18.09 Exchange traded interest rate derivatives
The Bank has not undertaken any transactions in Exchange traded interest rate derivatives during the year ended
March 31, 2023 and March 31, 2022.
18.10 Credit default swaps
The Bank has not undertaken any transactions in Credit Default Swaps (CDS) during the year ended March 31, 2023 and
March 31, 2022. Further, there are no outstanding CDS as on March 31, 2023 and March 31, 2022.
18.11 Disclosures on risk exposure in derivatives
Qualitative disclosures :
a. Structure and organization for management of risk in derivatives trading, the scope and nature of risk measurement, risk reporting and risk monitoring systems, policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants :
i The Bank undertakes transactions in FX and derivatives for the purpose of hedging the Balance Sheet, support customer FX and derivatives hedging / business requirements and takes proprietary positions. Bank deals in various kinds of products viz. FX spot and forwards, INR and CCY swaps and foreign currency options. The Bank undertakes trading positions FX spot, forward, swaps, futures and FX Options.
ii Treasury Sales Desk is a customer centric desk that caters to customers requirements in FX and derivatives products subject to regulatory and internal requirements. Product offering to the clients is based on Suitability and appropriateness policy of the Bank as well as by the extant RBI guidelines. The policy ensures that the product being offered by the Bank are in sync with the nature of the underlying risk sought to be hedged giving due regard to the risk appetite of the customer and understanding of the risk by the customer. The credit risk related to off Balance Sheet exposures of clients arising out of FX and derivative transactions are monitored by the Bank daily through current exposure method. Exposures are independently monitored and reported.
iii The Bank recognizes all derivative contracts (other than those designated as hedges) at fair value. The mark to market movement on the positions is monitored daily. Changes in the fair value of derivatives other than those designated as hedges are recognized in the Profit and Loss Account. Hedge transactions are accounted for on an accrual basis or fair value in line with the approved policy. Hedging transactions are undertaken by the Bank to protect the variability in the fair value or the cash flow of the underlying Balance Sheet item.
iv All the derivative transactions are governed by the FX & Derivative policy, Market Risk Management policy and Limit Management Framework of the Bank. Limit Management Framework details various types of market risk limits which are monitored daily and breaches, if any, are reported promptly. Risk assessment of the portfolio is undertaken periodically and presented to the Market Risk Committee / Asset Liability Committee. These limits are set up considering market volatility, risk appetite, business strategy and management experience. The Bank has a clear functional segregation of Treasury operations between Front Office, Market Risk and Back Office.
b. Accounting policy for recording hedge and non - hedge transactions, recognition of income, premiums and discounts, valuation of outstanding contracts, provisioning, collateral and credit risk mitigation :
For hedge transactions, the Bank identifies the hedged item (asset or liability) and assesses the effectiveness at inception as well as at each reporting date. Hedge derivative transactions are accounted for pursuant to the principles of hedge accounting based on guidelines issued by RBI. Funding swaps are accounted in accordance with FEDAI guidelines.
Interest rate swaps are booked with the objective of managing the interest rate risk on liabilities. Interest rate swaps in the nature of hedge are recorded on accrual basis or fair value in line with approved policy. Any resultant profit or loss on termination of the hedge swaps is amortised over the life of the swap or underlying liability, whichever is shorter.
Currency interest rate swaps in the nature of hedge, booked with the objective of managing the currency and interest rate risk on foreign currency liabilities are recorded on accrual basis or fair value basis in line with the approved policy. Any resultant profit or loss on termination of hedge swaps is amortised over the life of swap or underlying liability, whichever is shorter. The foreign currency balances on account of principal of currency interest rate swaps outstanding as at the Balance Sheet date are revalued using the closing rate.
The Bank offers a mix of loan products designed in accordance to the need of customers. The interest rates for these products may be fixed or variable as per the customer requirements. Further, the Bank raises liabilities to meet its funding requirements. To manage the interest rate risk in the Banking Book (net interest margin / market value of equity), the Bank has executed interest rate swaps to hedge or minimize the duration gap in the Balance Sheet. The Bank reckoned fair value for both the underlying instruments and derivatives contract in line with the applicable guidelines and net MTM is recognized in the Profit and Loss Account, in accordance with the ICAI guidance note on Accounting of Derivatives Contracts. The net MTM of the derivative contracts reckoned as fair value hedge is about ' 7.60 crore (gain) for the year ended March 31, 2023.
The Bank assesses and monitors the hedge strategy on a periodic basis and reports the current status to ALCO, as per the internally approved framework.
iii. In respect of derivative contracts, the Bank evaluates the credit exposure arising therefrom. Credit exposure has been computed using the Current Exposure Method (CEM) which is the sum of :
a. the current replacement cost (marked to market value including accrued interest) of the contract or zero whichever is higher; and
b. the Potential Future Exposure (PFE) is a product of the notional principal amount of the contract and credit conversion factors derived basis the type / residual maturity of the contract, in line with the extant RBI guidelines.
b. Divergence in asset classification and provisioning for NPAs :
In terms of the RBI circular no. DBR.BP.BC.No.32/21.04.018/2018-19 dated April 01, 2019, banks are required to disclose the divergences in asset classification and provisioning consequent to RBI's annual supervisory process in their notes to accounts to the financial statements, wherever either or both of the following conditions are satisfied :
(i) the additional provisioning for NPAs assessed by RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the reference period and
(ii) the additional Gross NPAs identified by RBI exceed 10 per cent of the published incremental Gross NPAs for the reference period.
