IDFC First Bank Ltd Directors Report.

To The Members of IDFC FIRST Bank Limited

(formerly, IDFC BANK LIMITED)

Report on the Audit of the Standalone Financial Statements

Opinion

We have audited the standalone financial statements of IDFC FIRST Bank Limited (Formerly, IDFC Bank Limited) (the ‘Bank), which comprise the standalone balance sheet as at 31 March 2020, the standalone profit and loss account, the standalone cash flow statement for the year then ended, and notes to the standalone financial statements, including a summary of the significant accounting policies and other explanatory information.

In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Banking Regulation Act, 1949 as well as the Companies Act, 2013 (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, of the state of affairs of the Bank as at 31 March 2020, and its loss, and its cash flows for the year ended on that date.

Basis for Opinion

We conducted our audit in accordance with the Standards on Auditing (‘SAs) specified under Section 143 (10) of the Act. Our responsibilities under those SAs are further described in the Auditors Responsibilities for the Audit of the Standalone 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 together with the ethical requirements that are relevant to our audit of the standalone financial statements under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained, is sufficient and appropriate to provide a basis for our opinion on the standalone financial statements.

Emphasis of matter

As more fully described in Note 18.13(d) to the standalone financial statements, the extent to which the COVID-19 pandemic will have an impact on the Banks financial performance is dependent on future developments, which are highly uncertain.

Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements of the current period. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key Audit Matter How the matter was addressed in our audit
Provisions on advances
P&L Charge (including write-off): Rs.1,859 crore for year ended 31 March 2020
Provision on advances: Rs.1,471 crore as at 31 March 2020
Refer to the accounting policies in "Note 17.02 to the Standalone Financial Statements: Significant Accounting Policies -Advances" and "Schedule 9 to the Standalone Financial Statements: Advances"
Significant estimate and judgment involved Our key audit procedures included:
Provisions in respect of non-performing and restructured advances are made based on managements assessment of the degree of impairment of the advances subject to the minimum provisioning levels prescribed under the Prudential Norms on Income Recognition, Asset Classification & Provisioning, prescribed by the Reserve Bank of India (RBI) from time to time. The provision on non-performing assets (NPAs) are also based on the valuation of the security available. In case of restructured accounts, provision is made in accordance with the RBI guidelines. Design/controls
We identified provision on advances as a key audit matter because of the management judgement involved in determining the provision and the valuation of the security available in determining NPA loans and because of its significance to the financial results of the Bank. • Assessing the design, implementation and operating effectiveness of key internal financial controls over monitoring of watch list loans, including monitoring process of overdue loans (and those which became overdue subsequent to the reporting date), measurement of provision, identification of NPA accounts, assessing the reliability of management information (including overdue reports). Also, assessing how management has factored in the deterioration in the overall economic environment arising from COVID-19 in its NPA assessment.
• Understanding managements approach, interpretation, systems and controls implemented in relation to NPA computation, particularly in light of the COVID-19 regulatory package.
• For corporate loans, testing controls over credit review processes, approval of external collateral valuation vendors and review controls over the approval of significant individual specific provisions.
Impact of COVID-19 • Tested review controls over measurement of provisions including documentation of the relevant approvals along with basis and rationale of the provision and disclosures in financial statements.
On 11 March 2020, the World Health Organisation declared the Novel Coronavirus (COVID-19) outbreak to be a pandemic. • Involving information system specialist to gain comfort over data integrity, extraction of reports and system interface reconciliations.
We have identified the impact of, and uncertainty related to the COVID-19 pandemic as a key event and consideration for recognition and measurement of NPAs on account of application of regulatory package and relaxations announced by the RBI on asset classification, regulatory reporting and provisioning. • Testing key controls operating over the information technology in relation to NPA systems, including system access and system change management, program development and computer operations.
Management has conducted an assessment of the loan portfolio which may be impacted on account of COVID-19 with respect to moratorium benefit and provision computation to borrowers prescribed by the regulatory package.
Substantive tests
• Test of details over calculation of NPA provisions as at the year-end for assessing the completeness, accuracy and relevance of data and to ensure that the same is in compliance with the Prudential Norms on Income Recognition, Asset Classification & Provisioning.
• Further for the accounts which meet the criteria for asset classification benefit in accordance with the RBI COVID-19 Regulatory Package, as per days past due status at 29 February 2020, testing calculation of provisions in line with the Banks Board approved policy and regulatory guidelines.
• Selection of a sample of loans to test potential cases of loans repaid and disbursed to the same customer during the current financial year and fresh disbursement(s) to stressed customers.
• Testing a sample (based on quantitative and qualitative thresholds) of large corporate loans where impairment indicators had been identified by management. Obtaining managements assessment of the recoverability of these exposures (including individual provisions calculations) and challenging whether individual impairment provisions, or lack thereof, were appropriate.
This included the following procedures:
- Reviewing in detail the statement of accounts, approval process, board minutes, credit review of customers, review of SMA reports and other related documents to assess recoverability and the classification of the facility;
- assessing external collateral valuers credentials and comparing external valuations to values used in managements assessment.
- For a risk-based sample of corporate loans not identified as displaying indicators of impairment by management, challenged this assessment by reviewing the historical performance of the customer and formed our own view whether any impairment indicators were present.
• Assessing the factual accuracy and appropriateness of the additional financial statement disclosures made by the Bank regarding impact of COVID-19.
Assessment of the realizability of deferred tax assets
Deferred tax asset (net): Rs.2,021 crore as at 31 March 2020
Refer to the accounting policies in "Note 17.08 to the Stands Income Tax" and "Note 18.29 to the Standalone Financial Standalone Financial Statements: Significant Accounting Policies - tements: Deferred Tax"
Significant estimate and judgement involved Our key audit procedures included:
Recognition of deferred tax assets require a determination of future taxable income based on the Banks expectations. The assessment of realizability of deferred tax assets is based on a virtual or reasonable certainty test, depending on the composition of the deferred tax assets. • Assessing the design, implementation and operating effectiveness of managements key internal financial controls over the recognition of deferred tax assets.
Given the Banks recent financial performance and uncertainty in business growth on account of COVID-19, we identified recognition of deferred tax assets as a key audit matter because of the significant management judgement and assumptions involved in estimating the future taxable income based on the income forecasts approved by the Banks Board of Directors. • Obtained details of different components of deferred tax assets and details of estimates of taxable incomes for future periods as approved by the Board of Directors.
• Sighted minutes of the meetings of the Board of Directors where the future forecasts were approved.
• Evaluating management assessment for estimating availability of future taxable profits for determination of recognition of deferred tax assets.
• Evaluated managements considerations involved in forecasting future taxable profits due to the uncertainty on account of COVID-19.
• Assessed the period over which the deferred tax assets would be recovered against future taxable income.
• Evaluated the Banks actual performance vis-a-vis the budgets for the current and past years and discussed with management their basis and assumptions in respect of convincing evidence to support that there will be sufficient taxable income to absorb the deferred tax asset.
• Performed sensitivity analysis over the Banks expectations of the future taxable income.
Valuation of Investments
Net Value of Investments: Rs.45,405 crore as at 31 March 2020
Refer to the accounting policies in "Note 17.01 to the Standalone Financial Statements: Significant Accounting Policies- Investments" and "Schedule 8 to the Standalone Financial Statements: Investments"
Subjective estimates and judgment involved Our key audit procedures included:
Investments Test of design/controls
Investments are classified into ‘Held for Trading (‘HFT), Available for Sale (‘AFS) and ‘Held to Maturity (‘HTM) categories at the time of purchase. Investments, which the Bank intends to hold till maturity are classified as HTM investments. • Assessed the design, implementation and operating effectiveness of managements key internal financial controls over classification, valuation, valuation models and specific provisions on certain investments.
Investments classified as HTM are carried at amortised cost. Where, in the opinion of management, a diminution other than temporary, in the value of investments has taken place, appropriate provisions are required to be made. • Read investment agreements/term sheets entered during the current year, on a sample basis, to understand the relevant investment terms and identify any conditions that were relevant to the valuation of financial instruments.
Investments classified as AFS and HFT are marked- to-market on a periodic basis as per the relevant RBI guidelines. Substantive tests • For a selection of investments, we re-performed valuations.
We identified valuation of investments as a key audit matter because of the management judgement involved in determining the value of certain investments (bonds and debentures, security receipts, venture capital units, pass through certificates and unquoted equity securities) based on the policy and methodology developed by the Bank, impairment assessment for HTM book, specific provisions on certain investments and the overall significance of investments to the financial statements of the Bank. For cases where no directly observable inputs were used, we examined and challenged the assumptions used by the Bank in determination of net assets and cashflows while using a discounted cashflow method.
• We verified the management assessment of specific provisions against certain investments and evaluated the appropriateness of the provisions made.
• Assessed whether the financial statement disclosures appropriately reflect the Banks exposure to investments with reference to the requirements of the prevailing RBI guidelines.
Key Audit Matter How the matter was addressed in our audit
Information technology Our key IT audit procedures included:
Information Technology (IT) systems and controls • We focused on user access management, change management, segregation of duties, system interface controls, system application controls and Information Provided by entity (IPE) controls over key financial accounting and reporting systems.
The Banks key financial accounting and reporting processes are highly dependent on information systems including automated controls in systems, such that there exists a risk that gaps in the IT control environment could result in the financial accounting and reporting records being misstated. Amongst its multiple IT systems, we scoped in systems that are key for the overall financial reporting.
The Bank has also undertaken few data migration projects post the merger in the last financial year. • We tested a sample of key controls for data migration operating over the information technology in relation to financial accounting and reporting systems, including analysis of strategy documents, review of data mapping sheets and reconciliation confirmations from operations team, user acceptance test (UAT) sign offs, incidents monitoring and approvals for pre and post migration.
Further, the prevailing COVID-19 situation has caused the required IT applications to be made accessible on a remote basis. We have identified ‘IT systems and controls as a key audit matter because of the high level of automation, significant number of systems being used by management and the complexity of the IT architecture. • We tested the design and operating effectiveness of key controls over user access management which include new user creation and granting access rights, removal of user rights, user access review and preventive controls designed to enforce segregation of duties.
• For a selected group of key controls over financial and reporting systems, we independently performed procedures to determine that these controls remained unchanged during the year or were changed following the standard change management process.
• Other areas that were assessed included password policies, security configurations, controls over changes to applications and databases and controls to ensure that developers and production support did not have access to change applications, the operating system or databases in the production environment.
• Performed inquiry for data security controls in the context of a large population of staff working from remote location at the year end.

