To the Members of Kotak Mahindra Bank Limited
Report on the Audit of the Standalone Financial Statements
We have audited the accompanying standalone financial statements of Kotak Mahindra Bank Limited (the Bank) which comprise the Balance sheet as at March 31 2019 the Profit and Loss Account 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.
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 (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 March 31 2019 its profit and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit of the standalone financial statements in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Companies Act 2013. Our responsibilities under those Standards are further described in the Auditor's 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 together with the ethical requirements that are relevant to our audit of the standalone financial statements under the provisions of the Companies Act 2013 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 audit opinion on the standalone 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 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. 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. We have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the Standalone Financial Statements section of our report including in relation to these matters. Accordingly our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the standalone financial statements. The results of our audit procedures including the procedures performed to address the matters below provide the basis for our audit opinion on the accompanying standalone financial statements.
|Key audit matters||How our audit addressed the key audit matter|
|Identification of and provisioning for Non-performing advances (Refer Schedule 17C - Note 2 to the financial statements):|
|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 66% of the total assets and the gross NPA ratio of the Bank is 2.14% as at March 31 2019.||The audit procedures performed among others included:|
|- Considering the Bank's policies for NPA identification and provisioning and assessing compliance with the IRAC norms.|
|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.||- 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.|
|- Performing other procedures including substantive audit procedures covering the identification of NPAs by the Bank. These procedures included:|
|The provisioning for identified NPAs is estimated based on ageing and classification of NPAs value of security and other qualitative factors and is subject to the minimum provisioning norms specified by RBI.||- Testing of the exception reports generated from the application systems where the advances have been recorded.|
|Since the identification of NPAs and provisioning for advances require significant level of estimation and given its significance to the overall audit including possible observations by RBI which could result in disclosures in the financial statements we have ascertained identification and provisioning for NPAs as a key audit matter.||- Reading 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.|
|- Reading 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 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. With respect to provisioning of advances we performed the following procedures:|
|- Gained an understanding of the Bank's process for provisioning of advances.|
|- Tested on a sample basis the realizable value of assets provided as security against loans classified as non- performing for determining the provision.|
|- Tested on a sample basis the calculation performed by the management for compliance with RBI regulations and internally laid down policies for provisioning.|
|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.||- We included specialized IT auditors as part of the audit team for testing IT General Controls (logical access change management and aspects of IT operations controls) application controls and IT dependent manual controls implemented by the Bank and testing the information produced by the Bank.|
|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 design and operating effectiveness of the Bank's IT access controls over the information systems that are critical to financial reporting.|
|- Tested the Bank's periodic review of access rights. We inspected requests of changes to systems for approval and authorisation.|
|- Considered the control environment relating to various interfaces con guration and other application layer controls identified as key to our audit.|
|- Tested key application controls to evaluate their operating effectiveness.|
|- Where defficiencies were identified we tested compensating controls or performed alternate procedures.|
|Compliance with regulations impacting financial statements|
|The Bank operates in a highly regulated environment. In addition to the Banking Regulation Act 1949 RBI provides directives and guidelines in the form of circulars from time to time.||- Understood the relevant legal and regulatory framework within which the Bank operates and assessed the design and operation of its key controls over this framework.|
|Given the pervasive nature of the regulations failure to comply with them could have a material financial impact on the operations of the Bank.||- Assessed the compliance structure of the Bank with regard to adherences to various regulations. We understood the process followed by the Bank's compliance team to obtain and disseminate updates regarding new circulars/notifications/press releases.|
|- Reviewed the RBI Annual Financial Inspection report and other communication with regulators.|
|- Reviewed the minutes of meeting of board level committees risk management committee credit and NPA review committees and internal audit reports for any recorded instances of potential non-compliance and maintained a high level of vigilance when carrying out our other audit procedures for indications of noncompliance.|
|- Assessed that disclosures in the financial statements are in line with the requirements of RBI.|
|- Enquired about penalties levied on the Bank for any assessed non-compliance with regulatory requirements.|
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 other information received by us comprises the information included in the Basel III - Pillar 3 disclosures but does not include the financial statements and our auditor's reports thereon which we obtained prior to the date of this auditor's report and other elements of the Annual Report which are expected to be made available to us after that date. Our opinion on the standalone 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 standalone financial statements our responsibility is to read the other information identified above and in doing so consider whether such other information is materially inconsistent with the standalone financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If based on the work we have performed on the other information that we have obtained prior to the date of this auditor's report we conclude that there is a material misstatement of this other information we are required to report that fact. We have nothing to report in this regard.
