Query No. 13

Subject:

Segment reporting by a finance company. ¹

A. Facts of the Case

1. A public sector undertaking is registered under the Companies Act, 1956. The Government has also recognised it as a public financial institution under section 4A of the Companies Act, 1956.

2. The main operational activity of the company is financing of housing and infrastructure projects. The other activities include construction, consultancy, conducting management development programmes, etc., which revolve around the main activity of financing. A break-up of the activity-wise revenue is as under:

 

* Includes income of Rs. 374.74 crore from loan under retail finance scheme, i.e., Rs. 328.75 crore on account of bulk loans and Rs. 45.99 crore on account of direct loan to individuals.

3. The querist has informed that the financing activity, i.e., housing and infrastructure financing business, is shown as a single segment since the rates of interest at which loans are advanced, the securities taken against the loans and the recovery mechanism are absolutely the same for both the businesses. Also, the rate of interest as well as the security aspect of both types of projects are regulated through ‘Financing Pattern’ (a copy of which has been provided by the querist for the perusal of the Committee) which is approved by the company’s board of directors. Further, the loan agreement with the borrowing agencies is common for housing as well as infrastructure projects. The securities demanded for various projects are taken based on the common circular, according to which, there is a basket of securities from which available security is picked up. Thus, the types of security accepted are also same for both the types of projects. Moreover, in most of the cases, as per the querist, the loans are advanced to a single agency both for housing and infrastructure purposes. In this context, the querist has informed that the total loan outstanding in respect of loans advanced by the company as on 31.3.2005 was Rs. 21,583.90 crore (provisional). The loan outstanding in respect of the same agencies in housing as well as infrastructure loans is Rs. 7,263.11 crore.

4. The querist has stated that as per Accounting Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of Chartered Accountants of India, “a business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining whether products or services are related include:

      (a) the nature of the products or services;

      (b) the nature of the production processes;

      (c) the type and class of customers for the products or services;

      (d) the methods used to distribute the products or provide the services; and

      (e) if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.”

According to the querist, since the risks and returns in housing and infrastructure businesses are considered the same, no separate segments are required to be recognised for the purposes of AS 17.

5. In view of the above, a disclosure in the notes forming part of accounts is given by the company which is as under:

“The main business of the company is to provide finance for housing/infrastructure projects. All other activities of the company revolve around the main business and, therefore, there are no separate reportable segments as per AS 17”.

6. The querist has further mentioned that during the course of audit of accounts for the year 2003-2004 by the Comptroller and Auditor General of India (C&AG), a query was raised that since the company has classified its business into ‘housing’ and ‘non- housing business’ as required under NHB directions, the housing loans and infrastructure project loans should be reported as separate segments as per the requirements of AS 17, since the revenue generation from these activities are 41.21% and 46.40%, respectively of the total revenue of the company.

7. In this connection, the querist has further clarified that the company’s main business is long term financing for housing and urban infrastructure projects and is not undertaking housing and infrastructure activities as such. Therefore, the company’s main product/activity is long term financing – housing and infrastructure are the areas for which finances are provided.

8. The querist has also furnished the following information relating to the risk profile of financing of housing and infrastructure activities:

(i) (a) The profile of borrowers for housing loans includes various State Government agencies, e.g. Housing Boards, Rural     Housing Boards, Development Authorities, City Improvement Trusts, Municipal Corporations, Public Sector Undertakings, State Government Undertakings, NGOs, Co-operative Societies, viz., Primary Level Cooperative Housing Societies and State Level Apex Cooperative Housing Societies and Private Builders, Developers, Corporate Sector Agencies. Besides this, the company also provides loans to individuals under its retail finance scheme.

 

 (b) The profile of borrowers for infrastructure loans includes State Level Financing Institutions/ Corporations, Water Supply & Sewerage Boards, Development Authorities, State Functional Agencies for Housing and Urban Development, New Town Development Agencies, Regional Planning Boards, Improvement Trusts, Municipal Corporations/ Councils, Joint Sector Companies, Cooperative Societies/Trusts, NGOs, Private Companies/ Agencies including BOT Operators, Concessionaires.