Information other than the standalone financial statements and Auditors Report thereon

The Banks management and Board of Directors are responsible for the other information. The other information comprises the information included in the Banks Annual report, but does not include the standalone 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 standalone financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the standalone financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the standalone 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 therein, we are required to communicate the matter to those charged with governance.

Managements and Board of Directors Responsibility for the Standalone Financial Statements

The Banks management and Board of Directors are responsible for the matters stated in Section 134(5) of the Act with respect to the preparation of these standalone financial statements that give a true and fair view of the state of affairs, loss 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, provisions of Section 29 of the Banking Regulation Act, 1949 and the circulars and guidelines 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 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 standalone financial statements that give

a true and fair view and are free from material misstatement, whether due to fraud or error.

In preparing the standalone financial statements, the Management and Board of Directors are 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 the Management and Board of Directors either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

The Board of Directors is also responsible for overseeing the Banks financial reporting process.

Auditors Responsibilities for the Audit of the Standalone Financial Statements

Our objectives are to obtain reasonable assurance about whether the standalone 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 standalone 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 standalone 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)(i) 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 in the standalone financial statements made by the Management and Board of Directors.

• conclude on the appropriateness of the Management and Board of Directors 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 standalone 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 a Bank to cease to continue as a going concern.

• evaluate the overall presentation, structure and content of the standalone financial statements, including the disclosures, and whether the standalone 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 standalone financial statements of the current period 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.

Other Matters

The comparative figures for the year ended 31 March 2019 provided in the standalone financial statements have been audited by the predecessor auditor who expressed an unmodified opinion on those Audited Standalone Financial Statements vide their Independent Auditors Report dated 10 May 2019.

Our opinion on the standalone financial statements is not modified in respect of this matter.

Report on other legal and regulatory requirements

The standalone balance sheet and the standalone 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.

A. 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] read with the matter discussed in Note 18.01 of standalone financial statements, transactions of the Bank, which have come to our notice, have been within the powers of the Bank; and

[c] since the key operations of the Bank are automated with the key applications integrated to the core banking systems, the audit is carried out centrally as all the necessary records and data required for the purposes of our audit are available therein. However, during the course of our audit we have visited 14 branches.

