4.12 Provisions and contingent assets/liabilities

A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that outflow of resources will be required to settle the obligation. A contingent liability also arises in extremely rare cases where there is a liability that cannot be recognised because it cannot be measured reliably. The Bank does not recognise a contingent liability but discloses its existence in the financial statements.

The Bank creates a provision when there is a present obligation as a result of a past event that probably requires outflow of resources and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each Balance Sheet date and adjusted to reflect the current best estimate. Provisions are not discounted to their present value and are determined based on the best estimate required to settle the obligation as at the reporting date if it is no longer probable that an outflow of resources would be required to settle the obligation, the provision is reversed.

Contingent assets are neither recognised nor disclosed in the financial statements.

4.13 Leases

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased item are classified as operating lease. Operating lease payments are recognised as an expense in the Profit and Loss Account on a straight line basis over the lease term in accordance with AS 19 - Leases.

4.14 Transaction involving Foreign Exchange

All transactions in foreign currency are recognised at the exchange rate prevailing on the date of the transfer.

Foreign currency monetary items are reported using the exchange rate prevailing at the Balance Sheet date.

Non-monetary items which are measured in terms of historical cost denominated in foreign currency are reported using the exchange rate at the date of transaction. Non-monetary items which are measured at fair value or other similar value denominated in a foreign currency are translated using the exchange rate at the date when such value is determined. Exchange differences arising on settlement of monetary items or on reporting of such monetary items at rates different from those at which they were initially recorded during the Year, or reported

in previous financial statements, are recognised as income or expense in the Year in which they arise.

4.15 Employee Share based payments

The Employee Stock Option Schemes (ESOSs) of the Bank are in accordance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. The Schemes provide for grant of options on equity shares to employees of the Bank to acquire the equity shares of the Bank that vest in a cliff vesting or in a graded manner and that are to be exercised within a specified period.

In accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Guidance Note on Accounting for Employee Share-based Payments, issued by The Institute of Chartered Accountants of India, the cost of equity-settled transactions is measured using the intrinsic value method. The intrinsic value being the excess, if any, of the fair market price of the share under ESOSs over the exercise price of the option

is recognised as deferred employee compensation with a credit to Employee's Stock Option (Grant) Outstanding account. The deferred employee compensation cost is amortised on a straight-line basis over the vesting period of the option. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of equity instruments that are outstanding. Fair market value of an equity share, as determined by a Category I Merchant Banker registered with SEBI, based on the Board Approved financial statements within one Year prior to the date of Grant.

The options that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortised portion of value of lapsed portion. In respect of the options which expire unexercised the balance standing to the credit of Employee's Stock Option (Grant) Outstanding accounts is transferred to Profit & Loss Account.

¹⁸. NOTES ON ACCOUNTS FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2024

A. DISCLOSURES AS LAID DOWN BY RBI CIRCULARS:

1. Regulatory Capital:

The Bank is subject to the Basel II Capital Adequacy guidelines (NCAF) stipulated by RBI. The Capital Adequacy Ratio (CRAR) of the Bank is calculated as per the Standardised approach for Credit Risk.

As per RBI letter "DBR.NBD.No. 4502/16.13.218/2017-18" dated November 08, 2017, no separate capital charge is prescribed for market and operational risk. The total Capital Adequacy ratio of the Bank at March 31,2024 is 23.27% (Previous year: 19.83%) against the regulatory requirement of 15.00% prescribed by RBI.

No Capital Conservation Buffer and Counter - Cyclical Capital Buffer is applicable on Small Finance Bank (SFB) as per operating guidelines issued on SFB by RBI.

Qualitative disclosure around LCR

The Reserve Bank of India has prescribed monitoring of sufficiency of Bank's liquid assets using Basel III - Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of Banks to potential liquidity disruptions by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days. The LCR requirement has been introduced in a phased manner and the Bank is required to maintain minimum ratio of 100% from April 01,2021.

The ratio comprises of high quality liquid assets (HQLAs) as numerator and net cash outflows in 30 days as denominator. HQLA has been divided into two parts i.e. Level 1 HQLA which comprises of primarily cash, excess CRR, SLR securities in excess of minimum SLR requirement and a portion of mandatory SLR as permitted by RBI (under MSF) and Level 2 HQLA which comprises of investments in highly rated non-financial corporate bonds and listed equity investments considered at prescribed haircuts. Cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities by the outflow run-off rates and cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in.