Based on the above, no disclosure on divergence in asset classification and provisioning for NPAs is required with respect to RBI's annual supervisory process for the year ended March 31, 2022 and March 31, 2021.
c. Implementation of resolution plans (RPs) :
In terms of the RBI circular dated June 07, 2019 on Prudential Framework for Resolution of Stressed Assets, the Bank has not implemented Resolution Plan (RP) for any of the borrowers during the financial year ended March 31, 2023 (Previous Year Nil).
f. COVID-19
The COVID-19 virus, a global pandemic affected the world economy over more than last two years. The extent to which the COVID-19 pandemic, including the future subsequent waves, if any, may impact the Bank's operations and asset quality will depend on future developments. The Bank's capital and liquidity position is strong and would continue to be the focus area for the Bank.
The Bank holds COVID-19 related contingency provision of ' 89.17 crore as at March 31, 2023.
18.27 Draw down from reserves
The Bank has not undertaken any draw down from reserves during the year ended March 31, 2023 and March 31, 2022. Appropriation to Reserves
i Statutory Reserve
As mandated by the Banking Regulation Act, 1949, all banking companies incorporated in India shall create a reserve fund, out of the balance of profit of each year as disclosed in the Profit and Loss Account and before any dividend is declared and transfer a sum equivalent to not less than twenty five per cent of such profit. During the year, the Bank has transferred an amount of ' 609.50 crore (Previous Year ' 36.50 crore) to Statutory Reserve Account.
ii Investment Reserve Account (IRA)
As per RBI guidelines, if provisions created on account of depreciation in the ‘AFS' or ‘HFT' categories are found to be in excess of the required amount in any year, the excess shall be credited to the Profit and Loss Account and an equivalent amount (net of taxes, if any and net of transfer to Statutory Reserves as applicable to such excess provision) shall be appropriated to Investment Reserve Account. Further, the Bank may draw down from the IRA to the extent of provision made during the year towards depreciation in investment in AFS and HFT categories (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such excess provision). During the year, the Bank has transferred an amount of ' 79.00 crore (Previous Year ' 199.50 crore) to Investment Reserve Account.
iii Investment Fluctuation Reserve (IFR)
The RBI vide circular DBR.No.BP.BC.102/21.04.048/2017-18 dated April 02, 2018 advised banks to create an Investment Fluctuation Reserve (IFR) with effect from FY 2018-19. Accordingly, an amount not less than the lower of net profit on sale of investments in the HFT and AFS portfolio during the year or net profit for the year less mandatory appropriations shall be transferred to the IFR, until the amount of IFR is at least 2 percent of the HFT and AFS portfolio, on a continuing basis. Where feasible, this should be achieved within a period of 3 years. Accordingly, the Bank has appropriated ' 273.50 crore (Previous Year ' Nil) to IFR.
iv Capital Reserve
As per RBI guidelines, profit / loss on sale of investments in the ‘Held to Maturity' category is recognised in the Profit and Loss Account and profit is thereafter appropriated (net of applicable taxes and statutory reserve requirements) to Capital Reserve. Profit / loss on sale of investments in Available for Sale' and ‘Held for Trading' categories is recognised in the Profit and Loss Account. Accordingly, the Bank has appropriated ' 95.50 crore (Previous Year ' 45.00 crore) to Capital Reserve.
v Special Reserve
As per the provisions under Section 36(1)(viii) of Income Tax Act, 1961, specified entities like banks are allowed deduction in respect of any special reserve created and maintained, i.e. an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” is carried to such reserve account. This would be applicable till the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and general reserves of the entity. During the year, the Bank has transferred an amount of ' 65.00 crore (Previous Year ' 6.00 crore) to Special Reserve.
vi General Reserve
During the year ended March 31, 2023 and March 31, 2022, no amount was transferred to the General Reserve.
18.33 Unhedged foreign currency exposure (UFCE)
The Banks Credit Policy outlines the framework for evaluating the risks arising out of unhedged foreign currency exposure of the corporates, while extending credit facilities. Computation of UFCE is in line with the extant regulatory guidelines. At the time of sanctioning of limits, the Bank may stipulate limits on the unhedged foreign currency exposure of the corporate. Additionally, the Bank also monitors the unhedged portion of foreign currency exposures of such corporates on a periodic basis and also adhere to the extant regulatory requirements with regards to capital and provisioning requirements for exposures to entities with UFCE. During the year ended March 31, 2023, incremental capital held towards borrowers having unhedged foreign currency exposures is ' 149.34 crore (Previous Year ' 118.23 crore) and provision held towards UFCE is ' 54.50 crore (Previous Year ' 54.50 crore).
18.37 Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms)
There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.
18.38 Disclosures on remuneration (i) Qualitative disclosures
a Information relating to the composition and mandate of the Nomination and Remuneration Committee :
Name, composition and mandate of the main body overseeing remuneration :
The Nomination and Remuneration Committee of the Board oversees the framing, review and implementation of the Remuneration Policy of the Bank on behalf of the Board. The Committee works in close co-ordination with the Board. Nomination and Remuneration Committee comprised of the following members :
Mr. Hemang Raja Chairman
Mr. Aashish Kamat Member
Dr. (Mrs.) Brinda Jagirdar Member
Mr. Vishal Mahadevia Member
Some of the key functions of the Committee inter-alia include the following :
i. Review and recommend to the Board the overall remuneration framework and associated policies of the Bank.
ii. Evaluate performance of the Whole Time Directors (WTDs) (including the Managing Director & CEO) against predetermined parameters.
iii. Evaluate performance of Senior Management.
iv. Make recommendations on remuneration (including Variable Pay (Cash and Non-cash and perquisites)) of Whole Time Directors.
v. Approve policy and quantum of variable pay, bonus, stock options and increments for the employees of the Bank.
vi. Frame guidelines for the Employees Stock Option Scheme (ESOS) and recommend grants of the Bank's stock options to Whole Time Directors of the Bank.
vii. Review and recommend to the Board the payment of profit related commission to the Non-Executive Directors of the Bank within the overall limits as may be approved by the shareholders of the Bank, in terms of the Companies Act, 2013 and RBI guidelines.
