To the Members of
HDFC Bank Limited
Report on the Audit of the Standalone Financial Statements
We have audited the accompanying standalone financial statements of HDFC Bank Limited("the Bank") which comprise the Balance sheet as at March 31 2019 the Profitand Loss Account the Cash Flow Statement for the year then ended and notes to thefinancial statements including a summary of significant accounting policies and otherexplanatory information.
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone financial statements give the information requiredby the Banking Regulation Act 1949 as well as the Companies Act 2013 ("theAct") in the manner so required for banking companies and give a true and fair viewin conformity with the accounting principles generally accepted in India of the state ofaffairs of the Bank as at March 31 2019 its profit and its cash flows for the year endedon that date.
Basis for Opinion
We conducted our audit of the standalone financial statements in accordance with theStandards on Auditing (SAs) as specified under section 143(10) of the Act. Ourresponsibilities under those Standards are further described in the Auditor'sResponsibilities for the Audit of the Standalone Financial Statements' section of ourreport. We are independent of the Bank in accordance with the Code of Ethics' issuedby the Institute of Chartered Accountants of India together with the ethical requirementsthat are relevant to our audit of the standalone financial statements under the provisionsof the Act and the Rules thereunder and we have fulfilled our other ethicalresponsibilities in accordance with these requirements and the Code of Ethics. We believethat the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our audit opinion on the standalone financial statements.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the standalone financial statements for the financial yearended March 31 2019. These matters were addressed in the context of our audit of thestandalone financial statements as a whole and in forming our opinion thereon and we donot provide a separate opinion on these matters. For each matter below our description ofhow our audit addressed the matter is provided in that context.
We have determined the matters described below to be the key audit matters to becommunicated in our report. We have fulfilled the responsibilities described in the"Auditor's Responsibilities for the Audit of the Standalone FinancialStatements" section of our report including in relation to these matters.Accordingly our audit included the performance of procedures designed to respond to ourassessment of the risks of material misstatement of the standalone financial statements.The results of our audit procedures including the procedures performed to address thematters below provide the basis for our audit opinion on the accompanying standalonefinancial statements.
|Key audit matters ||How our audit addressed the key audit matter |
|Identification of Non-Derformina advances and Drovisionina of advances: |
|Advances constitute a significant portion of the Bank's assets and the quality of these advances is measured in terms of ratio of Non-Performing Advances ("NPA") to the gross advances of the Bank. The Bank's net advances constitute 65.84 % of the total assets and the gross NPA ratio of the Bank is 1.36% as at March 312019. ||The audit procedures performed among others included: |
| ||- Considering the Bank's policies for NPA identification and provisioning and assessing compliance with the IRAC norms. |
| ||- Understanding evaluating and testing the design and operating effectiveness of key controls (including application controls) around identification of impaired accounts based on the extant guidelines on IRAC. |
|The Reserve Bank of India's ("RBI") guidelines on Income recognition and asset classification ("IRAC") prescribe the prudential norms for identification and classification of NPAs and the minimum provision required for such assets. The Bank is also required to apply its judgement to determine the identification and provision required against NPAs by applying quantitative as well as qualitative factors. The risk of identification of NPAs is affected by factors like stress and liquidity concerns in certain sectors. ||- Performing other procedures including substantive audit procedures covering the identification of NPAs by the Bank. These procedures included: |
| ||- Considering testing of the exception reports generated from the application systems where the advances have been recorded. |
| ||- Considering the accounts reported by the Bank and other Banks as Special Mention Accounts ("SMA") in RBI's central repository of information on large credits (CRILC) to identify stress. |
|The provisioning for identified NPAs is estimated based on ageing and classification of NPAs recovery estimates value of security and other qualitative factors and is subject to the minimum provisioning norms specified by RBI. ||- Reviewing account statements and other related information of the borrowers selected based on quantitative and qualitative risk factors. |
| ||- Performing inquiries with the credit and risk departments to ascertain if there were indicators of stress or an occurrence of an event of default in a particular loan account or any product category which need to be considered as NPA. Examining |
|Additionally the Bank makes provisions on exposures that are not classified as NPAs including advances in certain sectors and identified advances or group advances that can potentially slip into NPA. These are classified as contingency provisions. ||the early warning reports generated by the Bank to identify stressed loan accounts.-Holding specific discussions with the management of the Bank on sectors where there is perceived credit risk and the steps taken to mitigate the risks to identified sectors. |