The Bank monitors the LCR periodically and has maintained LCR well above the regulatory threshold. Average LCR for Quarter ended March 31,2024 is 139.12% (Previous Year: 132.97%).

Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management. Treasury is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. Bank has incorporated Basel Liquidity Standards - LCR for liquidity risk. In computing the above information, certain estimates and assumptions have been made by the Bank's management which have been relied upon by auditors.

4.3 Overseas Assets, NPAs and Revenue:

The Bank does not have any overseas assets during the years ended March 31,2024 and March 31,2023

4.4 Resolution of stressed assets- Revised frame work

The Bank is having Nil loan account for resolution of stressed asset (revised framework) as on March 31,2024 (Previous year : Nil) as per the RBI Circular DBR.No. BP.BC.45/21.04.048/ 2018-19 dated June 07, 2019, as amended.

4.5 Divergence in asset Classification and provisioning

RBI vide circular no. DOR.ACC.REC.No.74/21.04.018/2022-23 dated October 11, 2022, has directed that banks shall make suitable disclosures, wherever (a) the additional provisioning requirement assessed by RBI exceeds 5 percent of the reported profit before provisions and contingencies for the reference period, or (b) the additional Gross NPA identified by RBI exceeds 5 percent of the published incremental Gross NPA for the reference period, or both. There are no reportable matters to the Bank for the years ended March 31,2023 and March 31,2024.

4.6 Disclosure of transfer of loan exposures

Details of loans transferred / acquired during the year ended March 31, 2024 under the RBI Master Direction on Transfer of Loan Exposures dated September 24, 2021 is given below: i) Details of Stressed loans transfers are given below:

The Bank has not transferred any stressed assets duriing year ended March 31,2024.

Details of Stressed loans transfers for the year ended March 31,2023 are given below:

5.3. Risk category wise country exposure

The Bank does not have any country exposure other than "home country" exposures and accordingly, no provision is maintained with regard to country risk exposure.

5.4. Unsecured Advances

During the years ended March 31, 2024 and March 31, 2023, the Bank has not extended any advances where the collateral is an intangible asset such as a charge over rights, licenses, authorisations, etc.

5.5. Details of factoring exposure:

The factoring exposure of the Bank as at March 31,2024 is Nil (Previous Year: Nil).

5.6. Intra Group Exposures

The Bank does not have any intra group exposures for the year ended March 31,2024 and March 31,2023. Exposure is computed as per RBI Master Circular on Exposure Norms DBOD. No. Dir.BC.12/13.03.00/ 2015-16 dated July 01,2015.

5.7. Unhedged foreign currency exposure

The Bank held '0.20 crore towards unhedged foreign currency exposure as on March 31,2024 (Previous Year: ' 0.12 crore). The bank held no incremental capital on advances to borrowers with unhedged foreign currency as on March 31,2024 (Previous Year: Nil).

7. Derivatives

The Bank did not have any transactions in derivative instruments. Hence the disclosure is not applicable with respect to Forward rate agreement / interest rate swap, exchange traded interest rate derivatives, risk exposure in derivatives and credit default swaps for the years ended March 31,2024 and March 31,2023.

8. Disclosures relating to Securitisation

The Bank has not undertaken any Securitised transaction during the years ended March 31,2024 and March 31,2023 and no outstanding as on March 31,2024. Hence the disclosure is not applicable to the Bank.

9. Off Balance Sheet SPVs sponsored

There are no Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms) during the years ended March 31,2024 and March 31,2023.

10. Transfer to Depositor Education and Awareness Fund (DEAF)

During the years ended 31st March 2024 and 31st March 2023, the Bank was not required to transfer any amount to Depositor Education and Awareness Fund.

13. Disclosure of Remuneration A. Qualitative Disclosures:

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

The Nomination, Remuneration and Compensation committee ("NRC") comprises of 4 independent directors of the Bank. Key mandate of the NRC is to oversee the implementation of the compensation policy of the Bank. The scope and function of the NRC are in accordance with Section 178 of the Companies Act 2013, Securites & Exchange Board of India Regulation 2015 and the guidelines issued by Reserve Bank of India from time to time.

