1.1 Corporate information

DFCC Bank PLC (“Bank”) is a limited liability public company incorporated and domiciled in Sri Lanka.

The Bank was incorporated in 1955 under DFCC Bank Act No. 35 of 1955 as a limited liability public company. The ordinary shares of the Bank were listed in the Colombo Stock Exchange (CSE).

Consequent to the enactment of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, the DFCC Bank Act No. 35 of 1955 was repealed and the Bank was incorporated under the Companies Act No. 07 of 2007 as a public limited company listed in the Colombo Stock Exchange with the name “DFCC Bank PLC” with effect from
6 January 2015.

DFCC Bank PLC (DFCC) also obtained a commercial banking license from the Monetary Board of the Central Bank of Sri Lanka in terms of the Banking Act No. 30 of 1988, as amended, and accordingly upon the amalgamation now operates as a licensed commercial bank.

The registered office of the Bank is at 73/5, Galle Road, Colombo 3.

Total staff strength of the Bank and the Group on 31 December 2021 was as follow:

Group	2,308 (31 December 2020 – 2,182)
Bank	2,191 (31 December 2020 – 2,072)

1.2 Consolidated Financial Statements

DFCC Bank PLC as the parent of subsidiaries under its control is required to present only the consolidated financial statements as per Sri Lanka Accounting Standard – SLFRS 10 on “Consolidated Financial Statements” and the proportionate share of the profit or loss and net assets of its Associates and joint Ventures in terms of the Sri Lanka Accounting Standard –
LKAS 28 on “Investments in Associates and Joint Ventures”. In addition to the consolidated financial statements, separate financial statements are also presented as per the Companies Act No. 07 of 2007 and Banking Act No. 30 of 1988 and amendments thereto.

The Bank’s financial statements comprise the amalgamation of the financial statements of the Domestic Banking Unit (DBU) and the Foreign Currency Banking Unit (FCBU).

1.3 Parent entity and ultimate parent entity

The Bank does not have an identifiable parent of its own. The Bank is the ultimate parent of the Group companies.

1.4 Principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries, associate and joint venture.

A summary of principal activities of DFCC Bank PLC, its subsidiary companies, associate company and joint venture company is as follows:

Entity	Principal business activity
DFCC Bank PLC	Range of financial services such as accepting deposits, corporate credit and retail banking, personal financial services, project financing, investment banking, foreign currency operations, trade finance and dealing in Government Securities and Treasury-related products.
Subsidiaries
DFCC Consulting (Pvt) Limited	Technical, financial, and other professional consultancy services in Sri Lanka and abroad.
Lanka Industrial Estates Limited	Leasing of land and buildings to industrial enterprises.
Synapsys Limited	Information technology services and information technology enabled services.
Associate
National Asset Management Limited	Management of Unit Trust and private portfolios.
Joint venture
Acuity Partners (Pvt) Limited	Investment banking-related financial services.

There were no significant changes in the nature of the principal activities of the Group during the financial year under review.

1.5 Approval of financial statements

The financial statements for the year ended 31 December 2021 were authorised for issue by the Directors on 17 February 2022.

1.6 Responsibility for financial statements

The responsibility of the Board of Directors in relation to the financial statements is set out in the Statement of Directors’ Responsibility report in the Annual Report.

2.1 Statement of compliance

The consolidated financial statements of the Group and the separate financial statements of the Bank, which comprise the Statement of Financial Position, Income Statement, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and Notes thereto, have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) laid down by
The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in compliance with the requirements of the Companies Act No. 07 of 2007 and the Banking Act No. 30 of 1988 and amendments thereto, and provide appropriate disclosures as required by the Listing Rules of the Colombo Stock Exchange (CSE).

These financial statements, except for information on cash flows have been prepared following the accrual basis of accounting.

Details of the Group's significant accounting policies followed during the year are given on Note 5 on pages 182 to 188.

These financial statements include the following components:

• an Income Statement and Statement of Profit or Loss and Other Comprehensive Income providing information on the financial performance of the Group and the Bank for the year under review; (Refer pages 170 and 171).
• a Statement of Financial Position providing information on the financial position of the Group and Bank as at the year end; (Refer page 172).
• a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and Bank; (Refer pages 174 and 175).
• a Statement of Cash Flows providing information to the users, on the ability of the Group and Bank to generate cash and cash equivalents and the needs of the entity to utilise those cash flows; (Refer pages 176 and 178).
• Notes to the financial statements comprising accounting policies and other explanatory information. (Refer pages
  179 to 309)

The format used in the preparation and presentation of the financial statement and the disclosures made therein also comply with the specified formats prescribed by the Central Bank of Sri Lanka in the Circular No. 2 of 2019 on "Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks".

2.2 Basis of measurement

These financial statements have been prepared on the historical cost convention except for the following material items, which are measured on an alternative basis on each reporting date:

Financial instruments

Item	Basis of measurement	Note	Page
Financial assets measured at fair value through profit or loss	Fair value	30	251
Derivative financial assets and derivative financial liabilities	Fair value	29	247
Financial assets measured at fair value through other comprehensive income	Fair value	34	261

Non-financial assets/liabilities

Item	Basis of measurement	Note	Page
Employee retirement benefits	Present value of the defined benefit pension obligation less the net total of the pension assets maintained in DFCC Bank Pension Fund, a trust separate from the Bank.	48	288
	Present value of the defined benefit gratuity obligation.	48	288

No adjustments have been made for inflationary factors affecting the financial statements.

2.3 Materiality and aggregation

Each item which is similar in nature is presented separately if material. Items of dissimilar nature or function are presented separately unless they are immaterial as permitted by the
Sri Lanka Accounting Standard – LKAS 1 on "Presentation of financial statements".

2.4 Going concern

The Directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on a going concern basis.

2.5 Comparative information

Comparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s financial statements and to enhance the inter period comparability.

The presentation and classification of the financial statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year.

These consolidated financial statements are presented in Sri Lankan Rupees, which is the Bank's functional currency. All amounts have been rounded to the nearest thousand, except when otherwise indicated. There was no change in the Group's presentation and functional currency during the year under review.

In preparing these financial statements, management has made judgements, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

Coronavirus (COVID-19) pandemic

The COVID-19 pandemic and its effect on the global economy have impacted the customers, operations and Group performance. The outbreak necessitated the government to respond at unprecedented levels to protect the health of the population, local economy and livelihoods. Thus the pandemic has significantly increased the estimation uncertainty in the preparation of these financial statements including, the extent and duration of the disruption to businesses, expected economic downturn, and subsequent recovery.

The significant accounting estimates impacted by these forecasts and associated uncertainties are predominantly related to expected credit losses, fair value measurement, and the assessment of the recoverable amount of non-financial assets. The impact of the COVID-19 pandemic on each of these estimates is discussed further in the relevant notes of these financial statements. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

4.1 Judgements

Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the financial statements are included in the following Notes:

Item	Note	Page
Establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining methodology for incorporating forward-looking information into measurement of Expected Credit Loss (ECL) and selection and approval models used to measure ECL.	17	229
Classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial assets are Solely Payment of Principal and Interest (SPPI) on the principal amount outstanding.	5.3.2	184
Determination of control over investees.	36, 37	268, 270

4.2 Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments to the carrying amounts of assets and liabilities is included in the following Notes:

Item	Note	Page
Impairment of financial instruments: determining inputs into the ECL measurement model, including incorporation of forward looking information and key assumptions used in estimating recoverable cash flows.	17, 32	229, 253
Determination of the fair value of financial instruments with significant unobservable inputs.	9.3.1	215
Measurement of defined benefit obligations: key actuarial assumptions.	48.2.2	291
Recognition of deferred tax assets: availability of future taxable profit against which carry-forward tax losses can be utilised.	41	281
Impairment testing for Cash Generating Units (CGU) containing goodwill: key assumptions underlying recoverable amounts.	5.4	187
Recognition and measurement of contingencies: key assumptions about the likelihood and magnitude of an outflow of resources.	57	299
Fair values of the assets held for sale: Determination of fair value less costs to sell on the basis of significant unobservable inputs.	43	283

The significant accounting policies set out below have been applied consistently to all periods presented in the financial statements of the Group.

These accounting policies have been applied consistently by Group entitles.

Set out below is an index of the significant accounting polices:

		Note	Page
A.	Basis of consolidation	5.1	183
B.	Foreign currency	5.2	184
C.	Interest	11	222
D.	Fee and commission	12	225
E.	Net trading income	13	226
F.	Net income from other financial instruments at fair value through profit or loss	14	227
G.	Dividend income	16	228
H.	Leases	59	305
I.	Income tax	22	239
J.	Financial assets and financial liabilities	5.3	184
	– Recognition and initial measurement	5.3.1	184
	– Classification	5.3.2	184
	– Derecognition	5.3.4	185
	– Modification of financial assets and financial liabilities	5.3.5	186
	– Offsetting	5.3.6	187
	– Fair value measurement	5.3.7	187
	– Impairment	5.3.8	187
	– Designation at fair value through profit or loss	5.3.9	187
K.	Cash and cash equivalents	26	246
L.	Trading assets and liabilities	30	251
M.	Derivatives held for risk management purposes and hedge accounting	29	247
N.	Loans and advances	31, 32	252, 255
O.	Investment securities	30, 33, 34	251, 260
P.	Property, plant and equipment	39	274, 261
Q.	Investment property	38	273
R.	Intangible assets and goodwill	40	278
S.	Impairment of non-financial assets	5.4	187
T.	Deposits, debt securities in issue and subordinated liabilities
U.	Provisions	50	293
V.	Financial guarantees and loan commitments	57	299
W.	Employee retirement benefits	48	288
X.	Share capital, other equity and reserves	52	296
Y.	Earnings per share	23	242
Z.	Segment reporting	60	307

5.1 Basis of consolidation

5.1.1 Business combinations

The Group accounts for business combinations using the acquisition method when the acquired set of activities and assets meets the definition of a business and control is transferred to the Group.

From 1 January 2020, in determining whether a particular set of activities and assets is a business, the Group assesses whether the set of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability to produce outputs. The Group has an option to apply a “concentration test” that permits a simplified assessment of whether an acquired set of activities and assets is not a business. The optional concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in income statement.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in Income Statement.

5.1.2 Subsidiaries

Details of the Bank's subsidiaries, how they are accounted in the financial statements and their contingencies are set out in Note 35 on pages 267 to 268.

5.1.3 Non-controlling interests (NCI)

Details of non-controlling interests are given in Note 56 on page 298.

5.1.4 Loss of control

When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

5.1.5 Interests in equity-accounted investees

The Group's interests in equity-accounted investees comprise interests in associates and a joint venture.

Details of the Bank's equity-accounted investees, how they are accounted in the financial statements and their contingencies are set out in Note 36 and 37 on pages 268 to 270.

5.1.6 Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated.

Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

5.1.7 Financial statements of subsidiaries, associate company, and joint venture company included in the consolidated financial statements

The financial statements of DFCC Consulting (Pvt) Limited, Acuity Partners (Pvt) Limited, Synapsys Limited and National Asset Management Limited included in the consolidation have financial years ending on 31 December.

Financial statements of Lanka Industrial Estates Limited included in the consolidation has financial year ending on 31 March.

Audited financial statements are used for consolidation of companies which have a similar financial year end, as the Bank and for other a special review is performed.

5.2 Foreign currency

5.2.1 Foreign currency transactions

Transactions in foreign currencies are translated into the respective functional currencies of Group companies at the exchange rates at the date of the transactions.

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest, impairment and payments during the year, and the amortised cost in the
foreign currency translated at the spot exchange rate at the end of the year.

Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction.

Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of the following items are recognised in OCI:

• equity investments in respect of which an election has been made to present subsequent changes in fair value in OCI;
• a financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and
• qualifying cash flow hedges to the extent that the hedges are effective

5.2.2 Foreign operations

The Bank does not have any foreign operations that is a subsidiary, associate, joint venture or a branch. Therefore, there is no exchange differences recognised in other comprehensive income.

5.3 Financial assets and financial liabilities

5.3.1 Recognition and initial measurement

The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument.

A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. The fair value of a financial instrument at initial recognition is generally its transaction price.

5.3.2 Classification

5.3.2.1 Financial assets

On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL.

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

• the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
• the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL:

• the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
• the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis.

All other financial assets are classified as measured at FVTPL.

In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

5.3.2.1.1 Business model assessment

The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

• the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether Management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;
• how the performance of the portfolio is evaluated and reported to the Group’s Management;
• the risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed;
• how managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and
• the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group’s stated objective for managing the financial assets is achieved and how cash flows are realised.

The Group’s retail, small and medium enterprises and corporate banking business comprises primarily loans to customers that are held for collecting contractual cash flows. In the retail business the loans comprise mortgages, overdrafts, unsecured personal lending and credit card facilities. Sales of loans from these portfolios are very rare.

Certain debt securities are held by the Group Central Treasury in a separate portfolio for long-term yield. These securities may be sold, but such sales are not expected to be more than infrequent. The group considers that these securities are held within a business model whose objective is to hold assets to collect the contractual cash flows.

Certain other debt securities are held by the Group Central Treasury in separate portfolios to meet everyday liquidity needs. The Group Central Treasury seeks to minimise the costs of managing these liquidity needs and therefore actively manages the return on the portfolio. That return consists of collecting contractual cash flows as well as gains and losses from the sale of financial assets. The investment strategy often results in sales activity that is significant in value. The Group considers that these financial assets are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

5.3.2.1.2 Assessment of whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, “principal” is defined as the fair value of the financial asset on initial recognition. “Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers:

• contingent events that would change the amount and timing of cash flows;
• leverage features;
• prepayment and extension terms;
• terms that limit the Group’s claim to cash flows from specified assets; and
• features that modify consideration of the time value of money.

Equity instruments have contractual cash flows that do not meet the SPPI criterion. Accordingly, all such financial assets are measured at FVTPL unless the FVOCI option is selected.

5.3.2.2 Financial liabilities

On initial recognition, the Bank classifies financial liabilities, other than financial guarantees and loan commitments, into one of the following categories:

• Financial liabilities at amortised cost; and
• Financial liabilities at fair value through profit or loss

5.3.2.2.1 Financial liabilities at amortised cost

Financial Liabilities issued by the Bank that are not designated at fair value through profit or loss are recognised initially at fair value plus any directly attributable transaction costs, by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Deposit liabilities including savings deposits, current deposits, fixed/time deposits, call deposits, certificates of deposit and debentures are classified as financial liabilities measured at amortised cost.

The EIR amortisation is included in “Interest expense” in the income statement. Gains and losses too are recognised in the income statement when the liabilities are derecognised as well as through the EIR amortisation process.