|The Bank has detailed its accounting policy in this ||With respect to provisioning of advances we performed the following procedures: |
|regard in Schedule 17- Significant accounting policies under note C- 2 Advances. ||- Gained an understanding of the Bank's process for provisioning of advances. |
|Since the identification of NPAs and provisioning for advances require significant level of estimation and ||- Tested on a sample basis the calculation performed by the management for compliance with RBI regulations and internally laid down policies for provisioning. |
|given its significance to the overall audit we have ascertained identification and provisioning for NPAs as a key audit matter. ||- For loan accounts where the Bank made provisions which were not classified as NPA we reviewed the Bank's assessment for these provisions. |
|Evaluation of ooen tax litigations (Direct and Indirect Tax) |
|The Bank has material open tax litigations including matters under dispute which involve significant judgment to determine the possible outcome of these disputes. Since the assessment of these open tax litigations requires significant level of judgement we have included this as a key audit matter. ||- Gained an understanding of the Bank's process for determining tax liabilities and the tax provisions. |
| ||- Involved direct and indirect tax specialists to understand the evaluation of likelihood and level of liability for significant tax risks after considering legal precedence other rulings and new information in respect of open tax positions as at reporting date. |
| ||- Agreed underlying tax balances to supporting documentation including correspondence with tax authorities. |
| ||- Assessed the disclosures within the standalone financial statements in this regard. |
|Information Technology ("IT") Systems and Controls || |
|The reliability and security of IT systems plays a key role in the business operations of the Bank. Since large volume of transactions are processed daily the IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. These systems also play a key role in the financial accounting and reporting process of the Bank. ||- For testing the IT general controls application controls and IT dependent manual controls we involved IT specialists as part of the audit. The team also assisted in testing the accuracy of the information produced by the Bank's IT systems. |
| ||- Tested the design and operating effectiveness of the Bank's IT access controls over the information systems that are critical to financial reporting. We tested IT general controls (logical access change management and aspects of IT operational controls). This included testing that requests for access to systems were appropriately reviewed and authorized. |
|Due to the pervasive nature and complexity of the IT environment we have ascertained IT systems and controls as a key audit matter. ||- Tested the Bank's periodic review of access rights. We inspected requests of changes to systems for appropriate approval and authorisation. We considered the control environment relating to various interfaces configuration and other application layer controls identified as key to the audit. |
| ||- In addition to the above the design and operating effectiveness of certain automated controls that were considered as key internal controls over financial reporting were tested. |
| ||- Tested compensating controls and performed alternate procedures where necessary. In addition understood where relevant changes made to the IT landscape during the audit period and tested those changes that had a significant impact on financial reporting. |
Information Other than the Standalone Financial Statements and Auditor's Report Thereon
The Bank's Board of Directors is responsible for the other information. The otherinformation received by us comprises the information included in the Basel III-Pillar 3disclosures and graphical representation of financial highlights (but does not include thefinancial statements and our auditor's reports thereon) which we obtained prior to thedate of this auditor's report and Annual Report which is expected to be made availableto us after that date.
Our opinion on the standalone financial statements does not cover the other informationand we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements our responsibilityis to read the other information identified above and in doing so consider whether suchother information is materially inconsistent with the standalone financial statements orour knowledge obtained in the audit or otherwise appears to be materially misstated. Ifbased on the work we have performed on the other information that we have obtained priorto the date of this auditor's report we conclude that there is a material misstatement ofthis other information we are required to report that fact. We have nothing to report inthis regard.
When we read the Annual Report if we conclude that there is a material misstatementtherein we are required to communicate the matter to those Charged with Governance.
Responsibilities of Management and those Charged with Governance for the StandaloneFinancial Statements
The Bank's Board of Directors is responsible for the matters stated in section 134(5)of the Act with respect to the preparation of these standalone financial statements thatgive a true and fair view of the financial position financial performance cash flows ofthe Bank in accordance with the provisions of Section 29 of the Banking Regulation Act1949 accounting principles generally accepted in India including the AccountingStandards 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 guidelines and directionsissued by Reserve Bank of India from time to time.