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

Objective of Banks' Compensation Policy is:

- to provide a fair and transparent structure that is designed to retain and attract the talent pool

- the compensation shall be adjusted for all types of risk and the outcomes shall be symmetric with risk outcomes.

- to ensure that a sustained and rigorous compensation practice is followed.

- to ensure that a comprehensive and timely disclosure of information is made available to all stakeholders to facilitate constructive engagement.

c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks:

In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, the Bank has a policy to set apart a portion of the total compensation of senior and middle management as variable.

In the event of negative contributions of the Bank and/or in the relevant line of business, disciplinary proceedings initiated if any, in a year the deferred compensation will be subjected to 'malus' and 'clawback' arrangements.

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

Variable Pay for Whole time Directors/Managing Director/ Material Risk Takers will have minimum pay out of 50% of the fixed pay and maximum pay out 300% of the Fixed pay, which will be determined based on the level of responsibility. However, any bonus at the time of joining/ sign on bonus will be limited only to the first year and Would be in the form of Employee Stock Options.

e) A discussion of the banks' policy on deferral and vesting of variable remuneration and a discussion of the bank's policy and criteria for adjusting deferred remuneration before vesting and after vesting:

For MD&CEO, WTDs, and other employees who are MRTs, deferral arrangements exist for the variable pay, regardless of the quantum of pay. For such executives of the bank, a minimum of 60% of the total variable pay is invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus will be deferred. However, in cases where the cash component of variable pay is under ' 25 lakhs, deferral requirements is not necessary.

The deferral period is a minimum of three years and would be applicable to both the cash and non-cash components of the variable pay.

The deferral of the variable pay will be spread out over the course of the deferral period

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

Variable remuneration in the form of Cash or in the form ESOP is paid periodically.

The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed.

14.8. Unamortised Pension and Gratuity Liabilities

There are no unamortised pension and gratuity liabilities as at March 31,2024 and March 31,2023.

14.9 Letter of Comforts

The Bank has not issued any Letter of Comforts during years ended March 31, 2024 and March 31, 2023. Hence corresponding disclosures are not made.

14.10 Green Deposits

The Bank has not raised any green deposits during years ended March 31, 2024 and March 31, 2023. Hence corresponding disclosures are not made.

15. Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the Bank

During the years ended March 31,2024 and March 31,2023, the Bank's credit exposure to single borrower and group borrowers was within the prudential exposure limits prescribed by RBI.

8. Employee Stock Option Scheme ("ESOS")

i) ESAF Small Finance Bank Employee Stock Option Plan 2019

The Bank, pursuant to the resolutions passed by the Board on December 23, 2019 and Shareholders on January 03, 2020, adopted the ESAF ESOP Plan 2019.The ESAF ESOP Plan 2019 has been framed in compliance with the SEBI Regulations. The ESOP grant is of two types (i) loyalty grant and (ii) performance grant. As on March 31,2024 no options under performance grant have been granted by the Bank under the ESAF ESOP Plan 2019. The Nomination and Remuneration Committee of the Bank on June 28, 2021 granted loyalty grant to its eligible employees. The details of the options granted under the ESAF ESOP Plan 2019 as loyalty grant are as follows:

Nature of CSR activities :-

Children education, Substainable village development, waste management, liveable city projects, community school infrastucture, Krushak mitra for farmer and farmer collectives, Garshom projects for migrant labourers, Skill training for rural artisans and rural youth, flood rehabilitation, covid 19 response program, substainable development initiatives, Agroya Mithra - Health Enterprenuership development.

Refer Note B.7 of Schedule 18 for the related parties involved in activities relating to Corporate Social Responsibility.

11. Subordinated Debt and Perpetual Debt

a. The Bank has an outstanding subordinated debt of ' 425 crore (As at March 31, 2023 : ' 145 crore). This has been considered as part of Tier 2 Capital for capital adequacy computation after subjecting to discounting in accordance with RBI guidelines.

During the year ended March 31,2024, the Bank raised a Subordinated debt of ' 280 crore by way of private placement (Previous Year: ' Nil).

The Bank has an outstanding Perpetual Debt Instrument of ' 48 crore ( As at March 31,2023: ' 48 crore)

b. Interest Expended-Others includes interest of ' 22.83 Crore (Previous year : ' 18.29 Crore) on Subordinated Debt and includes interest of ' 6.26 Crore (Previous Year: ' 6.24 Crore) on perpetual Debt instrument.