5.3.2.2.2 Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include derivative liabilities held for risk management purposes.

5.3.3 Reclassifications

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. Financial Liabilities are not reclassified as such reclassification are not permitted by SLFRS 9.

5.3.4 Derecognition

5.3.4.1 Financial assets

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss
on derecognition of such securities.

Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability.

5.3.4.2 Financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

5.3.5 Modifications of financial assets and financial liabilities

5.3.5.1 Financial assets

If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different.

If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. Any fees received as part of the modification are accounted for as follows:

• fees that are considered in determining the fair value of the new asset and fees that represent reimbursement of eligible transaction costs are included in the initial measurement of the asset; and
• other fees are included in profit or loss as part of the gain or loss on derecognition.

If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases.

If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. For floating-rate financial assets, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs or fees incurred and modification fees received adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset.

If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest
rate method.

5.3.5.2 Financial liabilities

The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability.

If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss is recognised in profit or loss. For floating-rate financial liabilities, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs and fees incurred are recognised as an adjustment to the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument.

5.3.6 Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the SLFRS Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the significant accounting policies of the Bank/Group.

5.3.7 Fair value measurement

“Fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as “active” if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value on initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique for which any unobservable inputs are judged to be insignificant in based
on a valuation technique for which any unobservable inputs are judged to be insignificant in relation to the difference, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value on initial recognition and the transaction price.

Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market
or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for the particular risk exposure. Portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

5.3.8 Impairment

Details of impairment is given in Note 17 on page 229.

5.3.9 Designation at fair value through profit or loss

On initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI or at FVTPL, if doing so eliminated or significantly reduces an accounting mismatch that would otherwise arise.

The Bank has not designated any financial asset upon initial recognition at fair value through profit or loss as at the reporting date.

5.4 Impairment of non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

Goodwill is tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are allocated.

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Interest Rate Benchmark Reform – Phase 2 (Amendments to SLFRS 9, LKAS 39, SLFRS 7), (the phase 2 amendments) became effective on 1 January 2021. The Group has no other transactions that are affected by newly effective requirements.

A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2021 and earlier application is permitted; however, the Group has not early adopted the new and amended standards in preparing these consolidated financial statements.

7.1 A. Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)

The amendments narrow the scope of the initial recognition exemption to exclude transactions that give rise to equal and offsetting temporary differences – e.g. leases. The amendments apply for annual reporting periods beginning on or after 1 January 2023. For leases, the associated deferred tax asset and liabilities will need to be recognised from the beginning of the earliest comparative period presented, with any cumulative effect recognised as an adjustment to retained earnings or other components of equity at that date. For all other transactions, the amendments apply to transactions that occur after the beginning of the earliest period presented.

The Company and Group accounts for deferred tax on leases applying the “integrally linked” approach, resulting in a similar outcome to the amendments, except that the deferred tax impacts are presented net in the statement of financial position. Under the amendments, the Company & Group will recognise a separate deferred tax asset and a deferred tax liability. As at 31 December 2021, the taxable temporary difference in relation to the right-of-use asset is LKR 1,284 Mn. (Note 39) and the deductible temporary difference in relation to the lease liability is LKR 1,366 Mn. (Note 59), resulting in a net deferred tax asset of LKR 20 Mn. (Note 41). Under the amendments, the Company & Group will present a separate deferred tax liability of LKR 308 Mn. and a deferred tax asset of LKR 328 Mn. There will be no impact on retained earnings on adoption of the amendments.

B. Other standards

The following new and amended standards are not expected to have a significant impact on the Group’s consolidated financial statements.

• Onerous Contracts – Cost of Fulfilling a Contract (Amendments to LKAS 37).
• COVID-19-Related Rent Concessions beyond 30 June 2021 (Amendment to SLFRS 16).
• Annual Improvements to SLFRS Standards 2018-2020.
• Property, Plant and Equipment: Proceeds before Intended Use (Amendments to LKAS 16).
• Reference to Conceptual Framework (Amendments to SLFRS 3).
• Classification of Liabilities as Current or Non-current (Amendments to LKAS 1).
• SLFRS 17 Insurance Contracts and amendments to SLFRS 17 Insurance Contracts.
• Disclosure of Accounting Policies (Amendments to LKAS 1 and SLFRS Practice Statement 2).
• Definition of Accounting Estimates (Amendments to LKAS 8).

This note presents information about the Bank’s exposure to financial risks and the Bank’s management of capital.

8.1 Introduction and overview

The Bank has exposure to the following key risks from financial instruments:

• Credit risk;
• Liquidity risk;
• Market risk; and
• Operational risks

The following chart provides a link between the Bank's main business units and the principal risks that they are exposed to. The significance of risk is assessed within the context of the Bank as a whole and is measured based on allocation of the regulatory capital within the Bank.

This note presents information about the Bank’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing such risk.

Risk management framework

The Board of Directors has the overall responsibility for the establishment and oversight of the Bank’s risk management framework.

The Board Integrated Risk Management Committee (BIRMC) provides the Board, the assurance that risk management strategies, policies and processes are in place to manage events/outcomes that have the potential to impact significantly on earnings performance, reputation and capital.

Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and monitor risk and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Bank activities. The bank through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Bank Audit Committee.

	Page
A. Credit risk
8.2.1 Settlement risk	190
8.2.2 Management of credit risk	190
8.2.3 Credit quality analysis	190
8.2.4 Collateral held and other credit enhancements	192
8.2.5 Amounts arising from ECL	193
8.2.6 Concentrations of credit risk	195
8.2.7 Offsetting financial assets and financial liabilities	196
B. Liquidity risk
8.3.1 Management of liquidity risk	196
8.3.2 Exposure to liquidity risk	196
8.3.3 Maturity analysis for financial liabilities and financial assets	197
8.3.4 Liquidity reserves	201
8.3.5 Financial assets available to support future funding	202
C. Market risk
8.4.1 Management of market risk	203
8.4.2 Exposure to market risk – Trading portfolios	204
8.4.3 Exposure to market risk – Non-trading portfolios	205
8.4.4 Interest rate risk	206
8.4.5 Foreign exchange risk	208
8.4.6 Market risk exposure for regulatory capital assessment	208
D. Operational risk
8.5.1 Capital Management	209

8.2 Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Bank’s loans and advances to customers and other banks and investment in debt securities.

8.2.1 Settlement risk

The Bank's activities may give rise to risk at the time of settlement of transactions and trades. "Settlement risk" is the risk of loss due to the failure of an entity to honour its obligations to deliver cash, securities or other assets as contractually agreed.

8.2.2 Management of credit risk

The Board of Directors, BIRMC and the Credit Committee are responsible for the oversight of credit risk. Management of credit risk includes the following:

1. Formulating credit policies in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements.

2. Authority for establishing the authorisation structure for the approval and renewal of credit facilities is vested with the Board of Directors. Authorisation limits are allocated to business unit Heads. Approval by Branch Managers, Regional Managers, Head of Branch Banking, Head of Corporate Banking, Credit Committee or the Board of Directors would be required based on loan quantum and risk levels as appropriate.

3. Reviewing and assessing credit risk: Bank credit assesses all credit exposures in excess of designated limits, before facilities are committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.

4. Limiting concentrations of exposure to counterparties, industries (for loans and advances, financial guarantees and similar exposures), credit ratings and countries.

5. Developing and maintaining the Bank’s processes for measuring ECL: This includes processes for:

• initial approval, regular validation and back-testing of the models used;
• determining and monitoring significant increase in credit risk; and
• incorporation of forward-looking information.

6. Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to Bank Credit, which may require appropriate corrective action to be taken. These include reports containing estimates of Expected Credit Loss (ECL) allowances.

7. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

Each business unit is required to follow Bank credit policies and procedures, and each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval.

Regular audits of business units and Bank Credit processes are undertaken by Internal Audit.

Broader level of credit risk management approaches as described in 1 to 7 above are revised annually and strengthened as required in line with the regulatory requirements and economic environment. During the year, all relevant policies, guidelines and processes have been reviewed and updated accordingly.

8.2.3 Credit quality analysis

The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2 and 3.

Loans and advances to customers at amortised cost – gross carrying amount

As at 31 December	2021
In LKR '000	Stage 1	Stage 2	Stage 3	Total
Current	231,739,069	2,111,642	2,342,596	236,193,307
Overdue < 30 days	77,364,183	3,144,710	3,291,210	83,800,103
Overdue > 30 days	–	40,356,388	24,608,792	64,965,180
Total	309,103,252	45,612,740	30,242,598	384,958,590

As at 31 December	2020
In LKR '000	Stage1	Stage2	Stage3	Total
Current	184,609,999	8,446,879	2,200,563	195,257,441
Overdue < 30 days	66,108,438	9,292,992	2,618,816	78,020,246
Overdue > 30 days	–	24,412,315	19,542,611	43,954,926
Total	250,718,437	42,152,186	24,361,990	317,232,613

8.2.3.1 The following table shows an analysis of counterparty credit exposures arising from derivative transactions. Derivative transactions of the Bank are generally fully collateralised by cash. For further discussion of collateral and other credit enhancements:

	Derivative type
As at 31 December 2021	Forward		SWAP		Spot		Cross currency SWAP		Total
In LKR ’000	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
Derivative financial liabilities (Note 2)	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)
Note 1
Derivative financial assets by counterparty type
With banks	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
With other customers	–	–	–	–	–	–	–	–	–	–
Total	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
Note 2
Derivative financial liabilities by counterparty type
With banks	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)
With other customers	–	–	–	–	–	–	–	–	–	–
Total	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)

	Derivative Type
As at 31 December 2020	Forward		SWAP		Spot		Cross currency SWAP		Total
In LKR ’000	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	8,874,370	30,895	39,541,236	276,665	81,690	27	11,852,637	527,877	60,349,933	835,464
Derivative financial liabilities (Note 2)	8,881,730	(28,002)	39,512,159	(239,805)	81,739	(76)	–	–	48,475,628	(267,883)
Note 1
Derivative financial assets by counterparty type
With banks	6,128,972	22,862	39,541,236	276,665	81,690	27	11,852,637	527,877	57,604,535	827,431
With other customers	2,745,398	8,033	–	–	–	–	–	–	2,745,398	8,033
Total	8,874,370	30,895	39,541,236	276,665	81,690	27	11,852,637	527,877	60,349,933	835,464
Note 2
Derivative financial liabilities by counterparty type
With banks	6,125,797	(17,276)	39,512,159	(239,805)	81,739	(76)	–	–	45,719,695	(257,157)
With other customers	2,755,933	(10,726)	–	–	–	–	–	–	2,755,933	(10,726)
Total	8,881,730	(28,002)	39,512,159	(239,805)	81,739	(76)	–	–	48,475,628	(267,883)

8.2.4 Collateral held and other credit enhancements

The Bank holds collateral and other credit enhancements against certain of its credit exposures. The following table sets out the principal types of collateral held against different types of financial assets.

Type of credit exposure:

As at 31 December	2021		2020
	Gross loan balance LKR ’000	Security value LKR ’000	Gross loan balance LKR ’000	Security value LKR ’000
Stage 1
Cash collateral	13,700,373	32,428,966	13,448,486	21,939,627
Property, plant and machinery	81,148,479	283,971,161	88,492,471	234,118,285
Treasury guarantee	9,761,892	14,054,807	4,184,616	8,019,987
Others	156,675,101	25,198,860	85,911,585	12,780,184
Unsecured	32,702,116	–	39,410,513	–
Total	293,987,961	355,653,794	231,447,671	276,858,083
Stage 2
Cash collateral	2,008,907	3,077,989	1,186,142	1,453,731
Property, plant and machinery	13,269,267	46,147,047	16,774,823	36,954,269
Treasury guarantee	–	–	5,194,358	6,043,468
Others	19,935,954	3,934,887	11,042,254	43,659
Unsecured	3,305,529	–	3,489,676	–
Total	38,519,657	53,159,923	37,687,253	44,495,127
Stage 3
Cash collateral	348,981	1,076,080	181,950	235,006
Property, plant and machinery	11,458,713	29,420,878	10,015,522	14,402,036
Treasury guarantee	1,169	2,298	–	–
Others	13,570,519	37,616	6,670,291	21,594
Unsecured	3,309,990	–	6,102,588	–
Total	28,689,372	30,536,872	22,970,351	14,658,636

The above analysis does not include balances relating to lease rentals receivables, as the Bank holds the absolute
ownership of lease assets.

8.2.4.1 Derivatives, reverse sale-and-repurchase agreements and securities borrowing

The Bank mitigates the credit risk of derivatives, reverse sale-and-repurchase agreements and securities lending by entering into master netting agreements and holding collateral in the form of cash and marketable securities.

DFCC requires counterparties to sign an ISDA master agreement (International Swaps and Derivative Association) in order to enter into swaps and other derivative transactions. The agreement outlines the terms and conditions to be applied to the derivative transactions agreed by DFCC and other parties. Any Dispute of the transaction will be handled according to the agreement terms.

The Bank’s sale-and-repurchase, and reverse sale-and-repurchase, transactions and securities borrowing and lending are covered by master agreements. A master agreement has to be signed by both parties to enter such transactions. All terms and conditions are stipulated in the master agreement.

8.2.4.2 Loan to value ratio of residential mortgage lending

The following tables stratify credit exposures by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan to the value of the collateral.
The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral is based on valuations made by independent professional valuers.

	BANK/GROUP
As at 31 December	2021 LKR ’000	2020 LKR ’000
LTV ratio
Stage 1
Less than 50%	4,063,363	3,436,521
51%-70%	3,590,858	3,007,785
71%-90%	2,303,450	1,501,625
More than 90%	3,079,027	2,668,369
Total	13,036,698	10,614,300
Stage 2
Less than 50%	798,948	635,284
51%-70%	899,574	471,268
71%-90%	472,597	301,826
More than 90%	368,958	446,969
Total	2,540,077	1,855,347
Stage 3
Less than 50%	379,664	371,676
51%-70%	462,999	369,005
71%-90%	179,485	191,354
More than 90%	246,450	130,806
Total	1,268,598	1,062,841
Carrying amount – amortised cost	16,845,373	13,532,488

8.2.4.3 Assets obtained by taking possession of collateral

The Bank’s policy is to pursue timely realisation of the collateral in an orderly manner. The Bank does not generally use the non-cash collateral for its own operations.

8.2.5 Amounts arising from ECL

8.2.5.1 Loss allowance

The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instrument. The basis for determining transfers due to changes in credit risk is set out in our accounting policy; see Note 17.

