To the Members of
Equitas Small Finance Bank Limited
Report on the Audit of the Financial Statements
Opinion
We have audited the accompanying financial statements of Equitas Small
Finance Bank Limited (the "Bank"), which comprise the Balance Sheet as at March
31 2023, the Profit and Loss Account and the Cash Flow Statement for the year then ended,
and notes to the financial statements, including a summary of significant accounting
policies and other explanatory information (hereinafter referred to as the "financial
statements").
In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid financial statements give the information required
by the Banking Regulation Act, 1949 as well as the Companies Act, 2013, as amended (the
"Act") in the manner so required for Banking Companies and give a true and fair
view in conformity with the accounting principles generally accepted in India including
the accounting standards prescribed under section 133 of the Act, read with rules made
thereunder,of the state of affairs of the Bank as at March 31, 2023,and its profit and its
cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit of the financial statements in accordance with
the Standards on Auditing (SAs), as specified under section 143(10) of the Act. Our
responsibilities under those Standards are further described in the Auditors
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Bank in accordance with the Code of Ethics issued by the Institute of
Chartered Accountants of India(ICAI) together with the ethical requirements that are
relevant to our audit of the financial statements under the provisions of the Act and the
Rules made there under, and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the ICAI s Code of Ethics. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion on the financial statements.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment,
were of most significance in our audit of the financial statements for the financial year
ended March 31, 2023. These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters. For each matter below, our description of how our
audit addressed the matter is provided in that context.
We have determined the matters described below to be the key audit
matters to be communicated in our report.
| S.No. Key Audit Matters |
How our Audit Addresses our Key Audit Matters |
| Identification of non-performing advances and provisioning
for advances |
|
| 1 Advances form a material portion of the Banks assets and
the quality of the Banks loan portfolio is measured in terms of the proportion of
non-performing assets (NPAs) to the total loans and advances. Identification,
classification and provisioning of NPAs are governed by the prudential norms on income
Recognition and Asset Classification ("IRAC") and the specific guidelines with
relating to COVID-19 Regulatory Package issued by the Reserve Bank of India
("RBI") which include rule-based and judgmental factors. Management is also
required to make estimates of stress, recoverability issues, and security erosion in
respect of specific borrowers or groups of borrowers, on account of specific factors that
may affect such borrowers/groups (including factors relating to economic stress arising
out of the COVID-19 Pandemic). |
We considered the Banks accounting policies for NPA
identification, and provisioning and have assessed the compliance with the IRAC norms
prescribed by the RBI read with the specific RBI guidelines relating to COVID-19
Regulatory Package. |
|
We tested the operating effectiveness of the controls
(including application and IT dependent controls) for borrower wise classification of
loans in the respective asset classes viz., standard, sub-standard, doubtful and loss with
reference to their days-past-due (DPD) status (including consideration of the moratorium
on loans offered under the Regulatory Package). |
|
We considered the special mention accounts ("SMA")
reports submitted by the Bank to the RBIs central repository of information on large
credits (CRILC) and made inquiries of personnel in the Banks credit and risk departments
regarding indicators of stress or the occurrence of specific event(s) of default or other
factors affecting the loan portfolio / particular loan product category, that may affect
NPA identification and/ or provisioning. |
| In view of the significance of this area to the overall audit
of financial statements, it has been considered as a key audit matter. |
|
|
Selected the borrowers based on quantitative and qualitative
risk factors for their assessment of appropriate classification as NPA including
computation of overdue ageing to assess its correct classification and provision amount as
per extant IRAC norms and Bank policy. |
|
We performed analytical procedures which considered both
financial and non- financial parameters, in relation to identification of NPAs and
provisioning there against. |
| Information Technology ("IT") Systems and Controls
impacting Financial Reporting |
|
| 2 The IT environment of the Bank is complex and involves a
large number of independent and interdependent IT systems used in the operations of the
Bank for processing and recording a large volume of transactions at numerous locations. As
a result, there is a high degree of reliance and dependency on such IT systems for the
financial reporting process of the Bank. |
As part of our Audit, we have carried out testing of the IT
general controls, application controls and IT dependent manual controls. |
|
We have gained an understanding of IT controls framework
through walk through of processes. We have referred to reports of information system
audit. We have also tested the design and operating effectiveness of the banks, IT access
controls over the key information systems that are critical to financial reporting |
| IT infrastructure is critical for smooth functioning of the
banks, business operations as well as for timely and accurate financial accounting and
reporting |
|
|
We tested IT general controls in the nature of controls over
logical access, changes management, and other aspects of IT operational controls. These
included testing that requests for access to systems were reviewed and authorized. |
| IT general controls include user access management and change
management across applications, networks, database, and operating systems. |
|
|
Where deficiencies were identified, we tested compensating
controls or performed alternate procedures. |
| Due to the pervasive nature and complexity of the IT
environment as well as its significance in relation to accurate and timely financial
reporting we have identified this area as a key audit matter. |
|
Information other than the Financial Statements and Auditors Report
thereon
The Banks Board of Directors is responsible for the other information.