 

 (c) The profile of borrowers under the Niwas scheme of the company includes individuals and State Government bodies/HFCs for lending to individuals for housing purpose.

 (ii)  As per the guidelines of the company, any agency which is undertaking housing and urban development programme in the country can avail finance from the company both for housing as well as urban infrastructure schemes. Further, the housing and urban infrastructure schemes are supplementary to each other and most of the state borrowers undertake complete activity/ development, which includes housing as well as urban infrastructure programmes.

 (iii) Housing and infrastructure loans are provided after appraising the project with respect to two aspects, viz., (i) scheme based appraisal, and (ii) agency based appraisal. Under the scheme based appraisal, the project submitted by the agency is evaluated from legal, technical and financial point of view, keeping in view the objective of each scheme and the respective guidelines. The agency based appraisal focuses on (i) the agency’s financial soundness, (ii) the organisational strength of the agency, and (iii) the track record of the agency in terms of execution and delivery of similar products in the past. Accordingly, risk profile of common borrowers of the housing loans and infrastructure loans is same. Further, the process of providing loans, extent of financing for housing and infrastructure loans, etc., is the same as stated above.

(iv) The borrowing agencies for housing loan are involved in various types of activities depending upon their constitution, regulatory framework, e.g., housing board for development of land, providing developed plots and housing, etc.

 (v) The borrowing agencies for infrastructure loans are involved in various housing and urban development activities depending on their constitution, Memorandum and Articles of Association, etc.

9. According to the querist, being a housing finance company, it is regulated by the National Housing Bank (NHB). Sub-paragraph (2) of paragraph 25 of the Housing Finance Companies (NHB) Directions, 2001 requires that the principal provisions made shall be distinctly indicated under separate heads of accounts separately for ‘housing’ and ‘non-housing finance business’ and individually for each type of assets as under:

  (a) Provisions for sub-standard, doubtful and loss assets; and

  (b) Provisions for depreciation in investments.

10. The querist has informed that since the above disclosure in the balance sheet is required to be given by every housing finance company (HFC), the principal outstanding and provision as on the date of the balance sheet for housing business and non-housing business were classified under standard, sub-standard, doubtful and loss assets in the notes to accounts (note no. 27 of annual accounts for 2003-2004).

11. Regarding the internal reporting system prevalent in the company, the querist has informed that the reporting of performance of housing and infrastructure business is done through MIS Report (a copy of which has been provided by the querist for the perusal of the Committee) which comprises data on releases, sanctions, schemes in pipelines and progress of the schemes for regional offices and all India level. This report is forwarded to the Ministry and is also used for replying to parliament questions and queries, etc. from the Ministry. It is further clarified by the querist that although the performance of housing and infrastructure activities alongwith their sub-heads is intimated to board of directors separately, yet its purpose is to achieve better internal control and effective monitoring and not for arriving at the profit/loss from both types of activities. The querist has also stated that there is only one department which is looking after entire sanctions of all types of schemes, i.e., housing, urban infrastructure, commercial, Ministry grant related schemes, etc. Similarly, there is only one department which is responsible for all issues relating to releases and post releases, i.e., recoveries, default, monitoring of defaults, etc. Similarly, delegation of powers does not specify any different criteria pertaining to housing, urban infrastructure or any other type of schemes.

12. As regards making decisions about future allocations of resources, the querist has stated that the resource progamme is placed before the board for its approval for the full year in the beginning of the financial year and there is no bifurcation between resource generation for different types of schemes, i.e., housing, urban infrastructure, etc. and the resources are raised subsequently by considering overall fund requirement for all types of schemes.

13. The querist has also informed that the NHB norms dealing with the provisions for Non-Performing Assets (NPA) etc., are the same for housing and infrastructure loans. The main business of the company is to make available finances for housing as well as for infrastructure projects. Maintenance of account books/various records and calculation of profit and loss account of the company is made in a consolidated manner irrespective of the type of schemes.

