six groups, viz. Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Subsidiaries/Joint Ventures and Other investments for the purposes of disclosure in the Balance Sheet. (b) Investments which are Held for sale within 90 days from the date of purchase are classified as "Held for Trading". (c) Investments which the bank intends to hold till maturity are classified as "Held to Maturity". (d) Investments which are not classified in either of the above two categories are classified as "Available for Sale". B. Valuation The cost of investments is determined on the weighted average basis. Broken period interest paid on debt instruments is treated as a revenue item. The transaction cost, including brokerage, commission etc. paid at the time of acquisition of investments are charged to revenue. The valuation of investments is made in accordance with the RBI Guidelines: a. Held for Trading/ Available for Sale - Each security in this category is valued at the market price or fair value and the net debrciation of each group is recognised in the Profit and Loss account. Net apbrciation, if any, is ignored. The market value of investments where current quotations are not available is determined as per the norms brscribed by RBI. b. Held to Maturity - These are carried at their acquisition cost. Any brmium on acquisition of debt instruments is amortized over the remaining maturity of the security. Any diminution, other than temporary, in the value of such securities is provided for. c. Repurchase and Reverse Repurchase transactions - These are accounted as outright sale and outright purchase respectively. The difference between the clean price of the first leg and the clean price of the second leg is recognised as interest income / interest expense over the period of the transaction. However, debrciation in their value, if any, compared to their original cost, is provided for. d. In respect of securities included in any of the three categories of investments where interest / principal is in arrears, for more than 90 days, income is not recognised and appropriate provision for the debrciation in the value of the investments is made, as per prudential norms applicable to non-performing advances. Debentures / Bonds in the nature of advances are subjected to usual prudential norms applicable to advances. C. Transfer Between Categories Transfer between categories is done at the lower of the acquisition cost/ book value/ market value on the date of the transfer and the debrciation, if any, on such transfer is fully provided for. Transfer of securities from/ to Held to Maturity category is done as per guidelines issued by RBI from time to time. D. Profit or Loss on Sale / Redemption of Investments a. Held for Trading and Available for Sale - Profit or loss on sale/ redemption is recognised in the Profit and Loss account. b. Held to Maturity - Profit or Loss on Sale/ Redemption of Investments is recognised in the Profit and Loss account. In case of Profits, the same is appropriated to Capital Reserve, after adjustments for tax and transfer to statutory reserve. 6. FIXED ASSETS a) The Fixed Assets are stated at historical cost less debrciation. b) The revalued assets are stated at the revalued amount less debrciation. The apbrciation in value consequent to revaluation is credited to Revaluation Reserve. Debrciation on assets revalued is charged based on remaining useful life of the asset including the additions made on revaluation, and an equivalent amount towards the additional debrciation provided on revaluation, is transferred from Revaluation Reserve to profit and loss account. c) Debrciation on Fixed Assets is provided based on the useful life of the asset as brscribed under Part C of Schedule II to the Companies Act, 2013. d) Amount expended towards acquisition of Software is capitalized where it is reasonably estimated that the software has an enduring useful life. Software is amortized over an estimated useful life of 5 years on straight-line basis. 7. TRANSACTIONS INVOLVING FOREIGN EXCHANGE i) Monetary assets and liabilities, guarantees, acceptances, endorsements and other obligations are translated to Indian Rupee equivalent at the exchange rates notified by FEDAI as on the Balance Sheet date. ii) Forward Exchange contracts are translated to Indian Rupee equivalent at the exchange rate brvailing on the date of commitments. Gain/ Losses on outstanding forward exchange contracts are taken to revenue as per the FEDAI guidelines. iii) Income and Expenditure in foreign currency are accounted for at the exchange rate brvailing on the date of transaction. 8. IMPAIRMENT OF ASSETS The Bank assesses at each Balance Sheet date, whether there is any indication that an asset is impaired or not. Impairment loss, if any, is provided in the Profit and Loss Account to the extent the carrying amount of assets exceeds their estimated realisable amount. 9. TAXES ON INCOME The income tax expense comprises current tax and deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income Tax Act. 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 period and are capable of reversal in one or more subsequent periods. Deferred tax asset is recognised subject to prudence and judgment that realisation is more likely than not. Deferred tax assets and liabilities are measured using tax rates under tax laws that have been enacted before 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 period of the change. 10. ACCOUNTING FOR PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS In accordance with Accounting Standard 29, Provisions, Contingent Liabilities and Contingent Assets specified under Sec. 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules 2014, the bank recognizes provisions when it has a brsent obligation as a result of a past event and it is possible that an outflow of resources embodying economic benefits will be required to settle the obligation in respect of which a reliable estimate of the amount of the obligation can be made. Provisions are determined based on management estimate required to settle the obligation at the balance sheet date, supplemented by experience of similar transactions. These are reviewed at each balance sheet date and adjusted to reflect the current management estimates. In cases where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure is made in the financial statements. Contingent assets, if any, are not recognised or disclosed in the financial statements. ACCOUNTING CONTROLS AND PROCEDURES The above policies are in the nature of general principles adopted by the bank for recognising, recording, and summarising the financial transactions of the bank. Banking services are extended from various offices of the bank sbrad across India. For proper accounting, accounting aspects of such events/ services are first recorded at such offices from where these transactions/services/events become measurable in monetary terms. Transactions thus generated are further compiled at Head Office to brpare the financial statements of the bank. Detailed rules covering procedural aspects of accounting, including accounting controls, of various products/services at branches and Head Office are included in the policies, Manuals and circulars issued from time to time. 2. OTHER ASSETS (SCHEDULE NO.: 11), BALANCE WITH BANKS AND MONEY AT CALL AND SHORT NOTICE (SCHEDULE NO.: 7) & FIXED ASSETS (SCHEDULE NO.: 10) Reconciliation of rent advance/ security deposit for brmises occupied by branches/ offices, etc. (as per Schedule No. 11), and physical verification of fixed assets (Schedule No. 10) is in progress. In the opinion of the management no material impact of reconciliation of accounts is anticipated. 