Financial assets at amortised cost – Loans to and receivables from other customers – ECL

	2021				2020
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Balance as at 1 January	1,305,740	1,065,570	12,951,966	15,323,276	901,871	1,563,877	9,940,734	12,406,482
Transfer to Stage 1	458,386	(310,328)	(148,058)	–	662,248	(563,585)	(98,663)	–
Transfer to Stage 2	(154,222)	406,248	(252,026)	–	(84,923)	172,478	(87,555)	–
Transfer to Stage 3	(53,608)	(142,167)	195,775	–	(27,796)	(173,925)	201,721	–
Net remeasurement of loss allowance	(386,947)	640,505	1,120,996	1,374,554	(577,698)	(161,992)	1,788,137	1,048,447
New financial assets originated or purchased	1,033,386	329,956	1,108,204	2,471,546	432,750	232,572	1,227,042	1,892,364
Write-off*	(67)	(200)	(213,315)	(213,582)	(712)	(3,855)	(27,398)	(31,965)
Foreign exchange and other movement	–	–	102,256	102,256	–	–	7,948	7,948
Balance as at 31 December	2,202,668	1,989,584	14,865,798	19,058,050	1,305,740	1,065,570	12,951,966	15,323,276

* The contractual amount outstanding on financial assets that were written off during the year ended 31 December 2021 and that are still subject to enforcement activity is LKR 186 Mn.

Financial assets at amortised cost-debt and other instruments – ECL

	2021		2020
	Stage 1 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Total LKR ’000
Balance at beginning	271,515	271,515	82,571	82,571
Transferred from FVOCI during the year	–	–	67,231	67,231
Net remeasurement of loss allowance	291,959	291,959	121,713	121,713
Balance as at 31 December	563,474	563,474	271,515	271,515

Loan Commitments and financial guarantee contracts – ECL

	2021			2020
	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000
Balance at beginning	343,598	13,292	356,890	164,144	16,487	180,631
Net remeasurement of loss allowance	232,692	18,670	251,362	179,454	(3,195)	176,259
Balance as at 31 December	576,290	31,962	608,252	343,598	13,292	356,890

8.2.5.2 Sensitivity of ECL to future economic conditions

The ECL are sensitive to judgements and assumptions made regarding formulation of forward looking scenarios and how such scenarios are incorporated into the calculations. Management performs a sensitivity analysis on the ECL recognised on material classes of its assets.

Sensitivity of factors used to determine impairment provisions

The uncertainty of the impact of COVID-19 introduces significant estimation uncertainty in relation to the measurement of the Bank’s allowance for expected credit losses. The rapidly evolving consequences of COVID-19 and government, business and consumer responses could result in significant adjustments to the allowance in future financial years.

Given current economic uncertainties and the judgment applied to factors used in determining the expected default of borrowers in future periods, expected credit losses reported by the Bank should be considered as a best estimate within a range of possible estimates.

The table below shows the sensitivity of the impairment provision of the Bank as at 31 December 2021 to a reasonably possible change in PDs, LGDs, and forward looking information.

	Sensitivity effect on Statement of Financial Position Increase/(Decrease) in impairment provision
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	Sensitivity effect on Income Statement LKR ’000
PD 1% increase across all age buckets	1,356,631	250,295	–	1,606,926	(1,606,926)
PD 1% decrease across all age buckets*	(1,204,107)	(249,871)	–	(1,453,978)	1,453,978
LGD 5% increase	294,898	312,485	415,259	1,022,642	(1,022,642)
LGD 5% decrease	(294,898)	(312,485)	(415,259)	(1,022,642)	1,022,642
Probability weighted economic scenarios
– Worst case 5% decrease and base case 5% Increase	(10,418)	(8,223)	–	(18,641)	18,641
– Worst case 5% Increase and base case 5% decrease	10,418	8,214	–	18,632	(18,632)

* The PD decrease is capped to 0%, if applicable

8.2.6 Concentration of credit risk

The Group monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk from loans and advances, loan commitments, financial guarantees and investment securities is shown below:

In LKR ’000	Loans to and receivable from banks		Loans to and receivable from customers		Investment in debt securities		Loan commitments and financial guarantees issued
As at 31 December	2021	2020	2021	2020	2021	2020	2021	2020
Gross carrying amount	–	4,152,717	384,958,590	317,232,613	69,014,083	108,079,830	–	–
Amount committed/guaranteed	–	–	–	–	–	–	117,609,177	124,612,897
Concentration by sector
Agriculture, forestry, and fishing	–	–	40,827,861	34,483,557	–	–	7,336,743	9,554,167
Manufacturing	–	–	68,451,049	55,769,741	–	–	21,669,988	29,282,013
Tourism	–	–	16,537,932	15,990,359	–	–	3,009,414	2,612,852
Transportation and storage	–	–	9,379,401	9,108,654	–	–	991,193	643,732
Construction	–	–	37,306,964	34,175,044	–	–	13,587,240	6,700,539
Infrastructure development	–	–	40,393,111	34,465,896	–	–	19,392,260	21,722,145
Wholesale and retail trade	–	–	51,206,160	41,871,503	–	–	28,818,181	31,324,334
Information technology and communication services	–	–	2,330,228	1,712,933	–	–	1,056,371	1,294,637
Financial services	–	4,152,717	20,393,853	13,286,037	879,281	661,941	5,302,922	4,793,138
Professional, scientific, and technical activities	–	–	3,289,367	3,203,777	–	–	398,058	318,401
Arts, entertainment, and recreation	–	–	1,016,926	756,676	–	–	159,239	36,875
Education	–	–	4,392,320	3,751,677	–	–	681,853	1,631,020
Health care, social services, and support services	–	–	6,107,068	6,077,955	–	–	690,845	1,089,879
Consumption	–	–	68,626,259	50,166,517	–	–	14,313,150	13,234,405
Lending to ministry of finance	–	–	–	33,923	–	–	–	–
Lending to overseas entities	–	–	14,700,091	12,378,364	–	–	201,720	374,760
Government	–	–	–	–	68,134,802	107,417,889	–	–
Other	–	–	–	–	–	–	–	–
Total	–	4,152,717	384,958,590	317,232,613	69,014,083	108,079,830	117,609,177	124,612,897

8.2.7 Offsetting financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

8.3 Liquidity risk

“Liquidity risk” is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Bank’s operations and investments.

8.3.1 Management of liquidity risk

The Bank’s Board of Directors sets the Bank’s strategy for managing liquidity risk and oversight of the implementation is administered by Assets and Liability Management Committee (ALCO). ALCO approves the Bank’s liquidity policies and procedures. Treasury manages the Bank’s liquidity position on a day-to-day basis and reviews daily reports covering the liquidity position of both the Bank and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted to ALCO on a monthly basis or ad hoc when predefined thresholds are breached.

The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. The key elements of the Bank’s liquidity strategy are as follows:

• Monitoring maturity mismatches, behavioural characteristics of the Bank’s financial assets and financial liabilities, and the extent to which the Group’s assets are encumbered and so not available as potential collateral for obtaining funding.
• Monitoring the Bank’s liquidity through the Liquid Assets Ratio (statutory minimum is currently 20%) and Liquidity Coverage Ratios using a stock approach.
• Effecting threshold limits relevant for liquidity management as part of the overall risk limits system of the Bank.
• Carrying a portfolio of highly liquid assets, diversified by currency and maturity.

8.3.2 Exposure to liquidity risk – Regulatory liquidity (Bank)

As at 31 December	2021	2020
Statutory liquid assets (LKR ’000)	124,519,853	137,237,163
Statutory liquid assets ratio (minimum requirement 20%)
Domestic banking unit (%)	21.60	33.78
Off-shore banking unit (%)	41.79	35.45
Liquidity coverage ratio (minimum requirement 100% in 2021 and 90% in 2020)
All currencies (%)	136.18	204.44
Rupee only (%)	152.86	288.27

Details of the consolidated liquid assets ratio during the reporting period were as follows:

As at 31 December	2021 %	2020 %
Average for the period	28.48	31.98
Maximum for the period	32.23	34.99
Minimum for the period	21.12	28.27

8.3.3 Maturity analysis for financial liabilities and financial assets

The following tables set out the remaining contractual maturities of the Bank’s gross nominal (undiscounted) financial liabilities and financial assets.

As at 31 December 2021 BANK	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	3,349,836	3,349,836	1,995,803	1,354,033	–	–	–	3,349,836
Financial liabilities at amortised cost – Due to depositors	319,861,013	327,681,290	81,601,821	130,346,356	25,433,646	22,937,555	67,361,912	327,681,290
Financial liabilities at amortised cost – Due to other borrowers	69,589,129	83,745,373	11,971,958	8,898,713	16,922,493	15,393,628	30,558,581	83,745,373
Debt securities in issue	16,297,256	24,840,225	475,186	857,065	4,940,183	9,715,044	8,852,747	24,840,225
Other liabilities	4,470,497	4,470,497	2,603,484	180,183	466,470	392,836	827,524	4,470,497
Subordinated term debt	18,387,276	23,616,937	27,223	446,151	11,221,832	11,606,585	315,146	23,616,937
	431,955,007	467,704,158	98,675,475	142,082,501	58,984,624	60,045,648	107,915,910	467,704,158
Derivative liabilities
Risk management:	814,219	814,219	814,219	–	–	–	–	814,219
	814,219	814,219	814,219	–	–	–	–	814,219
Financial assets by type
Non-derivative assets
Cash and cash equivalents	10,688,255	10,688,255	10,688,255	–	–	–	–	10,688,255
Balances with Central Bank	9,359,241	9,359,241	9,359,241	–	–	–	–	9,359,241
Placements with banks	6,288,006	6,288,006	6,288,006	–	–	–	–	6,288,006
Financial assets measured at fair value through profit or loss	218,875	218,875	218,875	–	–	–	–	218,875
Financial assets at amortised cost – Loans to and receivables from other customers	365,900,540	481,668,878	61,273,808	67,029,941	93,803,084	128,363,162	131,198,883	481,668,878
Financial assets at amortised cost – Debt and other instruments	26,674,962	27,333,991	2,434,964	15,898,873	6,334,236	2,665,918		27,333,991
Financial assets measured at fair value through other comprehensive income	54,329,436	54,894,914	16,294,094	10,064,019	7,571,114	4,713,767	16,251,920	54,894,914
Other assets	2,855,254	2,855,254	2,572,622	95,529	45,210	85,755	56,138	2,855,254
	476,314,569	593,307,414	109,129,865	93,088,362	107,753,644	135,828,602	147,506,941	593,307,414
Derivative assets
Risk management:	280,235	280,235	280,235	–	–	–	–	280,235
	280,235	280,235	280,235	–	–	–	–	280,235

As at 31 December 2020 BANK	Carrying amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	14,909,937	3,631,087	3,765,692	7,513,158	–	–	14,909,937
Financial liabilities at amortised cost – Due to depositors	310,026,892	98,852,578	105,106,743	28,970,585	16,457,256	60,639,730	310,026,892
Financial liabilities at amortised cost – Due to other borrowers	46,847,076	12,641,905	10,124,287	12,393,268	3,553,834	8,133,782	46,847,076
Debt securities in issue	16,291,279	1,025,771	305,890	–	8,764,378	6,195,240	16,291,279
Other liabilities	4,783,877	2,298,859	724,698	383,163	421,465	955,692	4,783,877
Subordinated term debt	19,357,497	617,851	1,173,506	8,956,610	8,404,530	205,000	19,357,497
	412,216,558	119,068,051	121,200,816	58,216,784	37,601,463	76,129,444	412,216,558
Derivative liabilities
Risk management:	267,883	267,883	–	–	–	–	267,883
	267,883	267,883	–	–	–	–	267,883
Financial assets by type
Non-derivative assets
Cash and cash equivalents	7,724,364	7,724,364	–	–	–	–	7,724,364
Balances with Central Bank	4,901,753	4,901,753	–	–	–	–	4,901,753
Placements with banks	15,414,287	15,414,287	–	–	–	–	15,414,287
Financial assets measured at fair value through profit or loss	609,717	564,837	–	–	–	44,880	609,717
Financial assets at amortised cost – Loans to and receivables from banks	4,152,717	4,152,717	–	–	–	–	4,152,717
Financial assets at amortised cost – Loans to and receivables from other customers	301,909,337	53,502,826	35,148,436	58,850,180	57,608,042	96,799,853	301,909,337
Financial assets at amortised cost – Debt and other instruments	31,604,175	5,374,610	13,359,011	10,929,576	1,940,978	–	31,604,175
Financial assets measured at fair value through other comprehensive income	88,718,002	15,805,674	25,872,632	17,342,423	7,691,826	22,005,447	88,718,002
Other assets	1,999,405	1,921,049	13,550	11,747	31,747	21,312	1,999,405
	457,033,757	109,362,117	74,393,629	87,133,926	67,272,593	118,871,492	457,033,757
Derivative assets
Risk management:	835,464	835,464	–	–	–	–	835,464
	835,464	835,464	–	–	–	–	835,464

The following tables set out the remaining contractual maturities of the Group’s financial liabilities and financial assets.