This responsibility also includes maintenance of adequate accounting records inaccordance with the provisions of the Act for safeguarding of the assets of the Bank andfor preventing and detecting frauds and other irregularities; selection and application ofappropriate accounting policies; making judgments and estimates that are reasonable andprudent; and the design implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the accuracy and completeness ofthe accounting records relevant to the preparation and presentation of the standalonefinancial statements that give a true and fair view and are free from materialmisstatement whether due to fraud or error.
In preparing the standalone financial statements management is responsible forassessing the Bank's ability to continue as a going concern disclosing as applicablematters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Bank or to cease operations or has norealistic alternative but to do so.
Those Charged with Governance are also responsible for overseeing the Bank's financialreporting process.
Auditor's Responsibilities for the Audit of the Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalonefinancial statements as a whole are free from material misstatement whether due to fraudor error and to issue an auditor's report that includes our opinion. Reasonable assuranceis a high level of assurance but is not a guarantee that an audit conducted in accordancewith SAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if individually or in theaggregate they could reasonably be expected to influence the economic decisions of userstaken on the basis of these standalone financial statements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the standalonefinancial statements whether due to fraud or error design and perform audit proceduresresponsive to those risks and obtain audit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatementresulting from fraud is higher than for one resulting from error as fraud may involvecollusion forgery intentional omissions misrepresentations or the override of internalcontrol.
Obtain an understanding of internal control relevant to the audit in order todesign 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 hasadequate internal financial controls system in place and the operating effectiveness ofsuch controls.
Evaluate the appropriateness of accounting policies used and the reasonablenessof accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basisof accounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Bank'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our auditor's report to the related disclosures inthe standalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Bank to cease tocontinue as a going concern.
Evaluate the overall presentation structure and content of the standalonefinancial statements including the disclosures and whether the standalone financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.
We communicate with those Charged with Governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.
We also provide those Charged with Governance with a statement that we have compliedwith relevant ethical requirements regarding independence and to communicate with themall relationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.
From the matters communicated with those Charged with Governance we determine thosematters that were of most significance in the audit of the standalone financial statementsfor the financial year ended March 312019 and are therefore the key audit matters. Wedescribe these matters in our auditor's report unless law or regulation precludes publicdisclosure about the matter or when in extremely rare circumstances we determine that amatter should not be communicated in our report because the adverse consequences of doingso would reasonably be expected to outweigh the public interest benefits of suchcommunication.
The comparative financial statements of the Bank for the corresponding year ended March31 2018 were audited by a predecessor auditor who expressed an unmodified opinion onthose financial statements on April 21 2018.
Report on Other Legal and Regulatory Requirements
1. The Balance Sheet and the Profit and Loss Account have been drawn up in accordancewith the provisions of Section 29 of the Banking Regulation Act 1949 read with Section133 of the Companies Act 2013 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 ourknowledge and belief were necessary for the purpose of our audit and have found them tobe satisfactory;
b. The transactions of the Bank which have come to our notice have been within thepowers of the Bank; and
c. The financial accounting systems of the Bank are centralized and thereforeaccounting returns for the purpose of preparing standalone financial statements are notrequired to be submitted by its branches; we have visited 237 branches for the purpose ofour audit.
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 bestof 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 theBank so far as it appears from our examination of those books;
c. The Balance Sheet the Profit and Loss Account the Cash Flow Statement dealt withby this Report are in agreement with the books of account;
d. In our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act read with Rule 7 of theCompanies (Accounts) Rules 2014 to the extent they are not inconsistent with theaccounting policies prescribed by RBI;
e. On the basis of the written representations received from the directors as on March312019 taken on record by the Board of Directors none of the directors is disqualifiedas on March 31 2019 from being appointed as a director in terms of Section 164(2) of theAct;
f. With respect to the adequacy of the internal financial controls over financialreporting of the Bank with reference to these standalone financial statements and theoperating effectiveness of such controls refer to our separate Report in "Annexure1" to this report;
g. In our opinion the entity being a banking company the remuneration to whole-timedirectors during the year ended March 312019 has been paid by the Bank in accordance withthe provisions of Section 35B(1) of the Banking Regulation Act 1949; and
h. With respect to the other matters to be included in the Auditor's Report inaccordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 as amended inour opinion and to the best of our information and according to the explanations given tous:
i. The Bank has disclosed the impact of pending litigations on its financial positionin its standalone financial statements-Refer Note C17 of Schedule 17 Note 16 (d) ofSchedule 18 and Schedule 12-Contingent liabilities in the standalone financial statements;
ii. The Bank has made provision as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts-Refer Note C17 of Schedule 17 Note 10 and 16 (d) of Schedule 18forming part of the standalone financial statements; and
iii. There were no amounts which were required to be transferred to the InvestorEducation and Protection Fund by the Bank.
