annual-report-FY2021

343 MAHINDRA & MAHINDRA LTD. INTEGRATED ANNUAL REPORT 2020-21 Impact of COVID-19 ‘The impact of COVID-19 on the global economy and how governments, businesses and consumers respond is uncertain. This uncertainty is reflected in the assessment of impairment loss allowance on its loans which are subject to a number of judgements and estimates. In relation to COVID-19, judgements and assumptions include the extent and duration of the pandemic, the impacts of actions of governments and other authorities, and the responses of businesses and consumers in different industries, along with the associated impact on the global economy. The Honourable Supreme Court of India (Hon’ble SC), in a public interest litigation (Gajendra Sharma Vs. Union of India & Anr), vide an interim order dated 3 rd September, 2020 (“Interim Order”), had directed banks and NBFCs that accounts which were not declared NPA till 31 st August, 2020 shall not be declared as NPA till further orders. Accordingly, the financial services business did not classify any account which was not NPA as of 31 st August, 2020 as per the RBI IRAC norms, as NPA after 31 st August, 2020. Basis the said interim order, until 31 st December, 2020, the financial services business did not classify any additional borrower account as NPA as per the Reserve Bank of India or other regulatory prescribed norms, after 31 st August, 2020 which were not NPA as of 31 st August, 2020, however, during such periods, the financial services business has classified those accounts as stage 3 and provisioned accordingly for financial reporting purposes. The interim order granted to not declare accounts as NPA stood vacated on 23 rd March, 2021 vide the judgement of the Hon’ble SC in the matter of Small Scale Industrial manufacturers Association vs. UOI & Ors. and other connected matters. In accordance with the instructions in paragraph 5 of the RBI circular no. RBI/2021-22/17DOR. STR.REC.4/21.04.048/2021-22 dated 7 th April, 2021 issued in this connection, the financial services business has continued with the asset classification of borrower accounts as per the extant RBI instructions/IRAC norms and as per ECL model under Ind AS financial statements for the quarter and year ended 31 st March, 2021. In accordance with the instructions in aforementioned RBI circular dated 7 th April, 2021, and the Indian Banks’ Association (‘IBA’) advisory letter dated 19 th April, 2021, the financial services business has put in place a Board approved policy to refund/ adjust the ‘interest on interest’ charged to borrowers during the moratorium period. i.e. 1 st March, 2020 to 31 st August, 2020. The financial services business has estimated the said amount and made a provision in the financial statements for the year ended 31 st March, 2021. Assumptions considered in the ECL model The financial services business has made the following assumptions in the ECL Model: — “Loss given default” (LGD) is common for all three stages and is based on loss in past portfolio. Actual cashflows are discounted with average rate for arriving loss rate. Effective interest rate (EIR) has been taken as discount rate for all retail loans. — “Probability of default” (PD) is applied on Stage 1 and Stage 2 on portfolio basis and for Stage 3 PD is 100%. This is calculated as an average of the last 60 months yearly average. Estimation Technique The financial services business has applied the following estimation technique in its ECL model: — “Probability of Default” (PD) is applied on Stage 1 and Stage 2 on portfolio basis and for Stage 3 PD at 100%. This is calculated as an average of the last 60 months yearly movement of default rates and future adjustment for macro economic factor. — Loss given default is calculated based on discounted actual cash flow on past portfolio in default along with reversals. While the methodologies and assumptions applied in the impairment loss allowance calculations remained unchanged from those applied while preparing the financial statements for the year ended March 2020, estimates, assumptions and judgements specific to the impact of the COVID-19 pandemic and the associated support packages have been incorporated in the measurement of impairment loss allowance and recognised an overlay in the consolidated statement of profit and loss. The impairment loss allowance estimates are inherently uncertain and, as a result, actual results may differ from these estimates. Forward Looking Information In calculating the expected credit loss rates, the financial services business considers historical loss rates on portfolio over a period which covers most external factors like drought, government and policy changes etc and these historical PDs are converted into forward looking PDs considering the agricultural and GDP growth estimates. Assessment of significant increase in credit risk When determining whether the risk of default has increased significantly since initial recognition, the financial services business considers both quantitative and qualitative information and analysis based on the business’s historical experience, including forward- looking information. The financial services business considers reasonable and supportable information that is relevant and available without undue cost and effort. The financial services business’s accounting policy is not to use the practical expedient that the financial assets with ‘low’ credit risk at the reporting date are deemed not to have had a significant increase in credit risk. As a result the financial services business monitors all financial assets and loan commitments that are subject to impairment for significant increase in credit risk. 33. Financial Instruments (contd.) (c) Credit risk related to financial services business (contd.)