External consultants whose advice has been sought, the body by which they were commissioned, and in what areas of the remuneration process :
The Bank's Human Resource function commissions Aon Consulting Pvt. Limited', to conduct market benchmarking of employee compensation. In this process, the Bank participates in the salary benchmarking survey conducted by Aon for the Private Banking firms. Every year Aon conducts salary benchmarking survey and the information gathered by
Aon on Fixed and Variable salary from various private sector peer banks across functions, levels and roles is referred to by the human resource function to evaluate the market competitiveness of Bank's compensation positioning and practices.
A description of the scope of the Bank's remuneration policy (e.g. by regions, business lines), including the extent to which it is applicable to foreign subsidiaries and branches :
The Bank has defined the below policies to cover its respective personnel as highlighted in the title:
1. Remuneration Policy for Whole Time / Executive Directors, Material Risk Takers, Key Managerial Personnel, Senior Management Personnel, Control Function and all other employees. The scope of this policy covers pan India employees across management levels. Currently, the Bank doesn't have any foreign subsidiaries and branches.
2. Remuneration Policy (for Independent Directors). The scope of this policy covers all Independent Directors.
A description of the type of employees covered and number of such employees.
Employees are categorised into the following four categories from remuneration structure and administration stand point. The Head count as at March 31, 2023 is stated against each category :
1. MD & CEO 1
2. Material Risk Takers 21 (including 1 retired during the year)
3. Control Function Staff 8 (1 exited during the year)
4. Other Staff 35,323
b. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy :
Objective, Principles and Key Features : The remuneration philosophy of the Bank is guided by the organization's Philosophy for enabling employee performance to achieve the organization's short term and long-term objectives, balanced with prudent risk taking and are in compliance with the regulatory guidelines.
To achieve this the following principles are adopted :
• The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate talent.
• Respect employee needs basis relevant market anchors and to compensate adequately for the contribution towards the Bank's growth.
• The cost / income ratio of the Bank supports the remuneration package consistent with maintenance of sound capital adequacy ratio.
• The remuneration is balanced between fixed pay and variable pay, with adequate focus on prudent risk taking and the short term as well as the long term objectives of the Bank and its shareholders.
• The variable pay is balanced between cash linked and share linked component as well as between immediate and deferred component so that remuneration is aligned to performance and risk outcomes over both short term and long term.
• Establish relationship between remuneration and performance with adequate focus on achievement of performance objectives incorporating elements of risk, compliance and service measures.
The Compensation structure of MD & CEO and other Material Risk Takers (MRTs) are aligned to the RBI's “Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff” dated November 04, 2019
The Remuneration Policy was reviewed and revised in FY2022-23 to strengthen the linkage of performance and remuneration and describe the governance process around it and ensure that its in order with the RBI Compensation guidelines :
i) Governance Framework :
All components of remuneration for Whole Time Directors, Executive Directors and Chief Executive Officers is recommended by Nomination and Remuneration Committee (NRC) and approved by the Board and the same is approved by the shareholders of the Bank and Reserve Bank of India.
All components of remuneration for Key Managerial Personnel (KMP), Senior Management Personnel (SMP), Material Risk Takers (MRTs) and Control Function is recommended by Nomination and Remuneration Committee to the Board of Directors of the Bank for their necessary approval.
The remuneration of other employees is determined by CHRO in consultation with MD & CEO of the Bank and placed before the NRC & Board for approval.
A discussion of how the bank ensures that risk and compliance employees are remunerated independently of the businesses they oversee :
The Bank ensures that risk, internal audit and compliance employees are remunerated independently of the businesses they oversee and is guided by the individual employee performance. The remuneration is determined on the basis of relevant risk measures included in the Key Deliverables of the respective employee across levels in these functions. The parameters reviewed for performance based rewards are independent of performance of the business area they oversee and commensurate with their individual role in the Bank. Additionally, the ratio of fixed and variable compensation is weighed towards fixed compensation in case of employees in risk, internal audit, and compliance function.
ii) Identification of Material Risk Takers (MRTs) for the Bank based on RBI guidelines :
The Bank has used the combination of qualitative and quantitative criteria in order to identify whether an employee is a material risk taker as per the compensation guidelines of RBI dated November 04, 2019.
Standard Qualitative Criteria
Relates to the role and decision-making power of staff members (e.g., senior manager, member of management body) having jointly or individually, the authority to commit significantly to risk exposures, etc.
In the context of the Bank, this qualitative criterion translates into members of various committees of the Bank who have decision making authority to cause significant risk exposure, individually or jointly with other committee members.
In addition, following quantitative criteria shall be used to identify the material risk takers (MRTs)
• Quantitative Criteria 1: Their total remuneration exceeds ' 1.5 crore or
• Quantitative Criteria 2: They are included among top 0.3% of the highest paid employees of the Bank or
• Quantitative Criteria 3: Their remuneration is equal to or greater than the lowest total remuneration of senior management and other risk-takers.