| ||For S. R. Batliboi & Co. LLP |
| ||Chartered Accountants |
| ||Firm's Registration No.: 301003E/E300005 |
| ||per Sudhir Soni |
|Mumbai ||Partner |
|April 20 2019 ||Membership No.: 41870 |
ANNEXURE 1 TO THE INDEPENDENT AUDITOR'S REPORT OF EVEN DATE ON THE STANDALONE FINANCIALSTATEMENTS OF HDFC BANK LIMITED
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section143 of the Companies Act 2013 ("the Act")
To the Members of
HDFC Bank Limited
We have audited the internal financial controls over financial reporting of HDFC BankLimited ("the Bank") as of March 31 2019 in conjunction with our audit of thestandalone financial statements of the Bank for the year ended on that date.
Management's Responsibility for Internal Financial Controls
The Bank's Management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Bank considering the essential components of internal control stated inthe Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issuedby the Institute of Chartered Accountants of India. These responsibilities include thedesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the orderly and efficient conduct of its businessincluding adherence to the Bank's policies the safeguarding of its assets the preventionand detection of frauds and errors the accuracy and completeness of the accountingrecords and the timely preparation of reliable financial information as required underthe Act.
Our responsibility is to express an opinion on the Bank's internal financial controlsover financial reporting based on our audit. We conducted our audit in accordance with theGuidance Note on Audit of Internal Financial Controls Over Financial Reporting (the"Guidance Note") and the Standards on Auditing as specified under section143(10) of the Companies Act 2013 to the extent applicable to an audit of internalfinancial controls both applicable to an audit of Internal Financial Controls and bothissued by the Institute of Chartered Accountants of India. Those Standards and theGuidance Note require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether adequate internal financial controlsover financial reporting was established and maintained and if such controls operatedeffectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls system over financial reporting and their operatingeffectiveness. Our audit of internal financial controls over financial reporting includedobtaining an understanding of internal financial controls over financial reportingassessing the risk that a material weakness exists and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. The proceduresselected depend on the auditor's judgement including the assessment of the risks ofmaterial misstatement of the financial statements whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the internal financial controls system overfinancial reporting.
Meaning of Internal Financial Controls Over Financial Reporting
A company's internal financial control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company's internal financial control over financialreporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles and that receipts andexpenditures of the company are being made only in accordance with authorisations ofmanagement and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorised acquisition use or disposition of thecompany's assets that could have a material effect on the financial statements.
Inherent Limitations of Internal Financial Controls Over Financial Reporting
Because of the inherent limitations of internal financial controls over financialreporting including the possibility of collusion or improper management override ofcontrols material misstatements due to error or fraud may occur and not be detected.Also projections of any evaluation of the internal financial controls over financialreporting to future periods are subject to the risk that the internal financial controlover financial reporting may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.
In our opinion the Bank has in all material respects an adequate internal financialcontrols system over financial reporting and such internal financial controls overfinancial reporting were operating effectively as at March 312019 based on the internalcontrol over financial reporting criteria established by the Bank considering theessential components of internal control stated in the Guidance Note on Audit of InternalFinancial Controls Over Financial Reporting issued by the Institute of CharteredAccountants of India.
| ||For S.R. Batliboi & Co. LLP |
| ||Chartered Accountants |
| ||Firm's Registration No.: 301003E/E300005 |
| ||per Sudhir Soni |
|Mumbai ||Partner |
|April 20 2019 ||Membership No.: 41870 |