The other information comprises the information included in the Annual report, but does
not include the financial statements and our auditors report thereon. The Banks annual
report is expected to be made available to us after the date of this Auditors Report.
Our opinion on the financial statements does not cover the other
information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so, consider whether such
other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially misstated. When we
read the Banks annual report, if we conclude that there is a material misstatement of
this other information, we are required to communicate the matter to those charged with
governance.
Responsibilities of Management and Those Charged with Governance for
the Financial Statements
The Banks Board of Directors is responsible for the matters stated in
section 134(5) of the Act with respect to the preparation of these financial statements
that give a true and fair view of the financial position, financial performance and cash
flows of the Bank in accordance with the accounting principles generally accepted in
India, including the accounting standards specified under section 133 of the Act read with
Rule 7 of the Companies (Accounts) Rules, 2014 in so far as they apply to the Bank and
provisions of Section 29 of the Banking Regulation Act, 1949, and circulars, guidelines
and directions issued by Reserve Bank of India ("RBI") from time to time.
This responsibility also includes maintenance of adequate accounting
records in accordance with the provisions of the Act for safeguarding of the assets of the
Bank and for preventing and detecting frauds and other irregularities; selection and
application of appropriate accounting policies; making judgments and estimates that are
reasonable and prudent; and the design, implementation and maintenance of adequate
internal financial controls, that were operating effectively for ensuring the accuracy and
completeness of the accounting records, relevant to the preparation and presentation of
the financial statements that give a true and fair view and are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for
assessing the Banks ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Bank or to cease operations, or has no
realistic alternative but to do so.
Those Board of Directors are also responsible for overseeing the Banks
financial reporting process.
Auditors Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditors report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with SAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
As part of an audit in accordance with SAs, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control
• Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in the circumstances. Under
section 143(3) of the Act, we are also responsible for expressing our opinion on whether
the Bank has adequate internal financial controls with reference to financial statements
in place and the operating effectiveness of such controls.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of managements use of the going
concern basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on the
Banks ability to continue as a going concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditors report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of
our auditors report. However, future events or conditions may cause the Bank to cease to
continue as a going concern
• Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among
other matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our
audit.
We also provide those charged with governance with a statement that we
have complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the financial
statements for the financial year ended March 31, 2023 and are therefore the key audit
matters. We describe these matters in our auditors report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.
Report on Other Legal and Regulatory Requirements
1. The Balance Sheet and the Profit and Loss Account have been drawn up
in accordance with the provisions of Section 29 of the Banking Regulation Act, 1949 and
section 133 of the Act read with Rule 7 of the Companies (Accounts) Rules, 2014.
2. As required by sub section (3) of section 30 of the Banking
Regulation Act, 1949 we report that:
a) We have obtained all the information and explanations which, to the
best of our knowledge and belief, were necessary for the purpose of our audit and have
found them to be satisfactory;
b) The transactions of the Bank, which have come to our notice, have
been within the powers of the Bank; and
c) The financial accounting systems of the Bank are centralized and
therefore, accounting returns for the purpose of preparing financial statements are not
required to be submitted by the branches. Our audit is carried out centrally as all the
necessary records and data required for the purposes of our audit are centrally available.
However, we have visited 27 branches covering 15.74% of the gross advances as on March 31,
2023, for the purpose of our audit, in compliance with the extant RBI Circular.