Any employee who meets the qualitative criteria and any one of the quantitative criteria will be considered as a Material Risk Taker.
iii) Compensation Structure of WTD, MD & CEO and MRTs :
• At least 50% of total compensation shall be Variable Pay.
• Value of stock options will be included in definition of ‘Total Variable Pay'.
• Total Variable Pay for the MD & CEO / Whole Time Directors / Material Risk Takers of the Bank would be capped at 300% of Fixed Pay.
• If the Total Variable Pay is up to 200% of the Fixed Pay, a minimum of 50% of the Variable Pay; and in case Variable Pay is above 200%, a minimum of 67% of the Variable Pay shall be paid via employee stock options.
• Minimum 60% of the Total Variable Pay shall be deferred over 3 years. If cash component is part of Total Variable Pay, at least 50% of the cash component of Variable Pay should also be deferred over 3 years. In cases where the cash component of Total Variable Pay is under ' 25 lakh, Variable Pay shall not be deferred.
• All the fixed items of compensation, including retiral benefits and perquisites, will be treated as part of Fixed Pay.
iv) Components of Remuneration - Risk Control and Compliance Staff (Control Function) :
Risk Control and Compliance Staff (Control Function Staff) including Internal Audit include heads of functions who have a role and responsibility in defining and monitoring the Bank's Policies, Credit & Regulatory processes etc and such other functions as may be determined by CHRO in consultation with MD & CEO. They may also be member(s) of various committees of the Bank, however, not directly responsible for business. The total target variable pay for Risk control, Internal audit and Compliance staff shall be less than or equal to fixed pay. Further, a substantial portion of the variable pay should be deferred in the form of cash based or share linked instruments. All other elements of the compensation policy shall be same as that for WTDs and MRTs.
v) Guidelines on Malus & Clawback :
The Bank has defined guidelines on Malus and Clawback Conditions applicable under various scenarios. These conditions are included in the Remuneration Policy and Employee terms and conditions.
c. Description of the ways in which current and future risks are taken into account in the remuneration process including the nature and type of the key measures used to take account of these risks :
An overview of the key risks that the Bank takes into account when implementing remuneration measures’ : ‘Risk Appetite Statement Framework’ has been designed for the Bank - which provides strategic guidance around various parameters. It includes the Bank’s risk appetite, limits framework and policies and procedures governing various types of risk.
Bank's Board Approved Risk Appetite Statement (RAS) has clearly articulated & quantified portfolio level risk metrics / measures stipulated for each business segment which includes parameters like on-boarding criteria basis internal rating threshold, restrictions pertaining to specific industries / transactions, portfolio quality metrics, risk-based caps related to exposure, rating concentration, product concentration, group exposure etc. The RAS is communicated to the stakeholders in the form of the various limits and mandates. MD & CEO along with Risk Management Committee of the Bank ensures overall adherence to Risk Appetite Statement of the Bank. Some of the Bank level metrics includes limits on strategic risk, capital adequacy, liquidity risk, reputation risk etc.
Performance and risk measures are part of the performance assessment framework and are factored in while assessing performance. Remuneration is decided basis performance evaluation for the year. The remuneration framework is designed to focus on achieving financial and non-financial objectives, risk - adjusted returns that are consistent with our prudent risk and capital management, as well as emphasis on long term sustainable outcomes.
The pay-out structure for the WTD, MD & CEO, Senior Management Team, MRTs & Control Function are designed to align to performance payments with the long-term sustainable performance of the Bank through deferral and claw-back arrangements.
An overview of the nature and type of key measure used to take account of these risks, including risk difficult to measure : The Bank has a robust system of defining, measuring and reviewing risk parameters. The risk parameters are a part of the Key Result Areas and Deliverables used for setting of performance objectives and for measuring performance, which includes both financial performance and non-financial performance in the areas of Risk, Governance and Compliance, Customer Centricity and People development. Weightage is assigned to each parameter which includes both financial (Quantitative) and non-financial (Qualitative) parameter detailing the outcome to be achieved in each areas.
A discussion of the ways in which these measure affect remuneration : The aforesaid risk measures are included in the Key Result Areas and Key Performance Index of MD & CEO, WTD, MRTs and all employees. Inclusion of the above mentioned measures ensures that performance parameters are aligned to risk measures at the time of performance evaluation. The Nomination and Remuneration Committee takes into consideration all the above aspects while assessing organisational and individual performance and making compensation related recommendations to the Board.
A discussion of how the nature and type of these measures have changed over the past year and reasons for the changes as well as the impact of changes on remuneration: In the FY 2022-23, The Bank has sharpened the KPIs around Risk, Governance and Compliance besides the metrics around financial performance, people development, customer centricity and operational excellence. It continues to track performance outcome against these key metrics as a part of overall Bank's performance objective for FY 2022-23 and linked it to Bank's strategy, with focus on growth, profitability, compliance and sustainability.
d. Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration :
An overview of main performance metrics for bank, top level business lines and individual: Performance and its linkage to levels of remuneration is guided by the objective / principles of the Remuneration and Performance Management Framework defined by the Bank. Cash Variable Pay in form of Incentives and Performance Bonus is determined by the achievement against the defined performance thresholds. The performance thresholds and KPIs covers financial and non-financial metrics defined for the year.