B. Query

14. The opinion of the Expert Advisory Committee has been sought on the issue as to whether financing for housing and infrastructure activities are to be shown as separate business segments as observed by C&AG for the purposes of AS 17, ignoring the fact that risks and returns for financing, i.e., interest rate, security, agency, treatment of the defaults with reference to provisioning norms of NHB guidelines are the same for both the products.

C. Points considered by the Committee

15. The Committee restricts its opinion to the issue raised by the querist in paragraph 14 above, viz., whether financing for housing and infrastructure activities should be shown as separate business segments. Accordingly, the Committee has not addressed any other issue that may arise from the Facts of the Case, e.g., whether there can be business segments other than the housing loans and infrastructure loans activities.

16. The Committee notes the definition of the term ‘business segment’ reproduced in paragraph 4 above and paragraphs 11, 12 and 24 of AS 17 as below:

“11. Determining the composition of a business or geographical segment involves a certain amount of judgement. In making that judgement, enterprise management takes into account the objective of reporting financial information by segment as set forth in this Statement and the qualitative characteristics of financial statements as identified in the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India. The qualitative characteristics include the relevance, reliability, and comparability over time of financial information that is reported about the different groups of products and services of an enterprise and about its operations in particular geographical areas, and the usefulness of that information for assessing the risks and returns of the enterprise as a whole.

  12. The predominant sources of risks affect how most enterprises are organised and managed. Therefore, the organisational structure of an enterprise and its internal financial reporting system are normally the basis for identifying its segments.”

“24. Business and geographical segments of an enterprise for external reporting purposes should be those organisational units for which information is reported to the board of directors and to the chief executive officer for the purpose of evaluating the unit’s performance and for making decisions about future allocations of resources…”

17. On the basis of the above, the Committee is of the view that identification of a business segment involves consideration as to whether different components of an enterprise meet the definition of the term ‘business segment’ as reproduced in paragraph 4 above. Further, the factors specified in the definition, which need to be considered in determining whether product or services are related involves a certain amount of judgement. In the present case, in making the judgement with regard to the factors stated in the definition, apart from the information which is stated in the Facts of the Case, the management may have to consider other relevant factors since the list of the said factors is inclusive and not exhaustive. On the basis of the information which is furnished by the querist, the Committee notes as below:

 (i) The returns from the housing loans and infrastructure loans are the same except in case of certain housing loans such as EWS housing projects and LIG housing projects in respect of which interest rates are different from the other housing loans and the infrastructure loans. In other words, the returns are different in a few cases even within the housing loans component.

 (ii) The risk profile of the common borrowers of the housing loans and infrastructure loans is the same. The Committee, however, notes that only about 30% of the borrowers were common (paragraph 3 of the Facts of the Case) in the year ending 31.3.2005.

(iii) While the internal reporting system within the organisation reports the performance of housing and infrastructure activities to the board of directors separately, as per paragraph 12 of the Facts of the Case, there is no bifurcation between housing loans and infrastructure loans for making decisions about the future allocation of resources.

(iv) The organisation structure of the company also does not appear to differentiate between the housing loans and infrastructure loans as it is stated in paragraph 11 of the Facts of the Case that there is only one department which is responsible for various issues of releases and recoveries of both housing and infrastructure loans.

18. On the basis of the above observations based on the facts furnished by the querist, the Committee feels that the risks and returns from housing loans do not appear to be different from the risks and returns pertaining to infrastructure loans, even though for prudential norms purposes, the management has to make separate disclosures for housing loans and infrastructure loans. Further, the internal reporting system and organisation structure of the company is not structured in a manner that the management makes various resource allocation decisions between housing loans and infrastructure loans based on their respective performance.

D. Opinion

19. On the basis of the above, the opinion of the Committee on the issue raised by the querist in paragraph 14 above is that on the basis of the facts, the financing of housing and infrastructure activities need not be shown as separate business segments for the purposes of AS 17.

¹ Opinion finalised by the Committee on 15.5.2006