B. Further, 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 standalone balance sheet, the standalone profit and loss account, and the standalone cash flow statement dealt with by this Report are in agreement with the books of account;

[d] in our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, 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 31 March 2020 taken on record by the Board of Directors, none of the directors is disqualified as on 31 March 2020 from being appointed as a director in terms of Section 164 (2) of the Act; and

[f] with respect to the adequacy of the internal financial controls with reference to standalone financial statements of the Bank and the operating effectiveness of such controls, refer to our separate Report in ‘Annexure A.

C. 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, 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 as at 31 March 2020 on its financial position in its standalone financial statements - Refer Schedule 12 and Note 18.59 to the standalone financial statements;

[ii] the Bank has made provision, as required under the applicable law or accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts - Refer Schedule 12 and Note 18.59 to the standalone financial statements;

[iii] there has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Bank and

[iv] The disclosures required on holdings as well as dealing in Specified bank notes during the period from 8 November 2016 to 30 December 2016 as envisaged in notification G.S.R. 308(E) dated 30 March 2017 issued by the Ministry of Corporate Affairs is not applicable to the Bank.

D. With respect to the matter to be included in the Auditors Report under section 197(16) of the Act:

The Bank is a banking company as defined under Banking Regulation Act, 1949. Accordingly, the requirements prescribed under Section 197 of the Companies Act, 2013 do not apply.

For B S R & Co. LLP
Chartered Accountants
Firms Registration No: 101248W/W-100022
Manoj Kumar Vijai
Partner
Membership No: 046882
UDIN: 20046882AAAABF4728
Place: Mumbai
Date: 22 May 2020

Annexure A to the independent Auditors Report of even date on the standalone financial statements of IDFC FIRST Bank Limited (Formerly, IDFC Bank Limited) for the period ended 31 March 2020

Report on the internal financial controls with reference to the aforesaid standalone financial statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013

(Referred to in paragraph (B (f)) under ‘Report on other legal and regulatory requirements section of our report of even date)

Opinion

We have audited the internal financial controls with reference to standalone financial statements of IDFC FIRST Bank Limited (Formerly, IDFC Bank Limited) (the ‘Bank) as of 31 March 2020 in conjunction with our audit of the standalone financial statements of the Bank for the year ended on that date.

In our opinion, the Bank has, in all material respects, adequate internal financial controls with reference to standalone financial statements and such internal financial controls were operating effectively as at 31 March 2020, based on the internal financial controls with reference to standalone 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 (the ‘Guidance Note).

Managements responsibility for internal financial controls

The Banks management and the Board of Directors are responsible for establishing and maintaining internal financial controls based on the internal financial controls with reference to standalone financial statements criteria established by the Bank considering the essential components of internal control stated in the Guidance Note. 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 (the ‘Act).

Auditors responsibility

Our responsibility is to express an opinion on the Banks internal financial controls with reference to standalone financial statements based on our audit. We conducted our audit in accordance with the Guidance Note and the Standards on Auditing prescribed under section 143 (10) of the Act, to the extent applicable to an audit of internal financial controls with reference to standalone financial statements. 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 with reference to standalone financial statements were established and maintained and whether 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 standalone financial statements and their operating effectiveness. Our audit of internal financial controls with reference to standalone financial statements included obtaining an understanding of such internal financial controls, 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 standalone 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 with reference to standalone financial statements.

Meaning of internal financial controls over financial reporting

A banks internal financial controls with reference to standalone financial statements is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the standalone financial statements for external purposes in accordance with generally accepted accounting principles. A banks internal financial controls with reference to standalone financial statements include 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 standalone 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 standalone financial statements.

Inherent limitations of internal financial controls with reference to standalone financial statements

Because of the inherent limitations of internal financial controls with reference to standalone 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 standalone financial statements to future periods are subject to the risk that the internal financial controls with reference to standalone financial statements may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

For B S R & Co. LLP
Chartered Accountants
Firms Registration No: 101248W/W-100022
Manoj Kumar Vijai
Partner
Membership No: 046882
UDIN: 20046882AAAABF4728
Place: Mumbai
Date: 22 May 2020