As at 31 December 2021 GROUP	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	3,349,836	3,349,836	1,995,803	1,354,033	–	–	–	3,349,836
Financial liabilities at amortised cost – Due to depositors	319,362,372	327,182,649	81,103,180	130,346,356	25,433,646	22,937,555	67,361,912	327,182,649
Financial liabilities at amortised cost – Due to other borrowers	69,589,129	83,745,373	11,971,958	8,898,713	16,922,493	15,393,628	30,558,581	83,745,373
Debt securities in issue	16,297,256	24,840,225	475,186	857,065	4,940,183	9,715,044	8,852,747	24,840,225
Other liabilities	4,601,683	4,601,683	2,476,266	308,783	596,274	392,836	827,524	4,601,683
Subordinated term debt	18,387,276	23,616,937	27,223	446,151	11,221,832	11,606,585	315,146	23,616,937
	431,587,552	467,336,703	98,049,616	142,211,101	59,114,428	60,045,648	107,915,910	467,336,703
Derivative liabilities
Risk management:	814,219	814,219	814,219	–	–	–	–	814,219
	814,219	814,219	814,219	–	–	–	–	814,219
Financial Assets by type
Non-derivative assets
Cash and cash equivalents	10,690,873	10,690,873	10,690,873	–	–	–	–	10,690,873
Balances with Central Bank	9,359,241	9,359,241	9,359,241	–	–	–	–	9,359,241
Placements with banks	6,332,533	6,332,533	6,332,533	–	–	–	–	6,332,533
Financial assets measured at fair value through profit or loss	218,875	218,875	218,875	–	–	–	–	218,875
Financial assets at amortised cost – Loans to and receivables from other customers	365,900,540	481,668,878	61,273,808	67,029,941	93,803,084	128,363,162	131,198,883	481,668,878
Financial assets at amortised cost – Debt and other instruments	26,674,962	27,333,991	2,434,964	15,898,873	6,334,236	2,665,918	–	27,333,991
Financial assets measured at fair value through other comprehensive income	54,333,429	54,894,914	16,294,094	10,064,019	7,571,114	4,713,767	16,251,920	54,894,914
Other assets	2,916,565	2,916,565	2,518,797	95,529	131,331	114,770	56,138	2,916,565
	476,427,018	593,415,870	109,123,185	93,088,362	107,839,765	135,857,617	147,506,941	593,415,870
Derivative Assets
Risk management:	280,235	280,235	280,235	–	–	–	–	280,235
	280,235	280,235	280,235	–	–	–	–	280,235

As at 31 December 2020 GROUP	Carrying amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial Liability by type
Non-derivative liabilities
Due to banks	14,909,937	3,631,087	3,765,692	7,513,158	–	–	14,909,937
Financial liabilities at amortised cost – Due to depositors	309,566,423	98,392,109	105,106,743	28,970,585	16,457,256	60,639,730	309,566,423
Financial liabilities at amortised cost – Due to other borrowers	46,847,076	12,641,905	10,124,287	12,393,268	3,553,834	8,133,782	46,847,076
Debt securities issued	16,291,279	1,025,771	305,890	–	8,764,378	6,195,240	16,291,279
Other liabilities	4,900,958	2,298,860	724,698	500,243	421,465	955,692	4,900,958
Subordinated term debt	19,357,497	617,851	1,173,506	8,956,610	8,404,530	205,000	19,357,497
	411,873,170	118,607,583	121,200,816	58,333,864	37,601,463	76,129,444	411,873,170
Derivative Liabilities
Risk management:	267,883	267,883	–	–	–	–	267,883
	267,883	267,883	–	–	–	–	267,883
Financial Assets by type
Non-derivative assets
Cash and cash equivalents	7,728,969	7,728,969	–	–	–	–	7,728,969
Balances with Central Bank	4,901,753	4,901,753	–	–	–	–	4,901,753
Placements with banks	15,431,962	15,431,962	–	–	–	–	15,431,962
Financial assets measured at fair value through profit or loss	609,717	564,837	–	–	–	44,880	609,717
Financial assets at amortised cost – Loans to and receivables from banks	4,152,717	4,152,717	–	–	–	–	4,152,717
Financial assets at amortised cost – Loans to and receivables from other customers	301,909,337	53,502,826	35,148,436	58,850,180	57,608,042	96,799,853	301,909,337
Financial assets at amortised cost – Debt and other instruments	31,604,175	5,374,610	13,359,011	10,929,576	1,940,978	–	31,604,175
Financial assets measured at fair value through other comprehensive income	88,718,002	15,805,674	25,872,632	17,342,423	7,691,826	22,005,447	88,718,002
Other assets	2,066,621	1,988,265	13,550	11,747	31,747	21,312	2,066,621
	457,123,253	109,451,613	74,393,629	87,133,926	67,272,593	118,871,492	457,123,253
Derivative Assets
Risk management:	835,464	835,464	–	–	–	–	835,464
	835,464	835,464	–	–	–	–	835,464

The amounts in the table above have been compiled as follows:

Type of financial instrument	Basis on which amounts are compiled
Non-derivative financial liabilities and financial assets	Undiscounted cash flows, which include estimated interest payments.
Issued financial guarantee contracts, and unrecognised loan commitments	Earliest possible contractual maturity. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.
Derivative financial liabilities and financial assets held for risk management purposes	Contractual undiscounted cash flows. The amounts shown are the gross nominal inflows and outflows for derivatives that have simultaneous gross settlement (e.g. forward exchange contracts and currency swaps) and the net amounts for derivatives that are net settled.
Trading derivative liabilities and assets forming part of the Group’s proprietary trading operations that are expected to be closed out before contractual maturity.	Fair values at the date of the statement of financial position. This is because contractual maturities do not reflect the liquidity risk exposure arising from these positions. These fair values are disclosed in the “up to 3 months” column.
Trading derivative liabilities and assets that are entered into by the Bank with its customers	Contractual undiscounted cash flows. This is because these instruments are not usually closed out before contractual maturity and so the Group believes that contractual maturities are essential for understanding the timing of cash flows associated with these derivative positions.

The Bank’s expected cash flows on some financial assets and financial liabilities vary significantly from the contractual cash flows. The principal differences are as follows:

• demand deposits from customers are expected to remain stable or increase;
• unrecognised loan commitments are not all expected to be drawn down immediately;

8.3.4 Liquidity reserves

As part of the management of liquidity risk arising from financial liabilities, the Bank holds liquid assets comprising cash and cash equivalents, and debt securities issued by sovereigns, which can be readily sold to meet liquidity requirements. In addition, the Bank maintains agreed lines of credit with other banks and holds unencumbered assets eligible for use as collateral with central banks (these amounts are referred to as the “Bank’s liquidity reserves”).

The following table sets out the components of the Bank’s liquidity reserves:

As at 31 December	2021 Carrying amount LKR ’000	2021 Fair value LKR ’000	2020 Carrying amount LKR ’000	2020 Fair value LKR ’000
Cash and cash equivalents	10,688,255	10,688,255	7,724,364	7,724,364
Balances with Central Bank of Sri Lanka	9,359,241	9,359,241	4,901,753	4,901,753
Placements with banks	6,288,006	6,288,006	15,414,287	15,414,287
Unencumbered debt securities issued by sovereigns	58,121,647	58,121,647	98,472,348	98,472,348
Total liquidity reserves	84,457,149	84,457,149	126,512,752	126,512,752

8.3.5 Financial assets available to support future funding

The following table sets out the availability of the Bank’s financial assets to support future funding.

		Encumbered		Unencumbered
	Note	Pledged as collateral LKR ’000	Other* LKR ’000	Available as collateral LKR ’000	Other** LKR ’000	Total LKR ’000
31 December 2021
Cash and cash equivalents	26	–	–	10,688,255	–	10,688,255
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	–	9,359,241
Placements with banks	28	–	–	6,288,006	–	6,288,006
Derivative financial assets	29	–	–	280,235	–	280,235
Financial assets measured at fair value through profit or loss	30	–	–	218,875	–	218,875
Financial assets at amortised cost – Loans to and advances to banks	31	–	–	–	–	–
Financial assets at amortised cost – Loans to and receivables from customers	32	–	–	365,900,540	–	365,900,540
Financial assets at amortised cost – Debt and other instruments	33	865,200	–	25,809,762	–	26,674,962
Financial assets measured at fair value through other comprehensive income	34	4,424,434	–	49,909,002	–	54,329,436
Other assets		–	–	–	2,855,254	2,855,254
Non-financial assets		–	–	–	8,910,432	8,910,432
Total assets		5,289,634	9,359,241	459,090,675	11,765,686	485,505,236
31 December 2020
Cash and cash equivalents	26	–	–	7,724,364	–	7,724,364
Balances with Central Bank of Sri Lanka	27	–	4,901,753	–	–	4,901,753
Placements with banks	28	–	–	15,414,287	–	15,414,287
Derivative financial assets	29	–	–	835,464	–	835,464
Financial assets measured at fair value through profit or loss	30	–	–	609,717	–	609,717
Financial assets at amortised cost – Loans to and receivables from banks	31	–	–	4,152,717	–	4,152,717
Financial assets at amortised cost – Loans to and receivables from other customers	32	–	–	301,909,337	–	301,909,337
Financial assets at amortised cost – Debt and other instruments	33	308,951	–	31,295,224	–	31,604,175
Financial assets measured at fair value through other comprehensive income	34	8,674,356	–	80,043,646	–	88,718,002
Other assets		–	–	–	1,999,405	1,999,405
Non-financial assets		–	–	–	7,208,066	7,208,066
Total assets		8,983,307	4,901,753	441,984,756	9,207,471	465,077,287

* Represents assets that are not pledged but that the Group believes it is restricted from using to secure funding, for legal or other reasons. ** Represents assets that are not restricted for use as collateral, but that the Group would not consider readily available to secure funding in the normal course of business.

8.4 Market risk

“Market risk” is the possibility of losses arising from changes in market variables such as interest rates, equity prices, foreign exchange rates, and credit spreads. The objective of the Bank’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Bank’s solvency while optimising the return on risk.

8.4.1 Management of market risk

The Bank separates its exposure to market risks between trading and non-trading portfolios. Trading portfolios are mainly include positions arising from market making and proprietary position taking, together with financial assets and financial liabilities that are managed on a fair value basis and non-trading portfolios from positions arising from financial investments measured at fair value through other comprehensive income (FVOCI) and financial investments at amortised cost and from derivatives held for risk management purposes.

Overall authority for market risk is vested with the Board of Directors through the Board Integrated Risk Management Committee (BIRMC). The operational authority for managing market risk is vested with ALCO. Foreign exchange risk is managed within approved limits of the Bank.

The Bank employs a range of tools to monitor and limit market risk exposures. These are discussed below, separately for trading and non-trading portfolios.

The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios.

			Market risk measure
	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
31 December 2021
Assets subject to market risk
Cash and cash equivalents	26	4,606,253	–	4,606,253
Placements with banks	28	6,288,006	–	6,288,006
Derivative financial assets	29	280,235	–	280,235
Financial assets measured at fair value through profit or loss	30	218,875	185,165	33,710
Financial assets at amortised cost – Loans to and receivables from banks	31	–	–	–
Financial assets at amortised cost – Loans to and receivables from other customers	32	365,900,540	–	365,900,540
Financial assets at amortised cost – Debt and other instruments	33	26,674,962	–	26,674,962
Financial assets measured at fair value through other comprehensive income	34	54,329,436	–	54,329,436
Liabilities subject to market risk
Due to banks	44	3,349,836	–	3,349,836
Derivative financial liabilities	29	814,219	–	814,219
Financial liabilities at amortised cost – Due to depositors	45	319,861,013	–	319,861,013
Financial liabilities at amortised cost – Due to other borrowers	46	69,589,129	–	69,589,129
Debt securities in issue	47	16,297,256	–	16,297,256
Subordinated term debt	51	18,387,276	–	18,387,276

			Market risk measure
In LKR ’000	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
31 December 2020
Assets subject to market risk
Cash and cash equivalents	26	2,895,117	–	2,895,117
Placements with banks	28	15,414,287	–	15,414,287
Derivative financial assets	29	835,464	–	835,464
Financial assets measured at fair value through profit or loss	30	609,717	48,620	561,097
Financial assets at amortised cost – Loans to and advances to banks	31	4,152,717	–	4,152,717
Financial assets at amortised cost – Loans to and receivables to customers	32	301,909,337	–	301,909,337
Financial assets at amortised cost – Debt and other instruments	33	31,604,175	–	31,604,175
Financial assets measured at fair value through other comprehensive income	34	88,718,002	–	88,718,002
Liabilities subject to market risk
Due to banks	44	14,909,937	–	14,909,937
Derivative financial liabilities	29	267,883	–	267,883
Financial liabilities at amortised cost – Due to depositors	45	310,026,892	–	310,026,892
Financial liabilities at amortised cost – Due to other borrowers	46	46,847,076	–	46,847,076
Debt securities in issue	47	16,291,279	–	16,291,279
Subordinated term debt	51	19,357,497	–	19,357,497

8.4.2 Exposure to market risks – Trading portfolios

The principal tool used to measure and control market risk exposure within the Bank’s trading portfolios is VaR. The VaR of a trading portfolio is the maximum estimated loss that can arise with a specified probability (confidence level) in the portfolio over a specified period of time (holding period) from an adverse market movement.

The VaR model used by the Bank is based on a 99% confidence level and assumes 1, 10 and 60-day holding periods (Depending on product type). The VaR model used is based mainly on historical simulation. Taking account of market data, and observed correlation between different markets and prices, the model generates a wide range of plausible future scenarios for market price movements.

Although VaR is an important tool for measuring market risk, the assumptions on which the model is based give rise to some limitations, including the following.

• The holding period assumes that it is possible to hedge or dispose of positions within that period. This may not be the case for illiquid assets or in situations in which there is severe market illiquidity.
• A 99% confidence level does not reflect losses that may occur beyond this level. Even within the model used, there is a 1% probability that losses could exceed the VaR in any given period.
• VaR is calculated does not reflect exposures that may arise on positions during the trading day.
• The use of historical data as a basis for determining the possible range of future outcomes does not cover all possible scenarios, especially those of an exceptional nature.
• The VaR measure is dependent on the Bank’s position
  and the volatility of market prices. The VaR of an unchanged position reduces if market price volatility declines and
  vice versa.

The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the Bank's overall position. The Bank determines the scenarios as follows:

• sensitivity scenarios consider the impact of any single risk factor or set of factors that are unlikely to be captured within the VaR models;
• technical scenarios consider the largest move in each risk factor without consideration of any underlying market correlation; and
• hypothetical scenarios consider potential macro-economic events – e.g. periods of prolonged market illiquidity, reduced fungibility of currencies, natural disasters or other catastrophes, health pandemics, etc.

The analysis of scenarios and stress tests is reviewed by ALCO.

8.4.2.1 Equity price risk

Equity price risk is part of market risk which is defined as the risk of possible losses arising from the equity market investments due to changes in the market prices of the invested shares. The Bank is exposed to equity prices risk through its investments in the equity market which has been shown in the FVOCI portfolio and the trading portfolio.

Financial assets measured at fair value through profit or loss portfolio

Parameter	Position as at 31 December 2021 LKR ’000	Position as at 31 December 2020 LKR ’000
Marked-to-market value of the total quoted equity portfolio	181,425	44,880
Value-at-risk (under 99% probability for a quarterly time horizon)	36.83%	28.93%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	66,818	12,984
Unrealised gains in the trading equity portfolio reported in the fair value reserve	49,014	11,069

Equity price risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss Method. Historical four-year portfolio returns is adopted to compute VAR as a measure of the equity prices risk exposure by the Bank. This VAR computation for the equity Trading portfolio considers a quarterly time horizon.

8.4.3 Exposure to market risks – Non-trading portfolios

Financial assets measured at fair value through other comprehensive income

Parameter	Position as at 31 December 2021 LKR ’000	Position as at 31 December 2020 LKR ’000
Marked-to-market value of the total quoted equity portfolio	12,337,187	12,299,552
Value-at-risk (under 99% probability for a quarterly time horizon)	25.18%	27.48%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	3,106,503	3,379,917
Unrealised gains in the trading equity portfolio reported in the fair value reserve	2,419,120	2,801,795

Equity price risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss Method. Historical three-year portfolio returns is adopted to compute VAR as a measure of the equity prices risk exposure by the Bank. This VAR computation for the equity Trading portfolio considers a quarterly time horizon.