3. The Bank had entered into an agreement with M/s Bajaj Allianz Life insurance Company Ltd. ( BALIC) for sale of products of BALIC on specified terms and conditions. BALIC issued a demand notice to the Bank claiming a penalty amount of 1511 lakhs (for 2011-12) and Rs. 2123 lakhs ( for 2012-13) totaling Rs. 3634 lakhs for non-achievement of targets along with interest at 12% per annum for delay in paying the amount beyond fifteen days. Further, BALIC informed the bank that targets for the Financial year 2013-2014 had not been met by the bank and a further penalty of Rs. 2664 lakhs had to be paid to BALIC by the bank in addition to the earlier penalty of 3634 lakhs Considering the initiatives taken by both the parties to renegotiate the terms and conditions of the agreement and as legally advised, the demand of penalty of Rs. 6298 lakhs is shown as contingent liability (Schedule No. 12) 4. Pending settlement of wage revision w.e.f. 1st November, 2012, an adhoc provision of Rs.3164 lakhs is held as on 31.03.2015 which includes Rs.1962 lakhs provided during the current year. 5. In terms of RBI circular DBR No. BP BC 79/ 21.04.048/ 2014-15 dated March 30, 2015 Banks were permitted to utilise up to 50% countercyclical provision buffer/ floating provision held by them as on 31.12.2014 for making specific provisions for non-performing assets, as per the policy approved by their Board of Directors. Accordingly, the Bank has utilised an amount of Rs. 364 lakhs for making specific provisions for non-performing assets. 6. a) In terms of RBI guidelines contained in Circular DBR No.BPBC.83/21.01.048/2014-15 dated 01-04-2015, banks are required to provide, in case of fraud, the entire amount due to the Bank over a period not exceeding four quarters commencing from the quarter in which the fraud has been detected. As a prudent measure, the Bank has provided the entire amount during the year, thereby; the loss reported by the Bank is overstated by Rs. 4944 Lakhs. b) Though a special dispensation is given by RBI vide its Letter No. DBR No. BP 17661/21.04.048/ 2014-15 dated 20-05-2015 for providing the amount due to the Bank over a period of three quarters commencing from March, 2015 in respect of a borrowal account, the Bank, as a prudent measure, has provided for the entire amount during the year, thereby the loss reported by the Bank is overstated by Rs. 4524 Lakhs. 7. In respect of 259 employees who had opted for VRS in 2000 & 2004 and 424 retired employees, the Bank has not provided to the Pension Trust, funds required amounting to around Rs. 7938 lakhs for purchase of annuities for payment of pension/ increase in Dearness Allowance respectively. However, pension/ increase in dearness allowance is paid by the Bank by debiting Profit and Loss account. 8. Effective April 1, 2014 the Bank has changed the estimated useful life of certain fixed assets in line with the recommended useful life as per Part C of Schedule II to the Companies Act, 2013. On account of this change, the bank has reversed an amount of Rs. 901 lakhs during the year ended March 31, 2015, rebrsenting the excess debrciation charge and disclosed the same as an exceptional item. Except for this, there has been no change in the accounting policies followed during the quarter/ period ended 31st March, 2015 as compared to those followed in the brceding financial year ended 31st March, 2014. As a result of this change, the loss for the current financial year is decreased by Rs. 901 lakhs. 9. Disclosures on Remuneration a. Information relating to the composition and mandate of the remuneration committee. Composition The remuneration committee of the Board consists of four members of which one member from the Risk Management Committee of the Board facilitates effective governance of compensation. The rules and responsibilities of the remuneration committee are as follows; > To oversee the framing, review and implementation of Bank's overall compensation and related policies on remuneration packages payable to all employees and the Whole Time Directors (WTDs)/ MD&CEO including perquisites, stock option scheme etc. with a view to attract, motivate and retain employees and review compensation level vis-d-vis other banks and the industry in general. > The remuneration committee works in close coordination with the Risk Management Committee of the Bank in order to achieve effective alignment between remuneration and risks. The Committee also ensures that the cost income ratio of the Bank supports the remuneration package consistent with the maintenance of sound capital adequacy ratio. > The committee also functions as the compensation committee as brscribed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,1999 and is empowered to formulate detailed terms and conditions of the scheme, administer, supervise the same and to allot shares in compliance with the guidelines and other applicable laws. > To conduct the annual review of the compensation policy. > To fulfill such other powers and duties as may be delegated to it by the Board. 10. Previous year figures have been re-grouped/ re-classified wherever considered necessary to conform to current year's classification. Mr. Raghu Mohan N. AGM-Finance and Accounts Mr. G. Sreeram Managing Director & CEO Mr. Chella K. Srinivasan Director Dr. B. Raveendran Pillai Director As per our Report of even date For Sagar & Associates Chartered Accountants Firm Registration No. 003510S CA. Aruna B. (Partner) Membership No. 216454 Mr. Krishnan K. S. CFO & Company Secretary Mr. T. Y. Prabhu Chairman Mr. K. Jayakumar Director Mr. Manikandan P. Chief General Manager Mr. P. Mohanan Director Dr. K. R. Lakshmi Devi Director Mr. Susobhan Sinha Director Place : Kochi Date : May 28, 2015 |