13. Description of Contingent Liabilities:

The Bank has contingent liability of ' 0.11 crore (Previous Year : ' Nil) for claims against customer disputes , ' 0.56 crore (Previous year ' 0.50 crore) for properietory transactions and other Court matters and ' 1.51 crore (Previous Year: 1.39 crore) towards guarantees given on behalf of constituents in India.

14. The Bank has a process whereby periodically all long term contracts are assessed for material foreseeable losses. As on March 31, 2024 and March 31,2023, the Bank has reviewed and recorded adequate provision as required under any law /accounting standards for material foreseeable losses on such long term contracts in the books of account and disclosed the same under the relevant notes in the financial statements.

15. The Bank has received few intimations from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006. Based on the information received and available with the Bank, there are no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments during the years ended March 31,2023 and March 31,2022. Further, there are no outstanding against those suppliers as on March 31, 2024 and March 31,2023. The above is based on information available with the Bank and relied upon by the Auditors.

16. As a part of the normal banking business, the Bank grants loan and advances to its borrowers with permission to lend/ invest or provide guarantees/ securities in other entities identified by such borrowers or on the basis of the security/ guarantee provided by the co-borrower. Similarly, the Bank may accept funds from its customers who may instruct the bank to lend/ invest/ provide guarantee or security or the like against such deposits in other entities identified by such customers. These transactions are part of the Bank's normal banking business, which is conducted after exercising proper due diligence including adherence to "Know Your customer" guidelines.

Other than the nature of the transactions described above:

- No funds have been advanced or loaned or invested by the Bank to or in any other person(s) or entity(ies) ("intermediaries") with the understanding that the intermediary shall lend or invest in party identified by or on behalf of the Bank (ultimate beneficiary).

- The Bank has not received any funds from any party(s) (funding party) with the understanding that the Bank shall whether, directly or indirectly lend or invest in other persons or entities by or on behalf of the Bank ("ultimate beneficiaries") or provide any guarantee or security or the like on behalf of the ultimate beneficiary

17. Dividend

The Board of Directors at its meeting held on May 08, 2024 , has proposed a dividend of ' 0.70 per share ( Previous Year: Nil per share) for the year ended March 31, 2024, subject to approval of the shareholders at the ensuing Annual General Meeting. Effect of the proposed dividend has not been reckoned in determining capital funds in the computation of capital adequacy as on March 31,2024.

18. IPO Expenses

The Bank has incurred expenses towards the Initial Public offer amounting to ' 39.28 crore which has been charged-off to securities premium account as on March 31,2024 in accordance with Section 52 of the Companies Act, 2013.

As on March 31,2023, the Bank has incurred expenses in connection with ongoing Initial Public Offer (IPO), which include payments made to Merchant Bankers, Legal Counsel, Statutory Auditors and other incidental expenses amounting to '15.35 crore (Previous Year :' 13.05 crore). In accordance with the accounting policy approved by the Board, the provisions of the Companies Act, 2013 and Banking Regulation Act, 1949 the Share Issue Expenses are eligible to be drawn from share premium account. As the process of IPO is still in progress the said expenses are included under "others" in other assets (Schedule 11 [vii])of the balance sheet.

19. Previous Year's figures

Previous year figures have been regrouped/reclassified wherever necessary to correspond with the current year's classification/disclosure.The comparitive financial information of the Bank for the previous year has been audited by one of the joint auditor.

In terms of our report attached For and on behalf of the Board of Directors

For Abarna & Ananthan

Chartered Accountants Sd/- Sd/-

Firm's Registration Number: 000003S P R Ravi Mohan Kadambelil Paul Thomas

Chairman Managing Director & CEO

DIN:08534931 DIN: 00199925

Sd/- Sd/-

Abarna Bhaskar Thomas Jacob Kalappila

Partner Director

Membership No. : 025145 DIN: 00812892

Place: Mannuthy Date: 08 May 2024

For Kirtane & Pandit LLP

Chartered Accountants

Firm's Registration Number: 105215W/W100057

Sd/- Sd/- Sd/-

Sandeep Welling Gireesh C P Ranjith Raj P

Partner Chief Financial Officer Company Secretary

Membership No. : 044576

Place: Mannuthy Place: Mannuthy

Date: 08 May 2024 Date: 08 May 2024