Integrated Annual Report 2025-26 380 Impairment of loans and advances to customers in financial services business See Note 2(e)(v) to consolidated financial statements The key audit matter How the matter was addressed in our audit As at March 31, 2026, the carrying value of loan assets in financial service business aggregating Rs 143,403 crores, against which an impairment loss of Rs 4,140 crores has been recorded. This mainly includes the loan given by Mahindra & Mahindra Financial Services Limited and its subsidiary, (‘MMFSL Group’ or ‘Component’). The Component recognized impairment provision for loan assets based on the Expected Credit Loss (“ECL”) approach laid down under ‘Ind AS 109 - Financial Instruments’. The estimation of ECL on financial instruments involves significant management judgement and estimates and the use of different modelling techniques and assumptions which could have a material impact on reported profits. Significant management judgement and assumptions involved in measuring ECL is required with respect to: • ensuring completeness and accuracy of the data used to create assumptions in the model. • determining the criteria for a significant increase in credit risk. • factoring in future economic assumptions techniques used to determine probability of default, loss given default and exposure at default. Factoring in forward looking scenario-based assessment of evolving domestic macroeconomic factors and regulatory, geopolitical developments impacting industry and specific segments. These parameters are derived from the Component’s internally developed statistical models and other historical data. The disclosure regarding Component’s application of Ind AS 109 are key to explaining the key judgements and material inputs to the ECL results. Considering the significance of the above matter to the overall financial statements and extent of management’s estimates and judgements involved, it required significant attention. Accordingly, the component joint auditors of the financial services business have identified this as a key audit matter. The audit procedures applied by the component joint auditors included assessing appropriateness of component management’s judgement and estimates used in the impairment analysis through procedures that included, but were not limited to, the following: • Obtained an understanding of the modelling techniques adopted by the Component including the key inputs and assumptions; • Considered the accounting policies for estimation of Expected Credit Loss on loans and assessing compliance with the policies in terms of Ind AS 109; • Obtained an understanding of the management’s updated processes, systems and controls implemented in relation to impairment allowance process. • Accuracy of the computation of the ECL estimate including reasonableness of the methodology and assumption used to determine macro-economic overlays; • Tested the design and operating effectiveness of key controls over completeness and accuracy of the key inputs and assumptions considered for calculation, recording, monitoring of the impairment loss recognized and staging of assets; • Assessed the critical assumptions and input data used in the estimation of Expected Credit Loss models for specific key credit risk parameters, such as the movement logic between stages, Exposure at default (EAD), probability of default (PD) or loss given default (LGD); • Evaluated the reports and working for the methodology used in the computation of Through The Cycle PD, Point In Time PD and LGD, among others; • Performed test of details over calculation of ECL, in relation to the completeness and accuracy of the data; • Component joint auditors obtained written representations from component management and those charged with governance on whether they believe significant assumptions used in calculation of expected credit losses are reasonable; and • Assessed the appropriateness and adequacy of the related presentation and disclosures of “Financial Risk Management” disclosed in financial statements in accordance with the applicable accounting standards.
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