Performance measures are clearly defined in the beginning of the year for all the employees.
While setting performance measures of the MD & CEO, Senior Management team, MRTs & Control Function Staff, Strategy of the bank is kept in context. Further, Bank identifies key parameters that are important for the growth, success, stability and effective risk management of the Bank, as desired by the Board. Further, non-financial criteria such as maintaining high level of Compliance and Governance, Risk, Customer Centricity, Operations excellence & People management are also considered.
A discussion of how amounts of individual remuneration are linked to the Bank-wide and individual performance: The Bank follows balance scorecard approach for managing Performance and pay-outs. Individual performances are assessed annually, and the rewards are determined on the basis of the achievements against the various financial and non-financial objectives. The Performance measures are revised annually to reflect the priorities for the year and ensure its in line with the short term, long term, financial and non-financial objectives. This ensures close linkage between total compensation and our annual and long term business objectives.
A discussion of the measures the Bank will in general implement to adjust remuneration in the event that performance metrics are weak. This should include the Bank's criteria for determining weak performance metrics: The Bank uses deferral, malus and staff accountability tools to impact compensation pay offs for failures becoming apparent in future years. On an annual basis, Performance matrices is defined in the goal sheets of each individual, financial and non-financial - risk measures. The outcomes against these measures are considered and adjustment made basis performance and risk outcomes, where necessary. The Bank evaluates employees on a rating scale of 1-5, with 5 being
the highest. For people who have been rated 1 & 2, the Bank pays Zero variable pay, including Zero annual salary increment. Further, if there is significant impact owing to issues arising out of conduct or items listed under the Malus / Claw-back clause, the Bank pays Zero variable pay. (Owing to Bank's subdued or negative financial performance on account of external factors or any other factors, the Variable Pay could be zero in particular year). For Non-Cash (ESOP) component of variable pay, Bank has a deferral period of up to 5 years, which adequately covers the time horizon for risk to materialize. A minimum 75% of grants are deferred over a period of 5 years ensuring sensitivity to risk outcomes over a multi year risk horizon. Under the ESOP Scheme of the Bank, there is check made on the ratings of the employees every year to ascertain if the grants vesting for that year can be vested. Grants lapse for those employees who get a rating of 2 or 1 on the 5 point rating scale of the Bank. In case of significantly adverse risk outcomes, malus & claw back provisions become applicable as has been defined in the guideline and Bank's remuneration policy.
e. Description of the ways in which the Bank seeks to adjust remuneration to take account of the longer term performance Disclosure :
A discussion of the Bank's policy on deferral and vesting of variable remuneration and, if the fraction of variable remuneration that is deferred differs across employees or group of employees, a description of the factors that determine the fraction and their relative importance :
The Bank's Remuneration Policy / Framework is in line with the RBI “Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff” dated November 04, 2019.
The Remuneration Policy is approved by the Bank's Nomination and Remuneration Committee and the Board.
The Bank remuneration framework consist of guarding against excessive risk taking, wherein Bank has focus on achieving risk adjusted returns that are consistent with our prudent risk management, as well as emphasis on long term sustainable outcomes. Pay-out structures are designed to align variable pay with the long term performance of the Bank through deferral and malus / claw back arrangements.
Compensation in the Bank has linkages to risk outcomes, time horizon sensitive pay-out schedule in the form of a longer deferral period of 3 to 5 years for the variable remuneration. The cash component of variable pay for WTD and MRTs over ' 25 lakh vest in 3 years as per the guidelines. The ESOP vest from 2nd to 6th year (20% each year). In addition, cash bonus, unvested and / or vested shares is subject to malus / clawback and subject to the events triggered as stated in the Remuneration Policy. The ESOP guideline is applicable to employees across categories, who are eligible for ESOP.
A discussion of the Bank's policy and criteria for adjusting deferred remuneration before vesting and (if permitted by national law) after :
The Total Variable Pay for MD&CEO, Whole Time Directors and other Material Risk Takers of the Bank is subject to malus and clawback clauses, which are defined in the Remuneration Policy of the Bank. Detailed scenarios under which said clauses can be applied, such as event of an enquiry determining gross negligence or breach of integrity, or significant deterioration in financial performance are defined in the Remuneration Policy of the Bank.
The Bank follows a Balanced Scorecard approach for measuring performance at all levels. The Nomination and Remuneration Committee reviews the achievements against the set of parameters which determines the performance of the individuals in these roles.
For all other employees, performance appraisals are conducted annually and initiated by the employee with selfappraisal. The immediate supervisor reviews the appraisal ratings in a joint consultation meeting with the employee and assigns the performance rating. The final ratings are discussed and approved by the head of the departments. Both relative and absolute individual performances are considered for the moderation process. Individual fixed pay increases, variable pay and ESOPs are linked to the final performance ratings.
f. Description of the different forms of variable remuneration (i.e. Cash, Shares, Share-linked instruments and other forms) that the Bank utilizes and the rationale for using these different forms :
An Overview of the forms of variable remuneration offered, if the mix of different forms of variable remuneration differs across employees or group of employees, a description of the factors that determine the mix and their relative importance :
The Bank has the following forms of variable remuneration pay for WTD & MRTs, Control Function staff and other employees :
• Cash Variable pay - In form of Incentives for frontline sales staff and Performance Bonus for Senior Management (including WTD, MRTs, CF) and Non-sales staff members. Performance Bonus is part of the annual performance and compensation review cycle and is paid on the basis the performance rating of the individual employee. Incentive payments are subject to achievement of short term minimum threshold target performance on both quantitative and qualitative parameters, as defined in the plan.