8.4.4 Interest rate risk

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates.

Duration analysis as at 31 December 2021

Portfolio	Face value LKR ’000	Marked-to market value LKR ’000	Duration	Interpretation of duration
Treasury securities measured at FVOCI/LKR Bonds	40,636,810	40,780,663	1.21	Portfolio value will decline approximately by 1.21% as a result of 1% increase in the interest rates.
Treasury securities measured at FVOCI/Sovereign Bonds	1,412,040	994,984	0.81	Portfolio value will decline approximately by 0.81% as a result of 1% increase in the interest rates.

Market risk exposure for interest rate risk in the Trading portfolio as at 31 December 2021 is Nil. Market risk exposure for interest rate risk in the FVOCI Rupee portfolio as at 31 December 2021 is depicted by duration of 1.21%.

This level of interest rate risk exposure in the Rupee FVOCI portfolio can be interpreted as a possible potential loss in the marked-to-market value amounting to LKR 496.4 Mn, as at 31 December 2021.

Market risk exposure for interest rate risk in the FVOCI US Dollar portfolio as at 31 December 2021 is depicted by
duration of 0.81%.

This level of interest rate risk exposure in the FVOCI US Dollar portfolio can be interpreted as a possible potential loss in the marked-to-market value amounting to LKR 8.1 Mn, as at 31 December 2021.

8.4.4.1 Potential impact to NII due to change in market interest rates

Overall up to the 12-month time bucket, the Bank carried a net liability sensitive position. This sensitivity will vary for each time bucket up to the 12-month period where up to one month there is a net asset sensitive position.

The interest rate risk exposure as at 31 December 2021 is quantified based on the assumed change in the interest rates for each time period and is given in table below:

	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
31 December 2021
Cash and cash equivalents	844,731	–	–	–	–
Placements with banks	6,288,006	–	–	–	–
Loans to and receivables from banks	–	–	–	–	–
Loans to and receivables from other customers	246,322,818	18,918,758	23,714,679	14,306,803	54,326,519
Investment securities	4,676,892	14,964,475	18,817,129	6,918,328	23,073,785
	258,132,447	33,883,233	42,531,808	21,225,131	77,400,304
Due to banks	–	1,105,860	–	1,105,860	–
Deposits from banks	5,117,887	6,606,257	5,116,823	3,621,298	49,126,864
Deposits from customers	111,704,490	51,549,556	57,791,338	74,085,686	12,556,723
Debt securities in issue	–	–	–	–	16,297,256
Subordinated liabilities	–	–	–	–	18,387,276
	116,822,677	59,261,673	62,908,161	78,812,844	96,368,119
Net rate sensitive assets/(liabilities)	141,309,770	(25,378,440)	(20,376,353)	(57,587,713)	(18,967,815)
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00	–
Impact	706,549	(232,636)	(229,234)	(575,877)	–
Total net impact if interest rates increase	–	–	–	(331,198)	–
Total net impact if interest rates decline	–	–	–	331,198	–

	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
31 December 2020
Cash and cash equivalents	317,034	–	–	–	–
Placements with banks	15,414,287	–	–	–	–
Loans to and receivables from banks	4,152,717	–	–	–	–
Loans to and receivables from other customers	151,094,075	24,374,012	12,864,586	16,170,593	89,643,442
Investment securities	4,861,228	16,635,784	5,113,290	34,151,804	47,046,209
	175,839,341	41,009,796	17,977,876	50,322,397	136,689,651
Due to banks	1,792,092	7,927,554	–	–	5,000,000
Deposits from customers	7,492,850	12,453,461	10,591,793	1,239,278	15,069,694
Due to other borrowers	89,795,761	58,804,855	68,468,382	53,354,008	30,962,639
Debt securities in issue	–	–	–	–	16,291,279
Subordinated liabilities	–	–	–	1,791,357	17,566,140
	99,080,703	79,185,870	79,060,175	56,384,643	84,889,752
Net rate sensitive assets/(liabilities)	76,758,638	(38,176,074)	(61,082,299)	(6,062,246)	51,799,899
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00	–
Impact	383,793	(349,947)	(687,176)	(60,622)	–
Total net impact if interest rates increase	–	–	–	(713,952)	–
Total net impact if interest rates decline	–	–	–	(713,952)	–

The Bank has assumed that the assets and liabilities are repriced at the beginning of each time bucket and has also taken into account the remaining time from the repricing date up to one year.

8.4.4.2 Interest rate benchmark reform

Overview

A fundamental reform of major interest rate benchmarks is being undertaken globally, replacing some interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as “IBOR reform”). The Bank has exposure to certain IBORs on its financial instruments that are being reformed as part of these market-wide initiatives.

The main risks to which the Bank has been exposed as a result of IBOR reform are operational. For example, the renegotiation of loan contracts through bilateral negotiation with customers, updating of contractual terms, updating of systems that use IBOR curves and revision of operational controls related to the reform and regulatory risks. Financial risk is predominantly limited to interest rate risk.

The Asset and Liability Management Commitee (ALCO) and Treasury department of DFCC Bank PLC is working on its transition to alternative rates. The objectives of this task include evaluating the extent to which loans advanced, loan commitments, liabilities and derivatives reference IBOR cash flows, whether such contracts need to be amended as a result of IBOR reform and how to manage communication about IBOR reform with counterparties. It provides periodic reports to ALCO and Central Treasury to support the management of interest rate risk and works closely with the Group Operational Risk Committee to identify operational and regulatory risks arising from IBOR reform.

The Bank is in the process of applying a policy to require that retail products, such as its residential mortgage portfolio, are amended in a uniform way, and bespoke products, such as loans and advances to corporates, are amended in bilateral negotiations with the counterparties.

As at 31 December 2021, the IBOR reform in respect of currencies to which the Bank has exposure is in the process of reforming. The table below sets out the IBOR rates that the Group had exposure to, the new benchmark rates to which these exposures have or are being transitioned.

Currency	Benchmark before reform	Benchmark after reform	Status
GBP	GBP LIBOR	SONIA	In progress
USD	USD LIBOR	SOFR	In progress
EURO	EONIA	€STR	In progress
EURO	EURIBOR	EURIBOR reformed	In progress

Exposures subject to benchmark reform as at 31 December 2021

The table below shows the Group’s exposure to interest rate benchmarks subject to IBOR reform. These are financial instruments that contractually reference an IBOR benchmark planned to transition to an risk free rate, and have a contractual maturity date beyond the planned IBOR cessation date.

	Financial Instruments to be transferred to risk free rate
	USD Libor		GBP Libor
	USD Mn	LKR Mn	GBP Mn	LKR Mn
Non-derivative financial assets
Loans and advances to customers	202	40,752	2	565
Non-derivative financial liabilities
Borrowings	59	11,873	–	–
Derivative instruments
Cross currency swaps	7	1,371	–	–

8.4.5 Foreign exchange risk

Foreign exchange risk in net open position (NOP)/unhedged position of Bank

The following table indicates the DFCC’s exchange rate risk exposure based on its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31 December 2021, DFCC carried a USD equivalent net open/unhedged “Oversold” position of LKR 4.408 Bn. The impact of exchange rate risk is given below:

	Amount
Net exposure – USD equivalent	(21,852,440)
Value of position in LKR ’000	(4,408,074)
Exchange rate (USD/LKR) as at 31 December 2021	201.72
Possible potential loss to Bank – LKR ’000
– If Exchange rate (USD/LKR) depreciates by 1%	(44,081)
– If exchange rate depreciates by 10%	(440,807)
– If exchange rate depreciates by 15%	(661,211)

The estimated potential exchange loss is off set by the interest gain due to interest differential between Sri Lankan Rupee and the respective foreign currencies.

8.4.6 Market risk exposures for regulatory capital assessment

Under the standardised approach of Basel III with effect from July 2017, market risk exposures are quantified for regulatory capital purposes. The computation results as at 31 December 2021 are as follows:

	Risk-weighted assets LKR ’000	Quantified possible exposure LKR ’000
Interest rate risk	5,235,125	628,215
Equity price risk	81,692	9,803
Foreign exchange and gold risk	4,689,108	562,693
Total	10,005,925	1,200,711

8.5 Operational risk

“Operational risk” is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks –
e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Bank’s operations.

The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and innovation. In all cases, Bank’s policy requires compliance
with all applicable legal and regulatory requirements.

The following are included in the process of the operational risk management in the Bank.

a. Monitoring of the Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits using a traffic light system. Develop Risk and Control Self-Assessments to identify the risk exposure of all processes.

b. Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognise necessary improvements in the systems, processes and procedures.

c. Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. The key findings of the analysis are evaluated at the ORMC and the BIRMC meetings in an operational risk perspective.

The primary responsibility for the development and implementation of controls to address operational risk lies with IRMD whilst implementation is assigned to Senior Management within each business unit. Operational Risk Coordinating Officers are appointed withing each department/Branch to assist in managing the Operational Risk. This responsibility is supported by the development of overall standards for management of operational risk in the following areas:

1. Requirements for appropriate segregation of duties, including independent authorisation of transactions.
2. Requirements for reconciliation and monitoring of transactions.
3. Compliance with regulatory and other legal requirements.
4. Documentation of controls and procedures.
5. Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks.
6. Requirements for reporting of operational losses and propose remedial action.
7. Development of contingency plans.
8. Training and professional development to establish ethics and business standards.
9. Insurance covering risk due to threats arising from external and other events.

Compliance with the Bank’s standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the business unit to which they relate, with summaries submitted to the Audit Committee and Senior Management.

Group operational risk assessments are conducted at the Board level.

8.5.1 Capital management

The Bank manages its capital at Bank and Group level considering both regulatory requirement and risk exposures. Its regulatory capital position is analysed by the BIRMC on a quarterly basis and recommendations and decisions are made accordingly. The Group capital management goals are as follows:

1. Ensure regulatory minimum capital adequacy requirements are not compromised.
2. Bank to maintain its international and local credit rating and to ensure that no downgrading occurs as a result of deterioration of risk capital of the Bank other than in an extreme change in external operating environment.
3. Ensure capital impact of business decisions including strategic business plans are properly assessed and taken into consideration.
4. Ensure capital consumption by business actions are adequately priced.
5. Optimising ROE

Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis. The Bank is required to comply with the provisions of the Basel III requirements in respect of regulatory capital commencing from July 2017. The Bank currently uses the standardised approach for credit risk and market risk and basic indicator approach for operational risk.

The Basel III capital regulations, which are currently in force, will continue to be based on the three-mutually reinforcing Pillars introduced under Basel II, i.e., minimum capital requirement, supervisory review process and market discipline. Basel III focuses on increasing the quality and quantity of capital especially the Core Capital, through redefining the common equity capital and introducing new capital buffers such as the Capital Conservation Buffer and a Capital Surcharge on domestic systematically important banks. DFCC Bank started reporting capital computations under the Basel III requirements from mid 2017 as per the regulatory requirements.

Regulatory capital comprises Tier 1 capital and Tier 2 capital. The Bank’s policy is to maintain a strong capital base so as to ensure investor, creditor, and market confidence to sustain future development of the business. DFCC Bank and its Group have complied with the minimum capital requirements imposed by the Central Bank of Sri Lanka throughout the year.

Extraordinary regulatory measures issued by Central Bank of Sri Lanka on 27 March 2020, to provide flexibility to Licensed Banks to support business and individuals affected by the outbreak of COVID-19, allowed the Bank to draw down 0.5% of the capital conservation buffer setting the regulatory minimum requirement as 8% for Tier 1 capital ratio and 12% for Total capital ratio.

8.5.1.1 Key regulatory ratios – Capital adequacy

Item	31 December 2021		31 December 2020
	Bank	Group	Bank	Group
Regulatory capital (LKR ’000)
Common equity Tier 1	34,259,288	34,265,838	35,041,771	35,113,117
Tier 1 Capital	34,259,288	34,265,838	35,041,771	35,113,117
Total Capital	47,968,017	47,974,567	51,055,165	51,126,511
Regulatory capital ratios (%)
Common equity Tier 1 Capital ratio	9.31%	9.28%	10.82%	10.82%
Minimum requirement – 6.50%
Tier 1 capital ratio	9.31%	9.28%	10.82%	10.82%
Minimum requirement – 8.0%
Total capital ratio	13.03%	13.00%	15.76%	15.75%
Minimum requirement – 12.0%

Basel III computation of capital ratios

Item	31 December 2021		31 December 2020
	Bank LKR ‘000	Group LKR ‘000	Bank LKR ‘000	Group LKR ‘000
Common Equity Tier 1 (CET1) Capital after adjustments	34,259,288	34,265,838	35,041,771	35,113,117
Common Equity Tier 1 (CET1) Capital	46,687,119	50,436,550	45,423,144	48,839,196
Equity Capital (Stated Capital)/Assigned Capital	8,600,457	8,600,457	7,682,465	7,682,465
Reserve fund	2,746,968	2,746,968	2,583,968	2,583,968
Published retained earnings/(accumulated retained losses)	22,091,649	25,831,589	19,652,168	23,061,080
Published accumulated Other Comprehensive Income (OCI)	(531,794)	(522,303)	1,724,704	1,731,844
General and other disclosed reserves	13,779,839	13,779,839	13,779,839	13,779,839
Unpublished current year's profit/loss and gains reflected in OCI	–	–	–	–
Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total Adjustments to CET1 Capital	12,427,831	16,170,712	10,381,373	13,726,079
Goodwill (net)	–	156,226	–	156,226
Intangible assets (net)	2,227,577	2,252,589	1,713,052	1,728,580
Investment in capital of banks and financial institutions	10,200,254	13,761,897	8,571,286	11,838,354
Others	–	–	97,035	2,919
Additional Tier 1 (AT1) Capital after adjustments
Additional Tier 1 (AT1) Capital
Qualifying Additional Tier 1 Capital Instruments	–	–	–	–
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to AT1 Capital
Investment in own shares	–	–	–	–
Others (specify)	–	–	–	–
Tier 2 Capital after adjustments	13,708,729	13,708,729	16,013,394	16,013,394
Tier 2 Capital	13,708,729	13,708,729	16,013,394	16,013,394
Qualifying Tier 2 Capital Instruments	10,511,268	10,511,268	14,174,868	14,174,868
Revaluation gains	–	–	–	–
Loan loss provisions	3,197,461	3,197,461	1,838,526	1,838,526
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to Tier 2
Investment in own shares	–	–	–	–
Others (specify)	–	–	–	–
CET1 Capital	34,259,288	34,265,838	35,041,771	35,113,117
Total Tier 1 Capital	34,259,288	34,265,838	35,041,771	35,113,117
Total Capital	47,968,017	47,974,567	51,055,165	51,126,511
Total Risk Weighted Assets (RWA)
RWAs for credit risk	339,260,886	339,722,423	293,505,729	293,920,302
RWAs for market risk	10,005,925	10,005,925	12,956,450	12,956,450
RWAs for operational risk	18,909,993	19,380,488	17,400,093	17,751,642
CET1 Capital Ratio (including capital conservation buffer, countercyclical capital buffer and surcharge on D-SIBs) (%)	9.31	9.28	10.82	10.82
of which: Capital Conservation Buffer (%)	1.2	1.2	1.2	1.2
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A
Total Tier 1 Capital Ratio (%)	9.31	9.28	10.82	10.82
Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs) (%)	13.03	13.00	15.76	15.75
of which: Capital Conservation Buffer (%)	1.2	1.2	1.2	1.2
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A

ACCOUNTING POLICY

See accounting policy in Note 5.3.7.