When we read the other elements of the Annual Report if we conclude that there is a material misstatement therein we are required to communicate the matter to Those Charged with Governance.
Responsibilities of Management and Those Charged with Governance for the Standalone Financial Statements
The Bank's Board of Directors is responsible for the matters stated in section 134(5) of the Companies Act 2013 (the Act) with respect to the preparation of these standalone 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 provisions of Section 29 of the Banking Regulation Act 1949 accounting principles generally accepted in India including the Companies (Accounting Standards) Rules 2006 (as amended) specified under section 133 of the Act read with the Companies (Accounts) Rules 2014 in so far as they apply to the Bank and the guidelines and directions issued by the Reserve Bank of India 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 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 management is responsible for assessing the Bank's 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 Charged with Governance are also responsible for overseeing the Bank's financial reporting process.
Auditor's 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 auditor's 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 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 Companies Act 2013 we are also responsible for expressing our opinion on whether the company has adequate internal financial controls system 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 management's 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 Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists we are required to draw attention in our auditor's 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 auditor's 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 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 defficiencies 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 for the financial year ended March 31 2019 and are therefore the key audit matters. We describe these matters in our auditor's 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 read with the Companies (Accounting Standards) Rules 2006 (as amended) specified under section 133 of the Act read with the Companies (Accounts) Rules 2014.
2. As required 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 centralised and therefore accounting returns for the purpose of preparing financial statements are not required to be submitted by the branches; we have visited 144 branches for the purpose of our 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 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 standalone financial statements comply with the Companies (Accounting Standards) Rules 2006 (as amended) specified under section 133 of the Act read with the Companies (Accounts) Rules 2014;
(e) On the basis of written representations received from the directors as on March 31 2019 taken on record by the Board of Directors none of the directors is disqualified as on March 31 2019 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 and the operating effectiveness of such controls refer to our separate Report in Annexure 1 to this report;
(g) In our opinion the entity being a banking company the remuneration to whole-time directors during the year ended March 31 2019 has been paid 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 Auditor's 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 Schedule 12.I Schedule 17C - Note 13 and Schedule 18B - Note 15 to the 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 12.2 Schedule 17C - Note 11 Schedule 17C - Note 13 and Schedule 18B - Note 11 and Note 15 to the financial statements; and
iii. There has been no delay in transferring amounts required to be transferred to the Investor Education and Protection Fund by the Bank.
For S. R. BATLIBOI & CO. LLP
Firm's Registration No.: 301003E/E300005
per Viren H. Mehta
Membership Number: 048749
Place of Signature: Mumbai
Date: 30 April 2019
ANNEXURE 1 TO THE INDEPENDENT AUDITOR'S REPORT OF EVEN DATE ON THE STANDALONE FINANCIAL STATEMENTS OF KOTAK MAHINDRA BANK LIMITED
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section 143 of the Companies Act 2013 (the Act)
To the Members of Kotak Mahindra Bank Limited
We have audited the internal financial controls over financial reporting of Kotak Mahindra Bank Limited (the Bank) as of March 31 2019 in conjunction with our audit of the standalone 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 internal financial controls based on the internal control over financial reporting 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 Bank's 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.
Our responsibility is to express an opinion on the Bank's internal financial controls over financial reporting 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 were 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 system over financial reporting and their operating effectiveness. Our audit of internal financial controls over financial reporting included obtaining an understanding of internal financial controls over financial reporting 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 auditor's judgement 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 internal financial controls system over financial reporting.
Meaning of Internal Financial Controls Over Financial Reporting
A company's internal financial control over financial reporting 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 company's internal financial control over financial reporting 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 company; (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 company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition use or disposition of the company'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 financial reporting 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 over financial reporting to future periods are subject to the risk that the internal financial control over financial reporting may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion the Bank has in all material respects an adequate internal financial controls system over financial reporting and such internal financial controls over financial reporting were operating effectively as at March 31 2019 based on the internal control over financial reporting 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.
For S. R. BATLIBOI & CO. LLP
ICAI Firm Registration Number: 301003E/E300005
per Viren H. Mehta
Membership Number: 048749
Place of Signature: Mumbai
Date: 30 April 2019