• Non cash variable pay - In the form of an ESOP scheme has been designed for MD,CEO, WTD, MRTs and Control Function staff members, Senior Management staff with a view to ensure an appropriate risk balanced remuneration architecture and establish a sense of ownership amongst these categories of employees.
Variable pay in the form of performance based Cash bonus and ESOP is paid out annually and is linked to performance achievement against performance measures and aligned with the principles of meritocracy. The proportion of variable pay in total pay shall be higher at senior management levels. The payment of all forms of variable pay is governed by the affordability of the Bank and based on financial and risk performance outcomes. For MD and CEO and MRTs, a portion of variable compensation as stated above may be paid out in a deferred manner in order to drive prudent behaviour as well as long term & sustainable performance orientation. The quantum of grant of stock options is determined and approved by the Nomination and Remuneration Committee. The current ESOP design has an inbuilt deferral intended to spread and manage risk.
5 Represents portion of Variable pay for FY 2021-22 paid in FY 2022-23, this includes Cash Variable Pay for 1 MRT who retired during the year & does not include amount of ' 2.22 crore paid to the 3 exiting MRTs & ' 1.49 crore paid to 3 newly appointed MRTs. Previous year represents Variable pay for FY 2020-21 paid in FY 2021-22.
6 Amount as on March 31, 2023 represents portion of Cash Variable pay for FY 2020-21 payable in April 2023 to April 2024 & Variable pay for FY 2021-22 payable from April 2023 to April 2025. Amount as on March 31, 2022 represents portion of Variable pay for FY 2020-21 payable from April 2022 to April 2024.
7 Mean pay calculation of the Bank employees is based on Total Fixed Pay, which includes “Basic Pay, Allowances, and Employer’s contribution to Provident Fund”. Deviation of the pay of MD & CEO from the mean pay of the Bank is the difference between MD & CEO’s Total Fixed Pay and mean pay of the Bank.
8 Fair value is calculated using fair value of stock options computed using Black-Scholes options pricing models on the grant date. (iii) During the year ended March 31, 2023, the bank has paid ' 1.50 crore to Non - Executive Directors.
18.40 Net stable funding ratio
Banks are required to disclose Net Stable Funding Ratio (NSFR) under the Basel III framework in accordance with RBI guidelines. The Bank has made these disclosures which are available on its website at the link: http://www.idfcfirstbank. com/regulatory-disclosures.html. These disclosures have not been subjected to audit or limited review by the Joint Statutory Auditors of the Bank.
18.41 Liquidity coverage ratio
Qualitative disclosure
Liquidity risk management of the Bank is undertaken by the Balance Sheet Management Group (BSMG) under the central oversight of the Asset Liability Management Committee (ALCO) in accordance with the Board approved policies. The Bank has adopted the Basel III framework on liquidity standards as prescribed by RBI for reporting of the Liquidity Coverage Ratio (LCR). The mandated regulatory threshold as per the transition plan is embedded into the Limit Management Framework of the Bank with appropriate cushion to ensure maintenance of adequate liquidity buffers. Risk department computes the LCR and reports the same to the Asset Liability Management Committee (ALCO), Risk Management Committee of the Board and Board for oversight and periodical review. The Bank has been submitting LCR reports to RBI from January 2016.
The Bank follows the criteria laid down by the RBI for calculation of High Quality Liquid Assets (HQLA), gross outflows and inflows within the next 30 days period. HQLA predominantly comprises cash, excess CRR and investments qualifying to be HQLA as per the RBI guidelines. The Bank has maintained LCR above RBI and internal thresholds on an ongoing basis.
The Bank is funded through term deposits, CASA, refinance, issuance of bonds and foreign currency borrowings. All significant outflows and inflows determined in accordance with the RBI guidelines are included in the prescribed LCR computation.
The risk department measures and monitors the liquidity profile of the Bank and monitor against Board approved limits using the gap analysis technique supplemented by monitoring of key liquidity ratios and periodical liquidity stress testing. The Bank assesses the impact on short term liquidity gaps dynamically under various scenarios covering business projections under normal as well as varying market conditions. Periodical reports are placed before the Bank’s ALCO for perusal and review.
18.43 Earnings per share (‘EPS’)
Basic and diluted earnings per equity share are computed in accordance with AS-20 Earnings per share. Basic earnings per equity share is computed by dividing net profit after tax attributable to equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per equity share is computed by dividing net profit after tax attributable to equity shareholders by the weighted average number of equity shares and weighted average number of dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. Dilution of equity is on account of stock options granted by the Bank.
18.44 Movement in stock options granted is as under :
Employee Stock Option Scheme (ESOS) of IDFC FIRST Bank Limited viz. IDFC FIRST Bank ESOS-2015 (“the Scheme”) was framed with an object of encouraging higher participation on the part of employees in the Bank's financial growth and success. An effective stock option scheme enables retention of talent and aligning employee interest to that of the shareholders.
The shareholders of the Bank at its Extra-Ordinary General Meeting held on December 09, 2014 had approved IDFC FIRST Bank ESOS - 2015. The Scheme was further amended and was approved by the shareholders at its the 1st Annual General Meeting (AGM) held on September 29, 2015, at the 2nd AGM held on July 27, 2016 and at 5th AGM held on July 25, 2019.