9.1 Valuation models

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments.

Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like government securities, interest rate and currency swaps that use mostly observable market data and require little management judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, government securities and simple over the counter derivatives like forward exchange contracts and interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes that a third party market participant would take them into account in pricing a transaction.

Model inputs and values are calibrated against historical data and published forecasts and, where possible, against current or recent observed transactions in different instruments and against broker quotes. This calibration process is inherently subjective and it yields ranges of possible inputs and estimates of fair value, and management uses judgement to select the most appropriate point in the range.

9.2 Valuation Framework

The established control framework with respect to the measurement of fair values, includes an oversight which is independent of front office management. Treasury Middle Office has overall responsibility for independently verifying the results of trading and investment operation.

Specific controls include:

• Verification of observable pricing
• Review and approval process for new models and changes to models involving both product control and group market risk
• Calibration and back testing of models
• Stress Testing

When third party information, such as broker quotes or pricing services is used to measure fair value, the evidence so obtained to support the conclusion that such valuations meet the requirements of SLFRSs/LKASs is documented.

This includes:

• Verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument
• Several quotes obtained from randomly selected brokers for the same financial instrument and the fair value determined on this basis

Any changes to the fair value methodology is reported to the Bank’s Audit Committee.

9.3 Financial instruments measured at fair value – Fair value hierarchy

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position. The fair values include any deferred differences between the transaction price and the fair value on initial recognition when the fair value is based on a valuation technique that uses unobservable inputs.

A. Bank/Group

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	29
Forward foreign exchange contracts		–	280,235	–	280,235
Financial assets measured at fair value through profit or loss	30
Equity securities – quoted		181,425	–	–	181,425
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	33,710	–	33,710
Financial assets measured at fair value through other comprehensive income	34
Government of Sri Lanka Treasury Bills and Bonds		40,780,663	–	–	40,780,663
Sri Lanka sovereign bonds		994,984	–	–	994,984
Equity shares – quoted		12,337,187	–	–	12,337,187
Equity shares – unquoted		–	–	216,602	216,602
Preference shares		–	–	–	–
		54,297,999	313,945	216,602	54,828,546
Financial Liabilities
Derivative financial liabilities	29
Forward foreign exchange contracts		–	814,219	–	814,219
		–	814,219	–	814,219

 

As at 31 December 2020	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	29
Forward foreign exchange contracts		–	835,464	–	835,464
Financial assets measured at fair value through profit or loss	30
Equity securities – quoted		44,880	–	–	44,880
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	561,097	–	561,097
Financial assets measured at fair value through other comprehensive income	34
Government of Sri Lanka Treasury Bills and Bonds		75,272,434	–	–	75,272,434
Sri Lanka sovereign bonds		931,706	–	–	931,706
Equity shares – quoted		12,299,552	–	–	12,299,552
Equity shares – unquoted		–	–	213,810	213,810
Preference shares		–	–	500	500
		88,552,312	1,396,561	214,310	90,163,183
Financial liabilities
Derivative financial liabilities	29
Forward foreign exchange contracts		–	267,883	–	267,883
		–	267,883	–	267,883

As Treasury Bills/Bonds are valued using Central Bank published rates, investments in Treasury Bills/Bonds are classified under level 1. Other securities which are listed in Colombo stock exchange are also classified as Level 1 asset by referring to the quoted prices.

9.3.1 Valuation techniques and significant unobservable inputs

The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values for financial instruments in the statement of financial position, as well as the significant unobservable inputs used.

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement
Unquoted equity shares	Net asset approach: The fair value is determining based on the net assets value of the unquoted equity share	Net asset value per share	The estimated fair value would increase/(decrease) if the adjusted net asset value per share were higher/(lower)
Forward exchange contracts	Forward pricing: The fair value is determined using quoted forward exchange rates at the reporting date and present value calculations based on high credit quality yield curves in the respective currencies.	Not applicable	Not applicable
Interest rate swaps/Cross currency swaps	Swap models: The fair value is calculated as the present value of the estimated future cash flows. Estimates of future floating-rate cash flows are based on quoted swap rates, futures prices and interbank borrowing rates. Estimated cash flows are discounted using a yield curve constructed from similar sources and which reflects the relevant benchmark interbank rate used by market participants for this purpose when pricing interest rate swaps. The fair value estimate is subject to a credit risk adjustment that reflects the credit risk of the Group and of the counterparty; this is calculated based on credit spreads derived from current credit default swap or bond prices.	Not applicable	Not applicable
Units in unit trusts – unquoted	The fair value is determined by using the Daily Prices published by the Unit Trust managers (which is derived by dividing the net asset value by the number of units)	Not applicable	Not applicable

9.3.2 Transfers between Levels 1 and 2

There were no transfers from Level 1 to 2 or Level 2 to Level 1 in 2021 and no transfers in either direction in 2020.

9.3.3 Level 3 recurring fair values

9.3.3.1 Reconciliation of Level 3 fair values

The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values:

	Equity securities
	Bank/Group
	2021 LKR ’000	2020 LKR ’000
Balance at 1 January	213,810	200,357
Purchased during the year	–	–
Gain included in OCI
– Net change in fair value (unrealised)	2,792	13,453
Balance at 31 December	216,602	213,810

9.3.3.2 Transfer out of Level 3

There were no transfers out of Level 3 and no transfers out of Level 2 in 2021.

9.3.3.3 Sensitivity analysis

For the fair values of equity securities, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant, would have the following effects:

	OCI, net of tax
As at 31 December 2021	Increase LKR ’000	Decrease LKR ’000
Equity securities
Adjusted net assets value (5% movement)	10,830	(10,830)

Accounting judgements, estimates and assumptions

Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, those are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgement to establish fair values. The valuation of financial instruments is described in more detail in Note 4 to the financial statements.

COVID-19 Considereations

The Group evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degree of judgement and estimation in determining the carrying values of financial assets and financial liabilities at the reporting date.

The majority of valuation models the Group uses employ only observable market data as inputs. This has not changed as a result of COVID-19, However the Group has considered the impact of related economic and market disruptions on fair value measurement assumptions and the appropriateness of valuation inputs, notably valuation adjustments, as well as the impact of COVID-19 on the classification of exposures in the fair value hierarchy.

For certain financial instruments, the Group may use data that is not readily observable in current markets. If we use unobservable market data, then more judgement is exercised to determine fair value depending on the significance of the unobservable input to the overall valuation. Generally, unobservable inputs are derived from other relevant market data and compare them to observed transaction prices where available.

When establishing the fair value of a financial instrument using a valuation technique, the Group considers valuation adjustments in determining the fair value. The Group may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation adjustments – refer Note 29 Derivative Financial Instruments) to reflect the Group’s assessment of factors that market participants would consider in setting fair value.

9.4 Financial instruments not measured at fair value

The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised:

A. Bank

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	10,688,255	–	10,688,255	10,688,255
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	9,359,241	9,359,241
Placements with banks	28	–	6,288,006	–	6,288,006	6,288,006
Financial assets at amortised cost - Loans to and receivables from banks	31	–	–	–	–	–
Financial assets at amortised cost - Loans to and receivables from other customers	32	–	–	348,256,773	348,256,773	365,900,540
Financial assets at amortised cost - Debt and other instruments	33	24,847,144	1,315,778	–	26,162,922	26,674,962
Other assets	42	–	–	2,855,254	2,855,254	2,855,254
Total		24,847,144	27,651,280	351,112,027	403,610,451	421,766,258
Liabilities
Due to banks	44	–	3,349,836	–	3,349,836	3,349,836
Financial liabilities at amortised cost- Due to depositors	45	–	–	319,604,601	319,604,601	319,861,013
Financial liabilities at amortised cost - Due to other borrowers	46	–	–	69,589,129	69,589,129	69,589,129
Debt securities in issue	47	–	14,932,065	–	14,932,065	16,297,256
Other liabilities	50	–	–	4,470,497	4,470,497	4,470,497
Subordinated term debt	51	–	16,580,539	–	16,580,539	18,387,276
		–	34,862,440	393,664,227	428,526,667	431,955,007

 

As at 31 December 2020	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	7,724,364	–	7,724,364	7,724,364
Balances with Central Bank of Sri Lanka	27	–	4,901,753	–	4,901,753	4,901,753
Placements with banks	28	–	15,414,287	–	15,414,287	15,414,287
Financial assets at amortised cost - Loans to and receivables from banks	31	–	4,152,717	–	4,152,717	4,152,717
Financial assets at amortised cost - Loans to and receivables from other customers	32	–	–	295,969,708	295,969,708	301,909,337
Financial assets at amortised cost - Debt and other instruments	33	18,412,228	13,221,152	–	31,633,380	31,604,175
Other assets	42	–	–	1,999,405	1,999,405	1,999,405
Total		18,412,228	45,414,273	297,969,113	361,795,614	367,706,038
Liabilities
Due to banks	44	–	14,909,937	–	14,909,937	14,909,937
Financial liabilities at amortised cost- Due to depositors	45	–	–	304,408,686	304,408,686	310,026,892
Financial liabilities at amortised cost - Due to other borrowers	46	–	–	46,847,076	46,847,076	46,847,076
Debt securities in issue	47	–	17,124,659	–	17,124,659	16,291,279
Other liabilities	50	–	–	4,783,877	4,783,877	4,783,877
Subordinated term debt	51	–	20,476,257	–	20,476,257	19,357,497
		–	52,510,853	356,039,639	408,550,492	412,216,558

B. Group

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	10,690,873	–	10,690,873	10,690,873
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	9,359,241	9,359,241
Placements with banks	28	–	6,332,533	–	6,332,533	6,332,533
Financial assets at amortised cost - Loans to and receivables from banks	31	–	–	–	–	–
Financial assets at amortised cost - Loans to and receivables from other customers	32	–	–	348,256,773	348,256,773	365,900,540
Financial assets at amortised cost - Debt and other instruments	33	24,346,886	1,315,778	–	25,662,664	26,674,962
Other assets	42	–	–	2,916,565	2,916,565	2,916,565
Total		24,346,886	27,698,425	351,173,338	403,218,649	421,874,714
Liabilities
Due to banks	44	–	3,349,836	–	3,349,836	3,349,836
Financial liabilities at amortised cost- Due to depositors	45	–	–	319,105,960	319,105,960	319,362,372
Financial liabilities at amortised cost - Due to other borrowers	46	–	–	69,589,129	69,589,129	69,589,129
Debt securities in issue	47	–	16,297,256	–	16,297,256	16,297,256
Other liabilities	50	–	–	4,601,683	4,601,683	4,601,683
Subordinated term debt	51	–	–	16,580,539	16,580,539	18,387,276
		–	19,647,092	409,877,311	429,524,403	431,587,552

 

As at 31 December 2020	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	7,728,969	–	7,728,969	7,728,969
Balances with Central Bank of Sri Lanka	27	–	4,901,753	–	4,901,753	4,901,753
Placements with banks	28	–	15,431,962	–	15,431,962	15,431,962
Financial assets at amortised cost – Loans to and receivables from banks	31	–	4,152,717	–	4,152,717	4,152,717
Financial assets at amortised cost – Loans to and receivables from other customers	32	–	–	295,969,708	295,969,708	301,909,337
Financial assets at amortised cost – Debt and other instruments	33	18,412,228	13,221,152	–	31,633,380	31,604,175
Other assets	42	–	–	2,066,621	2,066,621	2,066,621
Total		18,412,228	45,436,553	298,036,329	361,885,110	367,795,534
Liabilities
Due to banks	44	–	14,909,937	–	14,909,937	14,909,937
Financial liabilities at amortised cost – Due to depositors	45	–	–	303,948,217	303,948,217	309,566,423
Financial liabilities at amortised cost – Due to other borrowers	46	–	–	46,847,076	46,847,076	46,847,076
Debt securities in issue	47	–	17,124,659	–	17,124,659	16,291,279
Other liabilities	50	–	–	4,900,958	4,900,958	4,900,958
Subordinated term debt	51	–	20,476,257	–	20,476,257	19,357,497
		–	52,510,853	355,696,251	408,207,104	411,873,170

Given below is the basis adopted by the Bank/Group in order to establish the fair values of the financial instruments.

9.4.1 Cash and Cash Equivalents and Placements with Banks

Carrying amounts of cash and cash equivalents and placements with banks approximates their fair value as these balances have a remaining maturity of less than three months from the reporting date.

9.4.2 Loans to and Receivables from Other Customers – Lease Rentals Receivable

The estimated fair value of lease rentals receivable is the present value of future cash flows expected to be received from such finance lease facilities calculated based on current interest rates for similar type of facilities.

9.4.3 Loans to and Receivables from Other Customers –
Other Loans

	Composition %
Floating rate loan portfolio	64
Fixed rate loans
– With remaining maturity less than one year	11
– Others	25

Since the floating rate loans can be repriced monthly, quarterly and semi-annually in tandem with market rates fair value of these loans is approximately same as the carrying value. Carrying amount of fixed rate loans with a remaining maturity of less than one year approximates the fair value.

Based on the results of the fair value computed on the lease rentals receivable, it is estimated that the fair value of the other loans at fixed interest rates with maturity of more than one year is not materially different to its carrying value as at the reporting date.

9.4.4 Financial assets at amortised cost – Debt and other instruments

Fair value of the fixed rate debentures are based on prices quoted in the Colombo Stock Exchange, where there is an active market for quoted debentures.

Where there is no active market, fair value of the fixed rate debentures has been determined by discounting the future cash flows by the interest rates derived with reference to Government Treasury Bond rates with adjustments to risk premiums at the time of investment.

9.4.5 Due to Banks

The carrying value of amounts due to banks with a remaining maturity of less than one year approximate their fair value. The others are repriced either monthly, quarterly or semi-annually and rates are revised in line with changes in market rates. Hence, the carrying value of these borrowings approximate the fair value.

