MAHINDRA & MAHINDRA LTD. | Integrated Annual Report 2022-23

365 COMPANY OVERVIEW BOARD’S REPORT MANAGEMENT DISCUSSION AND ANALYSIS CORPORATE GOVERNANCE BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORT STANDALONE ACCOUNTS CONSOLIDATED ACCOUNTS Inputs considered in the ECL model In assessing the impairment of loans assets under Expected Credit Loss (ECL) Model, the loan assets have been segmented into three stages. The three stages reflect the general pattern of credit deterioration of a financial instrument. The differences in accounting between stages, relate to the recognition of expected credit losses and the calculation and presentation of interest revenue. The financial services business categorises loan assets into stages based on the days past due status: — Stage 1: 0-30 days past due — Stage 2: 31-90 days past due — Stage 3: More than 90 days RBI COVID-19 Resolution Framework During the year ended 31 st March, 2021 and year ended 31 st March, 2022, the financial services business had implemented resolution plans in order to provide relief to borrowers adversely impacted due to onslaught of multiple waves /variants of COVID-19 Pandemic under the resolution framework 1.0 vide circular no. RBI/2020-21/16 DOR.No. BP.BC/3/21.04.048/2020-21 dated 6 th August, 2020 for personal loan customers and resolution framework 2.0 vide circular No. RBI/2021-22/32 DOR.STR.REC.12/21.04.048/2021-22 dated 5 th May, 2021. The loan modifications executed under both these schemes have not been classified as renegotiated as they are as a result of market-wide customer relief programme and not borrower-specific. The financial services business continues to monitor the recoverability of loans granted in accordance with these circulars and is continue to carry adequate provisioning based on the repayment behaviour on these loan accounts. Since the COVID-19 pandemic has been brought under control through development of vaccines, announcement of various health improvement and relief measures by respective Govt. authorities, and economies have returned to normalcy, the Group had witnessed significant improvement in business/financial performance over the period during second half of previous year as well as current year. Impact of COVID-19 The outbreak of COVID-19 led to nationwide lockdown from March 2020, which gradually phased out over the next few months basis the local level spread of the pandemic. The nation was impacted by the second wave of the pandemic in the first half of the fiscal year 2022 which again slowed down the economic activities to a limited extent. Despite the successful roll out of vaccines around the world, a varying degree of uncertainty remained through out the year ended 31 st March, 2022. This was caused by new variants of COVID-19, varying vaccine effectiveness and the need for reimposing of government - imposed restrictions. This uncertainty is reflected in the financial services business assessment of impairment loss allowance on its loans which are subject to a number of management judgements and estimates. In relation to COVID-19, judgements and assumptions include the extent and duration of the pandemic, the changes in the macro economic outlook and its associated impact on the impairment calculations. 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 cash flows are discounted at loan EIR rate for arriving loss rate. – “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. 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 such as agriculture and change in GDP are considered most relevant in determining the PD. The Group assigns probability to these factors in order to determine the impact of such factors on PD. – Loss given default is calculated based on discounted actual cash flow on past portfolio in default along with reversals. The methodologies and assumptions applied in the impairment loss allowance calculations have primarily remained unchanged from those applied while preparing the financial statements for the year ended 31 st March, 2022. The financial services business has been updating the ECL model with the latest set of data on reasonable periodic intervals for the year ended 31 st March, 2023, to capture the significant changes in economic and market drivers and changes in risk profile of customer credit exposures. Output of ECL model refresh is also factored in computation of provisions. 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. 36. Financial Instruments (contd.) (b) Credit Risk Management (contd.)