The Scheme is in compliance with Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 as amended from time to time. The Scheme is administered by the Nomination and Remuneration Committee (‘NRC') of the Bank. As per the Scheme,the NRC is authorized to determine the specific employees to whom Employee Stock Options (‘options') would be granted. The options granted under the Scheme would vest for period not less than one year and not more than five years from the date of grant of options, as approved by the NRC and the vesting would be subject to continued employment and achievement of performance criterias. The specific vesting schedule is outlined in the letter of grant given to option grantee at the time of grant of options.
Options granted under the Scheme shall be capable of being exercised within a period of 3 years from the date of vesting of the respective options or such other period as may be determined by the NRC. Options granted under the Scheme are settled with equity shares being allotted to the beneficiary upon exercise.
During the year ended March 31, 2023 , there has been no material change in IDFC FIRST Bank ESOS-2015.
The Bank has used the intrinsic value method to account for the compensation cost of stock options to employees of the Bank (other than Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function
Staff). Intrinsic value is the amount by which the quoted market price of the underlying share on the date, prior to the date of the grant, exceeds the exercise price on the option. Accounting for the stock options has been in accordance with the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 to the extent applicable. Further, the Bank recognises fair value of share-linked instruments on the date of grant as an expense for all instruments granted after the accounting period ending March 31, 2021 for Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff as required in the RBI clarification dated August 30, 2021 on “Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers / Material Risk Takers and Control Function Staff”. The fair value of the stock-based compensation is estimated on the date of grant using Black-Scholes model and is recognised as compensation expense over the vesting period.
Expected dividend during the estimated expected term of the option are based on the dividend declared for one financial year prior to the date of grant. Expected life of option is the period for which the Bank expects the option to be in existence. Risk free interest rates over the expected term of the option are based on the maturity zero coupon yield curve for Government Securities at the time of grant. Expected volatility during the estimated expected term of the option is based on historical volatility determined based on the daily closing market prices of the Bank's publicly traded equity shares.
18.49 Proposed dividend
The Bank did not declare any dividend for the financial year ended March 31, 2023 and March 31, 2022.
18.50 Small and micro industries
Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 02, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. During the year ended March 31, 2023, ' 20.00 crore (Previous Year ' 12.20 crore) worth bills were paid with delays to micro and small enterprises and ' 2.04 crore (Previous Year ' 0.10 crore) worth bills remained unpaid as at March 31, 2023. There have been no demand of interest on these payments during the year (Previous Year ' 0.01 crore).
18.51 Disclosure on factoring
As per the RBI circular Ref No. DBR.No.FSD.BC.32/24.01.007/2015-16 dated July 30, 2015, banks are required to disclose factoring exposures. Receivables acquired under factoring are treated as part of loans and advances and reported under the head ‘Bills Purchased and Discounted' in Schedule 9 of the Balance Sheet. The Bank has factoring exposure of ' 1,649.29 crore (Previous Year ' 1,057.31 crore) and outstanding of ' 1,134.47 crore (Previous Year ' 738.97 crore) as on March 31, 2023.
18.52 Investor education and protection fund
There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Bank.
18.53 Description of contingent liabilities
i. Claims against the Bank not acknowledged as debts
The Bank is a party to taxation matters which are in dispute and are under appeal. The demands are either in the process of being stayed or have been partly or wholly paid / adjusted and will be received as refund (where paid / adjusted) to the extent the matters are decided in favour of the Bank.
The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Bank's financial condition, results of operations or cash flows.
ii. Liability for partly paid investments
This represents amounts remaining unpaid towards liability for partly paid investments. These payment obligations of the Bank do not have any profit / loss impact.
iii. Liability on account of forward exchange and derivative contracts
The Bank enters into foreign exchange contracts, currency options, forward rate agreements, currency swaps and interest rate swaps with inter-bank participants on its own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by way of interest / principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. Interest rate futures are standardised, exchange-traded contracts that represent a pledge to undertake a certain interest rate transaction at a specified price, on a specified future date. Forward rate agreements are agreements to pay or receive a certain sum based on a differential interest rate on a notional amount for an agreed period. A foreign currency option is an agreement between two parties in which one grants to the other the right to buy or sell a specified amount of currency at a specific price within a specified time period or at a specified future time. An exchange traded currency option contract is a standardised foreign exchange derivative contract, which gives the owner the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date on the date of expiry. Currency Futures contract is a standardised, exchange-traded contract, to buy or sell a certain underlying currency at a certain date in the future, at a specified price.
With respect to transactions entered by customers, the Bank generally takes off-setting positions in the inter-bank markets which results into higher numbers of outstanding contracts. The same also leads to representation of large gross notional principal of the portfolio, while the actual credit / market risk is much smaller.
Further, the notional amounts of the financial instruments do not represent the current fair value or future cash flows and hence do not indicate the Bank's exposure to credit or price risk. The derivative instrument becomes an asset / liability basis change in underlying market rates compared to contracted rates.
iv. Guarantees given on behalf of constituents
As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfil its financial or performance obligations.
v. Acceptances, endorsements and other obligations
These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank's customers that are accepted or endorsed by the Bank.
vi. Other items
Other items represent estimated amount of contracts remaining to be executed on capital account and certain undrawn non-cancellable loan commitments. This also includes the amount of investments bought and remaining to be settled on the date of financial statements.
18.54 Implementation of IFRS converged Indian Accounting Standards (Ind - AS)
The Reserve Bank of India vide Circular RBI/2018-2019/146 DBR.BP.BC.No.29/21.07.001/2018-19 dated March 22, 2019 had deferred the implementation of Ind AS for banks till further notice.