9.4.6 Due to Other depositors

The carrying value of deposits with a remaining maturity of less than one year approximates the fair value.

Fair values of deposits with a remaining maturity of more than one year is estimated using discounted cash flows applying current interest rates offered for deposits of similar remaining maturities.

The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the reporting date and the savings account balances are repriced frequently to match with the current market rates, therefore the demand and saving deposits carrying amounts are reasonable approximation to the fair values as at the reporting date.

9.4.7 Due to Other Borrowers

This consists of borrowings sourced from multilateral and bilateral institutions. 70% of these borrowing are repriced either monthly, quarterly or semi-annually and rates are revised in line with changes in market rates. Hence the carrying value of these borrowings approximates the fair value.

The others at fixed rates which relates to borrowings on credit lines are based on interest rates which are specific to each refinancing arrangement and as such there are no comparable market rates. Hence, the fair value approximates the carrying value.

9.4.8 Debt Securities in Issue

Debts issued comprise the LKR debentures. The LKR debentures are fair valued by reference to current Government Treasury Bond rates with a risk premium.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Interest income (Note 11.1)	36,599,000	39,089,986	36,599,512	39,095,445
Fee and commission income (Note 12.1.1)	2,888,346	2,193,474	2,887,711	2,192,557
Net gain from trading (Note 13)	844,898	479,153	844,898	479,153
Net loss from financial instruments at fair value through profit or loss (Note 14)	(247,268)	(497,931)	(247,268)	(497,931)
Net gain from derecognition of financial assets (Note 15)	1,391,008	510,386	1,391,008	510,386
Net other operating income (Note 16)	1,172,778	1,524,732	1,553,419	1,824,837
	42,648,762	43,299,800	43,029,280	43,604,447

ACCOUNTING POLICY

Effective interest rate

Interest income and expense are recognised in profit or loss using the effective interest method.

The “effective interest rate” is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

• the gross carrying amount of the financial asset; or
• the amortised cost of the financial liability.

When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not ECL. For purchased or originated credit impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL.

The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability.

Amortised cost and gross carrying amount

The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance.

Calculation of interest income and expense

The effective interest rate of a financial asset or financial liability is calculated on initial recognition of a financial asset or a financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit impaired) or to the amortised cost of the liability. The effective interest rate is revised as a result of periodic re-estimation of cash flows of floating-rate instruments to reflect movements in market rates of interest. The effective interest rate is also revised for fair value hedge adjustments at the date on which amortisation of the hedge adjustment begins.

As per the internal risk management policies of the Bank, the facilities are considered to be credit impaired when three or more instalments are in arrears and the Bank has estimated that the probability of recoverability of the interest income from such loan facilities are low. Accordingly the Bank discontinues recognition of interest income on such loan facilities and cash flows are assessed based on the amortised cost net of interest. If the asset is no longer credit impaired the calculation of interest income reverts to the gross basis.

11.1 Composition

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Interest income (Note 11.1.1)	36,599,000	39,089,986	36,599,512	39,095,445
Interest expenses (Note 11.1.2)	(23,946,256)	(28,083,159)	(23,918,895)	(28,052,259)
Net interest income	12,652,744	11,006,827	12,680,617	11,043,186

11.1.1 Interest income

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Placements with banks	306,823	273,321	307,335	278,780
Financial assets measured at fair value through profit or loss	294	2,969	294	2,969
Financial assets at amortised cost – Loans to and receivables from banks	83,608	43,183	83,608	43,183
Financial assets at amortised cost – Loans to and receivables from other customers (Note 11.1.1.1)	29,277,833	31,401,629	29,277,833	31,401,629
Financial assets at amortised cost – Debt and other instruments	2,312,359	2,455,017	2,312,359	2,455,017
Financial assets measured at fair value through other comprehensive income	4,618,083	4,913,867	4,618,083	4,913,867
Total interest income	36,599,000	39,089,986	36,599,512	39,095,445

11.1.1.1 Interest Income from Loans to and receivables from other customers includes modifications made to loans due to moratorium/debt concessionary schemes implemented by the Government/Bank as a measure to support the recovery of businesses/customers affected by COVID-19 pandemic. There is no material modification loss or gain due to modification to the original terms and conditions of the loan during the year ended 31 December 2021.

11.1.2 Interest expenses

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Due to banks	635,452	1,962,008	635,452	1,962,008
Financial liabilities at amortised cost – Due to depositors	17,309,634	20,283,204	17,282,273	20,252,304
Financial liabilities at amortised cost – Due to other borrowers	1,875,774	2,063,873	1,875,774	2,063,873
Debt securities in issue	4,125,396	3,774,074	4,125,396	3,774,074
Total interest expenses	23,946,256	28,083,159	23,918,895	28,052,259

The amounts reported above include interest income and expense, calculated using the effective interest method, that relate to the following financial assets and financial liabilities.

	BANK		GROUP
As at 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Financial assets measured at amortised cost (Note 25)	421,766,258	367,706,038	421,874,714	367,795,534
Financial assets measured at FVOCI (Note 25)	54,329,436	88,718,002	54,333,429	88,718,002
Total	476,095,694	456,424,040	476,208,143	456,513,536
Financial liabilities measured at amortised cost (Note 25)	431,955,007	412,216,558	431,587,552	411,873,170

11.1.3 Interest income from Government Securities – Bank/Group

For the year ended 31 December	2021 LKR ’000	2020 LKR ’000
Financial assets measured at fair value through profit or loss	294	2,969
Financial assets at amortised cost – Loans to and receivables from banks	–	43,183
Financial assets at amortised cost – Debt and other instruments	2,296,146	2,302,655
Financial assets measured at fair value through other comprehensive income	4,618,083	4,913,867
	6,914,523	7,262,674

ACCOUNTING POLICY

Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income are recognised as the related services are performed. When a loan commitment is not expected to result in the draw down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period.

A contract with a customer that results in a recognised financial instrument in the Group’s financial statements may be partially in the scope of SLFRS 9 and partially in the scope of SLFRS 15. If this is the case, then the Group first applies SLFRS 9 to separate and measure the part of the contract that is in the scope of SLFRS 9 and then applies SLFRS 15 to the residual.

Fees for guarantees and trade related commissions are recognised on a straight-line basis over the period of the contract. Other fees and commission expense relate mainly to transaction and service fees, which are expensed, as the services are received.

12.1 Composition

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Fee and commission income (Note 12.1.1)	2,888,346	2,193,474	2,887,711	2,192,557
Fee and commission expenses	(292,468)	(132,157)	(292,468)	(132,157)
Net fee and commission income	2,595,878	2,061,317	2,595,243	2,060,400

12.1.1 Disaggregation of fee and commission income

In the following table, fee and commission income from contracts with customers in the scope of SLFRS 15 is disaggregated by major type of services.

Major service lines

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Loans and advances	919,868	887,024	919, 868	887,024
Credit cards	460,772	189,978	460,772	189,978
Trade and remittances	713,443	551,998	713,443	551,998
Customer accounts	286,648	252,742	286,648	252,742
Guarantees	424,178	296,110	424,178	296,110
Others (Management, consulting and other fees)	83,437	15,622	82,802	14,705
Net fee and commission income	2,888,346	2,193,474	2,887,711	2,192,557

12.1.2 Performance obligations and revenue recognition policies

Fee and commission income from contracts with customers is measured based on the consideration specified in a contract with a customer. The Group recognises revenue when it transfers control over a service to a customer.

The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, including significant payment terms, and the related revenue recognition policies.

Type of service	Nature and timing of satisfaction of performance obligations, including significant payment terms	Revenue recognition under SLFRS 15
Retail and corporate banking service	The Group provides banking services to retail and corporate customers, including account management, provision of overdraft facilities, foreign currency transactions, credit card and servicing fees.	Revenue from account service and servicing fees is recognised over time as the services are provided.
	Fees for ongoing account management are charged to the customer’s account on a monthly basis. The Group sets the rates separately for retail and corporate banking customers in each jurisdiction on an annual basis.	Revenue related to transactions is recognised at the point in time when the transaction takes place.
	Transaction-based fees for interchange, foreign currency transactions and overdrafts are charged to the customer’s account when the transaction takes place.
	Servicing fees are charged on a monthly basis and are based on fixed rates reviewed annually by the Group.

ACCOUNTING POLICY

Results arising from trading activities include all gains and losses from realised and unrealised fair value changes, related capital gains and losses, dividend income from trading assets and trading liabilities and foreign exchange differences.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Foreign exchange from Banks	644,719	387,113	644,719	387,113
Government Securities
Net capital (loss)/gain	(703)	8,303	(703)	8,303
Equities
Net marked to market gain	37,946	11,069	37,946	11,069
Net capital gain	160,561	71,153	160,561	71,153
Dividend income	2,375	1,515	2,375	1,515
	844,898	479,153	844,898	479,153

ACCOUNTING POLICY

The Bank has non-trading derivatives held for risk management purposes (e.g., forward foreign exchange purchase or sale contracts) that do not form part of qualifying hedge relationship,
that are mandatorily fair valued through profit or loss. In respect of such financial instruments, all realised and unrealised fair value changes and foreign exchange differences are included.

14.1 Net loss from financial instruments mandatorily measured at FVTPL other than those
included in “net trading income”

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Forward exchange fair value changes
– Contracts with commercial banks and other customers	(217,548)	(543,169)	(217,548)	(543,169)
– Contract with CBSL	(2,332)	–	(2,332)	–
(Loss)/gain on financial assets fair value through profit or loss equity securities	(27,388)	45,238	(27,388)	45,238
	(247,268)	(497,931)	(247,268)	(497,931)

Forward exchange fair value changes on contracts with commercial banks includes the unrealised gain/(loss) on derivatives carried for risk management purposes, after netting off the spot movement arising from the long-term foreign currency liabilities designated as hedge item as per the fair value hedge applied by the Bank (Note 29.2). The Bank has applied the fair value hedge accounting for a part of its foreign currency liabilities using forward contracts.

ACCOUNTING POLICY

“Net gains from derecognition of financial assets” comprise realised gains less losses related to debt instruments measured at FVOCI and financial assets measured at amortised cost as per SLFRS 9.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Fair value through profit or loss Gain on sale of equity securities	65,260	5,102	65,260	5,102
Fair value through other comprehensive income Gain on sale of Government Securities	1,325,748	505,284	1,325,748	505,284
	1,391,008	510,386	1,391,008	510,386

ACCOUNTING POLICY

Net other operating income includes realised gain or loss on sale of fair value through other comprehensive income securities (e.g., Treasury Bills and Bonds, and dividend income from ordinary shares classified as fair value through other comprehensive income financial assets, dividend income from group entities, rental income, gains on disposal of property, plant and equipment and foreign exchange gains and losses.

Rental income

Rental income and expenses are accounted on a straight-line basis over the entire period of the tenancy incorporating predetermined rent escalation during the period of the tenancy.

Dividend income

Dividend income is recognised when the right to receive payment is established. Dividend income are presented in net gain/(loss) from trading and net other operating income, net based on underlying classification of the equity investment. Where the dividend clearly represents a recovery of part of the cost of the investment, it is presented in other comprehensive income. Dividend income from subsidiaries and joint venture is recognised when the Bank’s right to receive the dividend is established.

Gains and losses on disposal of assets

Net gains and losses of a revenue nature arising from the disposal of property, plant and equipment and other non-current assets including investments in subsidiaries, joint ventures and associates are accounted for, in the statement of profit or loss after deducting from the proceeds on disposal, the carrying amount of such assets and the related selling expenses.

Foreign exchange gain/(loss)

Foreign currency positions are revalued at each reporting date. Gains and losses arising from changes in fair value are included
in the income statement in the period in which they arise.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Financial assets measured at fair value through other comprehensive income
Dividend income	951,419	742,511	951,419	742,511
Dividend income from subsidiaries, joint venture and associate	89,277	139,277	–	–
Net gain from repurchase transactions	369,894	549,618	369,894	549,618
Premises rental income	–	–	329,545	293,668
(Loss)/gain on sale of property, plant and equipment	(10,388)	13,708	1,723	23,240
Foreign exchange (loss)/gain	(304,580)	23,292	(303,218)	23,292
Recovery of loans written-off	66,380	42,021	66,380	42,021
Others	10,776	14,305	137,676	150,487
	1,172,778	1,524,732	1,553,419	1,824,837

ACCOUNTING POLICY

The Group recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL:

• financial assets that are debt instruments;
• lease receivables;
• financial guarantee contracts issued; and
• loan commitments issued.

No impairment loss is recognised on equity investments.

The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:

• debt investment securities that are determined to have low credit risk at the reporting date; and
• other financial instruments on which credit risk has not increased significantly since their initial recognition.

The Group considers a debt investment security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of “investment grade” other than the investment in government debt instruments. The Group does not apply the low credit risk exemption to any other financial instruments.

Individually assessed loans and advances and amortised cost debt instruments

These are exposures, where evidence of impairment exists and those that are individually significant meriting individual assessment for objective evidence of impairment and computation of impairment allowance. The factors considered in determining that the exposures are individually significant include –

• the size of the loan; and
• the number of loans in the portfolio.

For all loans and amortised cost debt instruments that are considered individually significant, Bank assesses on a case by case basis, whether there is any objective evidence of impairment. The criteria used by the Bank to determine that there is such objective evident include –

• Significant financial difficulty of the borrower or issuer;
• A breach of contract such as a default or past due event;
• The restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;
• It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
• The disappearance of an active market for a security because of financial difficulties.
  

A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment.

Impairment allowance on loans and advances and other financial instruments measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

Collective assessment

This includes all loans and advances of smaller value where there is no evidence of impairment and those individually assessed for which no evidence of impairment has been specifically identified on an individual basis.

These loans and advances are grouped together as per Basel Guidelines and product level according to their credit risk characteristics for the purpose of calculating an estimated collective impairment.

In making an assessment of whether an investment in debt instrument is credit-impaired, the Bank considers the following factors:

• The market’s assessment of creditworthiness as reflected in the bond yields.
• The rating agencies’ assessments of creditworthiness.
• The country’s ability to access the capital markets for new debt issuance.
• The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness.
• The international support mechanisms in place to provide the necessary support as “lender of last resort” to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.
  

The Bank manages credit quality using a three stage approach which is in line with SLFRS 9.

12-month ECL are the portion of lifetime ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which 12-month ECL are recognised are referred to as “Stage 1 financial instruments”. Financial instruments allocated to Stage 1 have not undergone a significant increase in credit risk since initial recognition and are not credit-impaired.