3. As required by Section 143(3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations
which to the best of our knowledge and belief were necessary for the purposes of our
audit;
(b) In our opinion, proper books of account as required by law have
been kept by the Bank so far as it appears from our examination of those books;
(c) The Balance Sheet, the Profit and Loss Account, and the Cash Flow
Statement dealt with by this Report are in agreement with the books of account;
(d) In our opinion, the aforesaid financial statements comply with the
accounting standards specified under section 133 of the Act read with Rule 7 of the
Companies (Accounts) Rules, 2014 to the extent they are not inconsistent with the
accounting policies prescribed by RBI;
(e) On the basis of the written representations received from the
directors as on March 31, 2023 taken on record by the Board of Directors, none of the
directors is disqualified as on March 31, 2023 from being appointed as a director in terms
of Section 164(2) of the Act;
(f) With respect to the adequacy of the internal financial controls
over financial reporting of the Bank with reference to these financial statements and the
operating effectiveness of such controls, refer to our separate Report in
"Annexure" to this report;
(g) In our opinion, the entity being a banking company, remuneration to
its director during the year ended March 31, 2023 has been paid / provided by the Bank in
accordance with the provisions of Section 35B (1) of the Banking Regulation Act 1949; and
(h) With respect to the other matters to be included in the Auditors
Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, as
amended in our opinion and to the best of our information and according to the
explanations given to us:
i. The Bank has disclosed the impact of pending litigations on its
financial position in its financial statements - Refer to Schedule 12 to the financial
statements;
ii. The Bank did not have any long-term contracts including derivative
contracts for which there were any material foreseeable losses;
iii. There were no amounts which were required to be transferred to the
Investor Education and Protection Fund by the Bank
iv. a) The Management has represented
that, to the best of its knowledge and belief, no funds (which are
material either individually or in the aggregate) 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 / entities, including foreign entities (Intermediaries),
with the understanding, whether recorded in writing or otherwise, that the Intermediary
shall, whether directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the Bank ("Ultimate
Beneficiaries") or provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries;
b) The Management has represented that, to the best of its knowledge
and belief, no funds (which are material either individually or in the aggregate) have
been received by the Bank from any persons / entities, including foreign entities
("Funding Parties"), that the company shall directly or indirectly, lend or
invest in other persons or entities identified in any manner whatsoever by or on behalf of
the Funding Party ("Ultimate Beneficiaries") or provide any guarantee, security
or the like on behalf of the Ultimate Beneficiaries;
c) Based on the audit procedures which we have considered reasonable
and appropriate in the circumstances and according to the information and explanations
provided to us by the Management in this regard, nothing has come to our notice that has
caused us to believe that the representations made by the Management under subclause (a)
and (b) above contain any material misstatement.
v. a) The company has not paid any dividend during the year
b) As stated in Schedule 18.1(c)(v) to the financial statements, the
Board of Directors of the Bank have proposed dividend for the year which is subject to the
approval of the members at the ensuing Annual General Meeting. The amount of dividend
proposed is in accordance with section 123 of the Act, as applicable.
vi. Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 for
maintaining books of account using accounting software which has a feature of recording
audit trail (edit log) facility is applicable to the Company with effect from April 1,
2023, and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules,
2014 is not applicable for the financial year ended March 31, 2023
Annexure to the Independent Auditors Report of Even Date on the
Financial Statements of Equitas Small Finance Bank Limited
Report on the Internal Financial Controls with reference to Financial
Statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013
("the Act")
We have audited the internal financial controls with reference to
Financial Statements of Equitas Small Finance Bank Limited (the "Bank") as of
March 31, 2023 in conjunction with our audit of the financial statements of the Bank for
the year ended on that date.
Managements Responsibility for Internal Financial Controls
The Banks Management is responsible for establishing and maintaining
internal financial controls based on the internal control with reference to Financial
Statements criteria established by the Bank considering the essential components of
internal control stated in the Guidance Note on Audit of Internal Financial Controls Over
Financial Reporting issued by the Institute of Chartered Accountants of India. These
responsibilities include the design, implementation and maintenance of adequate internal
financial controls that were operating effectively for ensuring the orderly and efficient
conduct of its business, including adherence to the Banks policies, the safeguarding of
its assets, the prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of reliable financial
information, as required under the Companies Act, 2013.
Auditors Responsibility
Our responsibility is to express an opinion on the Banks internal
financial controls with reference to Financial Statements based on our audit. We conducted
our audit in accordance with the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting (the "Guidance Note") and the Standards on Auditing as
specified under section 143(10) of the Companies Act, 2013, to the extent applicable to an
audit of internal financial controls, both applicable to an audit of Internal Financial
Controls and, both issued by the Institute of Chartered Accountants of India. Those
Standards and the Guidance Note require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether adequate internal
financial controls over financial reporting was established and maintained and if such
controls operated effectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about
the adequacy of the internal financial controls with reference to Financial Statements and
their operating effectiveness. Our audit of internal financial controls with reference to
Financial Statements included obtaining an understanding of internal financial controls
with reference to Financial Statements, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. The procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion on the Banks internal financial
controls system over financial reporting.
Meaning of Internal Financial Controls with reference to Financial
Statements
A Banks internal financial control with reference to Financial
Statements is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A Banks internal financial
control with reference to Financial Statements includes those policies and procedures that
1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the bank;
2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the bank are being
made only in accordance with authorizations of management and directors of the bank; and
3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the banks assets that could
have a material effect on the financial statements.
Inherent Limitations of Internal Financial Controls with reference to
Financial Statements
Because of the inherent limitations of internal financial controls with
reference to Financial Statements, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may occur
and not be detected. Also, projections of any evaluation of the internal financial
controls with reference to Financial Statements to future periods are subject to the risk
that the internal financial control with reference to Financial Statements may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Opinion
In our opinion, the Bank has, in all material respects, an adequate
internal financial controls system with reference
to financial statements and such internal financial controls with
reference to Financial Statements were operating effectively as at March 31, 2023, based
on the internal control with reference to Financial Statements criteria established by the
Bank considering the essential components of internal control stated in the Guidance Note
on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute
of Chartered Accountants of India.
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