The Bank has made considerable progress on Ind AS implementation. The Bank is an associate company of the IDFC Limited (‘IDFC'), which is a Non-Banking Finance Company (NBFC) that falls under the “Ind AS Road map” and to whom the Ind AS is mandatorily applicable from April 01, 2018 and accordingly, the Bank has been preparing and submitting special purpose condensed “Fit-for-Consolidation” consolidated financial information under Ind AS to IDFC Limited with the transition date as April 01, 2017. The said financial information is also reviewed by the Audit Committee and approved by the Board. Further, these are also subject to review / audit by the Statutory
Auditors of the Bank. Under the RBI guidelines, banks are not allowed to early adopt Ind AS. Accordingly, the general-purpose financial statements of the Bank presented in the Annual Report are not under Ind AS. The results of the Bank upon its first-time adoption of and transition to Ind AS, based on the updated regulations and accounting standards / guidance and business strategy at the date of actual transition, could differ from those reported in the Fit-for-Consolidation information. The Bank also submits Standalone Proforma financials in the format and frequency as prescribed by the RBI.
The implementation of Ind AS is expected to result in significant changes to the way the Bank prepares and presents its financial statements. The areas that are expected to have significant accounting impact on the application of Ind AS are summarized below:
1) Financial assets (which primarily include advances and investments) shall be classified under amortised cost, fair value through other comprehensive income (a component of Reserves and Surplus) or fair value through profit / loss categories based on the nature of the cash flows and the intention of holding the financial assets and business model assessment.
2) Interest will be recognised in the income statement using the effective interest method, whereby, fees net of transaction costs and all other premiums or discounts will be amortised over the life of the financial instrument.
3) Stock options will be required to be fair valued on the date of grant and be recognised as staff expenses in the income statement over the vesting period of the stock options.
4) The impairment requirements of Ind AS 109, Financial Instruments, are based on an Expected Credit Loss (ECL) model that replaces the incurred loss model under the existing reporting framework. The Bank will be generally required to recognise either a 12-month or Lifetime ECL, depending on whether there has been a significant increase in credit risk since initial recognition. Ind AS 109 will change the Bank's current methodology for calculating the provision for standard assets and Non-Performing Assets (NPAs). The Bank will be required to apply a three-stage approach to measure ECL on financial instruments accounted for at amortised cost or fair value through other comprehensive income. Financial assets will migrate through the following three stages based on the changes in credit quality since initial recognition:
Stage 1: 12 Months ECL - for exposures which have not been assessed as credit-impaired or where there has not been a significant increase in credit risk since initial recognition, the portion of the ECL associated with the probability of default events occurring within the next twelve months will need to be recognised.
Stage 2: Lifetime ECL - for credit exposures where there has been a significant increase in credit risk since initial recognition but are not credit-impaired, a lifetime ECL will need to be recognised.
Stage 3: Lifetime ECL - Financial assets will be assessed as credit impaired when one or more events having a detrimental impact on the estimated future cash flows of that asset have occurred. For financial assets that have become credit impaired, a lifetime ECL will need to be recognised.
5) Accounting impact on the application of Ind AS at the transition date shall be recognised in Equity (Reserves and Surplus) as and when it becomes statutorily applicable to the Bank.
The RBI has recently issued a discussion paper on “Introduction of Expected Credit Loss framework for provisioning by Banks” which demonstrates the intention of the RBI to move towards Ind AS on piecemeal basis. It may further be noted that the above significant impacted areas may change based on the final guidelines to be issued by the RBI. This will further change the way financial statements would be read and would bring people, business and technology changes across the Bank.
18.55 Utilisation of borrowed funds
The Bank, as part of its normal banking business, grants loans and advances, makes investment, provides guarantees to and accept deposits and borrowings from its customers, other entities and persons. These transactions are part of Bank's normal banking business, which is conducted ensuring adherence to all regulatory requirements.
Given the nature and background of transactions explained above, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Bank to or in any other persons or entities, including foreign entities (“Intermediaries”) with the understanding, whether recorded in writing or otherwise, that the Intermediary shall lend or invest in party identified by or on behalf of the Bank (Ultimate Beneficiaries) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
The Bank has also not received any fund from any person(s) or entity(ies), including foreign entities (Funding Parties) with the understanding, whether recorded in writing or otherwise, that the Bank shall whether, directly or indirectly lend or invest in other persons or entities identified by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
18.56 Particulars of items under Others (including provisions), Other Assets-“Others”, Other Income, Other expenditure
Others (including provisions)
Others (including provisions) under the head “Schedule 5(VI) - Other Liabilities and Provisions” includes Nil items (Previous Year Nil) which are exceeding 1% of the total assets of the Bank.
Other Assets - “Others”
Others under the head “Schedule 11 (VII) - Other Assets” includes Nil items (Previous Year Nil) which are exceeding 1% of the total assets of the Bank.
Other Income
Miscellaneous Income under the head “Schedule 14 (VIII) - Other income” includes Nil items (Previous Year Nil) which exceeds 1% of the total income of the Bank.
Other Expenditure
Other expenditure under the head “Schedule 16 (XII) - Operating Expenses” includes commission to sales agents, business correspondents and collection agents which are more than 1% of total income of the Bank.
18.57 Comparative figures
Figures for the Previous Year have been regrouped and reclassified wherever necessary to conform to the current year's presentation.
18.58 The figures of ' 50,000 or less have been denoted by B.
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