Lifetime ECL are the ECL that result from all possible default events over the expected life of the financial instrument or the maximum contractual period of exposure. Financial instruments for which lifetime ECL are recognised but that are not credit-impaired are referred to as “Stage 2 financial instruments”. Financial instruments allocated to Stage 2 are those that have experienced a significant increase in credit risk since initial recognition but are not credit-impaired.

Financial instruments for which lifetime ECL are recognised and that are credit-impaired are referred to as “Stage 3 financial instruments”.

Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information.

The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing:

• the remaining lifetime probability of default (PD) as at the reporting date; with
• the remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure (adjusted where appropriate for changes in prepayment expectations).

The Bank considers an exposure to have significant increase in credit risk (SICR) when the contractual payment of a customer are more than 30 days past due in accordance with rebuttable presumption in SLFRS 9, or other qualitative indicators reveal that there had been SICR.

COVID-19 initiatives

For facilities subject to the COVID-19 repayment deferral arrangements, an assessment of Significant Increase in Credit Risk (SICR) has been determined based on various measures of the customer’s current financial position, future earnings capacity and the sectors in which the customers operate from which the facilities are categorised into risk categories. SICR is then determined based on the resulting risk categorisation. Based on the risk categorisation, facilities have been stress tested and required allowance overlays have been made.

Generating the term structure of PD

The Bank collects performance and default information about its credit risk exposures analysed by type of product and borrower.

The Bank employs statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.

Determining whether credit risk has increased significantly

The Bank assesses whether credit risk has increased significantly since initial recognition at each reporting date.

Credit risk may also be deemed to have increased significantly since initial recognition based on qualitative factors linked to the Bank’s credit risk management processes that may not otherwise be fully reflected in its quantitative analysis on a timely basis. This will be the case for exposures that meet certain heightened risk criteria, such as placement on a watch list. Such qualitative factors are based on its expert judgement and relevant historical experiences.

As a backstop, the Bank considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received.

If there is evidence that there is no longer a significant increase in credit risk relative to initial recognition, then the loss allowance on an instrument returns to being measured
at 12-month ECL.

The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews
to confirm that:

• the criteria are capable of identifying significant increases in credit risk before an exposure is in default;
• the criteria do not align with the point in time when an asset becomes 30 days past due; except for, for which a backstop of 60 days past due is applied.
• the average time between the identification of a significant increase in credit risk and default appears reasonable;
• exposures are not generally transferred directly from 12-month ECL measurement to credit impaired; and
• there is no unwarranted volatility in loss allowance from transfers between 12-month PD (Stage 1) and lifetime PD (Stage 2).

Definition of default

The Bank considers a financial asset to be in default when:

• the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is held); or
• the borrower is more than 90 days past due on any material credit obligation to the Bank.
• the assessment of the external rating agencies indicates a default grading of the borrower; or
• all credit facilities listed in 1.3 of Annex 1 of the Directive No. 04 of 2018 issued by Central Bank of Sri Lanka on adoption of Sri Lanka Accounting Standard SLFRS 9: “Financial Instruments”

In assessing whether a borrower is in default, the Bank considers indicators that are:

• qualitative – e.g. breaches of covenant;
• quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and based on data developed internally and obtained from external sources

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Bank for regulatory capital purposes.

Incorporation of forward-looking information

The Bank incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL using a variety of external actual and forecasted information.

The Bank formulates a base case view of the future direction of relevant economic variables as well as a representative range (Best Case and Worst Case) of other possible forecast scenarios.

This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome. External information includes economic data and forecasts published by both local and international sources. The base case represents a most-likely outcome. The other scenarios represent more optimistic and more pessimistic outcomes.

The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macroeconomic variables credit risk and credit losses.

The economic variables used by the Bank based on the statistical significance include the followings:

Unemployment rate	}	Base case scenario along with two other scenarios has been used (Best Case and Worst Case)
Interest rate
GDP growth rate
Inflation rate
Exchange rate

Modified financial assets

The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy set out in Note 5.3.4.

When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of:

• its remaining lifetime PD at the reporting date based on the modified terms; with
• the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms.

When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time).

The Bank renegotiates loans to customers in financial difficulties (referred to as “forbearance activities”) to maximise collection opportunities and minimise the risk of default. Loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.

The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. The Bank’s Credit Committee regularly reviews reports on forbearance activities.

For financial assets modified as part of the Bank’s forbearance activity, the estimate of PD reflects whether the modification has improved or restored the Bank’s ability to collect interest and principal and the Bank’s previous experience of similar forbearance action. As part of this process, the Bank evaluates the borrower’s payment performance against the modified contractual terms and considers various behavioural indicators.

Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired. A customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired/to have SICR or the PD is considered to have decreased such that it falls within the 12-month PD ranges for the asset to be considered Stage 1.

If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different.

If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Bank first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss.

If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method.

Measurement of ECL

ECL are a probability-weighted estimate of credit losses. They are measured as follows:

• financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);
• financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;
• undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and
• financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover.

When discounting future cash flows, the following discount rates are used:

• financial assets other than purchased or originated credit-impaired (POCI) financial assets and lease receivables: the original effective interest rate or an approximation thereof;
• POCI assets: a credit-adjusted effective interest rate;
• lease receivables: the discount rate used in measuring the lease receivable;
• undrawn loan commitments: the effective interest rate, or an approximation thereof, that will be applied to the financial asset resulting from the loan commitment; and
• financial guarantee contracts issued: the rate that reflects the current market assessment of the time value of money and the risks that are specific to the cash flows.

The key inputs into the measurement of ECL are the term structure of the following variables:

• Probability of default (PD);
• Loss given default (LGD);
• Exposure at default (EAD).

ECL for exposures in Stage 1 are calculated by multiplying the 12-month PD by LGD and EAD.

Lifetime ECL are calculated by multiplying the lifetime PD by LGD and EAD.

The methodology for estimating PDs is discussed above under the heading “Generating the term structure of PD”.

LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery, costs of any collateral that is integral to the financial asset. LGD estimates are recalibrated for different economic scenarios and, for lending collateralised by property, to reflect possible changes in property prices. They are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor.

EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortisation. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. For financial guarantees, the EAD represents the amount of the guaranteed exposure when the financial guarantee becomes payable. For some financial assets, EAD is determined by modelling the range of possible exposure outcomes at various points in time using scenario and statistical techniques.

As described above, and subject to using a maximum of a 12-month PD for Stage 1 financial assets, the Bank measures ECL considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for credit risk management purposes, the Bank considers a longer period. The maximum contractual period extends to the date at which the Bank has the right to require repayment of an advance or terminate a loan commitment or guarantee.

Where modelling of a parameter is carried out on a collective basis, the financial instruments are Grouped on the basis of shared risk characteristics, which may include:

• instrument type;
• credit risk grade;
• collateral type;
• date of initial recognition;
• remaining term to maturity;
• industry; and
• client segment.

The Groupings are subject to regular review to ensure that exposures within a particular Group remain appropriately homogeneous.

Restructured financial assets

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows.

• If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset.
• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

Purchase of Credit-Impaired (POCI) financial assets

POCI financial assets are assets that are credit-impaired on initial recognition. For POCI assets, lifetime ECL are incorporated into the calculation of the effective interest rate on initial recognition.

Consequently, POCI assets do not carry an impairment allowance on initial recognition. The amount recognised as a loss allowance subsequent to initial recognition is equal to the changes in lifetime ECL since initial recognition of the asset.

Write-off

Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that
could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.

Reversals of impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written-back by reducing the loan impairment allowance accordingly. The write-back is recognised in the income statement.

Renegotiated loans

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up-to-date loans for measurement purposes once a minimum number of payments required have been received.

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until it is upgraded.

Financial guarantee contracts held

The Group assesses whether a financial guarantee contract held is an integral element of a financial asset that is accounted for as a component of that instrument or is a contract that is accounted for separately. The factors that the Group considers when making this assessment

• the guarantee is implicitly part of the contractual terms of the debt instrument;
• the guarantee is required by laws and regulations that govern the contract of the debt instrument;
• the guarantee is entered into at the same time as and in contemplation of the debt instrument; and
• the guarantee is given by the parent of the borrower or another company within the borrower’s group.

If the Group determines that the guarantee is an integral element of the financial asset, then any premium payable in connection with the initial recognition of the financial asset is treated as a transaction cost of acquiring it. The Group considers the effect of the protection when measuring the fair value of the debt instrument and when measuring ECL.

If the Group determines that the guarantee is not an integral element of the debt instrument, then it recognises an asset representing any prepayment of guarantee premium and a right to compensation for credit losses. A prepaid premium asset is recognised only if the guaranteed exposure neither is credit-impaired nor has undergone a significant increase in credit risk when the guarantee is acquired. These assets are recognised in “other assets”. The Group presents gains or losses on a compensation right in profit or loss in the line item “impairment losses on financial instruments”.

Presentation of allowance for ECL in the statement of financial position loss allowances for ECL are presented in the statement of financial position as follows:

• financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
• loan commitments and financial guarantee contracts: generally, as a provision;
• debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in fair value reserve.

Regulation issued by Central Bank of Sri Lanka (“CBSL”)

During the year the CBSL issued various circulars after the outbreak of COVID-19 relating to moratorium/debt relief/ credit support to customers and industries schemes offered by the Government to support recovery of the economy. These circulars have an impact on Recognition of Interest Income, stage-wise classification of facilities and computation of expected credit loss.

Composition

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Financial assets at amortised cost – Loans to and receivables from other customers	3,846,100	2,940,811	3,846,100	2,940,811
Financial assets at amortised cost – Debt and other instruments	291,959	121,713	291,959	121,713
Financial assets measured at fair value through other comprehensive income	56,673	73,699	56,673	73,699
Loan commitments and financial guarantee contracts	251,362	176,259	251,362	176,259
Other debts	39,194	11,927	39,194	11,927
Reversal of provision made on investment in subsidiaries	–	(30,000)	–	–
Write-offs – loans to and receivables from other customers	–	3,483	–	3,483
	4,485,288	3,297,892	4,485,288	3,327,892

Impairment charge to the income statement

For the year ended 31 December 2021	Note	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Financial assets at amortised cost – Loans to and receivables from other customers	32.1.4	896,995	924,214	2,024,891	3,846,100
Financial assets at amortised cost – Debt and other instruments	33.3	291,959	–	–	291,959
Financial assets measured at fair value through other comprehensive income	34.7	56,673	–	–	56,673
Loan commitments and financial guarantee contracts	57.1	232,692	18,670	–	251,362
		1,478,319	942,884	2,024,891	4,446,094
Other debts					39,194
Total impairment charge – Bank/Group					4,485,288

 

For the year ended 31 December 2020	Note	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Financial assets at amortised cost – Loans to and receivables from other customers	32.1.4	404,581	(494,452)	3,030,682	2,940,811
Financial assets at amortised cost – Debt and other instruments	33.3	121,713	–	–	121,713
Financial assets measured at fair value through other comprehensive income	34.7	73,699	–	–	73,699
Loan commitments and financial guarantee contracts	57.1	179,454	(3,195)	–	176,259
		779,447	(497,647)	3,030,682	3,312,482
Other debts					11,927
Reversal of provision made on investment in subsidiaries	35.1				(30,000)
Write-offs- loans to and receivables from other customers					3,483
Total impairment charge – Bank					3,297,892
Adjustment for investment in subsidiaries					30,000
Total impairment charge – Group					3,327,892

Accounting policy in Note 48.

Short-term employee benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal
or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

18.1 Composition

		BANK		GROUP
For the year ended 31 December	Note	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Salaries and other benefits		3,498,482	2,843,658	3,651,774	3,005,722
Contributions to defined benefit plans	18.1.1	22,644	199,187	28,857	205,142
Contributions to defined contribution plans	18.1.2	376,599	356,859	397,881	377,308
		3,897,725	3,399,704	4,078,512	3,588,172

18.1.1 Contributions to defined benefit plans

		BANK		GROUP
For the year ended 31 December	Note	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Funded pension liability
Current service cost		53,371	53,864	53,371	53,864
Interest on obligation		254,459	259,439	254,459	259,439
Expected return on pension assets		(243,743)	(248,700)	(243,743)	(248,700)
Past service cost	18.1.1.1	(176,254)	–	(176,254)	–
		(112,167)	64,603	(112,167)	64,603
Unfunded pension liability
Interest on obligation		5,379	5,625	5,379	5,625
		5,379	5,625	5,379	5,625
Unfunded end of service gratuity liability
Current service cost		71,336	78,850	75,280	82,804
Interest on obligation		46,738	50,109	49,007	52,110
Past service cost	18.1.1.1	11,358	–	11,358	–
		129,432	128,959	135,645	134,914
Total contribution to defined benefit plans		22,644	199,187	28,857	205,142

18.1.1.1 Past service cost

The Bank reassessed the pension fund liability taking into consideration the retirement age revision under the “Minimum Retirement Age of Workers Act No. 28 of 2021”. This reassessment resulted in a net reversal of liability which was immediately reversed to the statement of profit or loss as it is considered as a change to the plan in compliance with the Sri Lanka Accounting Standard “LKAS 19 – Employee Benefits”.

18.1.2 Contributions to defined contribution plans

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Employer's contribution to Employees’ Provident Fund	313,786	297,383	330,907	313,846
Employer's contribution to Employees’ Trust Fund	62,813	59,476	66,974	63,462
Total defined contribution plans	376,599	356,859	397,881	377,308

Accounting policy in Note 39 and 40.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Depreciation
– Investment property	–	–	23,670	21,057
– Property, plant and equipment	415,353	383,461	435,230	407,669
– Right-of-use assets	287,629	292,457	287,629	292,757
Amortisation
– Intangible assets	320,869	243,739	327,644	249,475
	1,023,851	919,657	1,074,173	970,958

ACCOUNTING POLICY

Expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant and equipment in a state of efficiency has been charged to the income statement.

	BANK		GROUP
For the year ended 31 December	2021 LKR ’000	2020 LKR ’000	2021 LKR ’000	2020 LKR ’000
Directors’ emoluments	18,135	17,445	19,019	18,001
Auditors’ remuneration
Audit fees and expenses	4,890	4,700	5,748	5,520
Audit related fees and expenses	2,622	2,737	2,849	2,940
Fees for non-audit services	2,457	520	2,457	612
Professional and legal expenses	17,886	21,455	17,886	21,455
Premises, equipment and establishment expenses	1,848,282	1,662,756	1,848,282	1,662,756
Other overhead expenses	1,565,370	1,357,616	1,504,621	1,284,062
	3,459,642	3,067,229	3,400,862	2,995,346

Directors emolument include fees paid to Non-Executive Directors. Remuneration paid to Executive Directors are included under salaries and other benefits in Note 18.1.