According to the regulatory requirements as well as Basel - II Pillar - 3 guidelines, "Market Discipline" achieved through meaningful disclosures would provide a fair opportunity for the market participants to assess the risk exposures of the Bank. Accordingly, the following discussion on Bank's risk management practices includes qualitative and quantitative disclosures to provide the stakeholders with a better insight of the Bank's risk profile.
Risk exists in all aspects of the banking business and the environment in which the Bank operates. The Bank's collective risk management capability and competency supports successful implementation of the Bank's strategic priorities. It also enables the development of a sustainable and resilient business model that is appropriately responsive to an ever-changing environment. Risk is identified and managed as part of a Bank-wide Risk Management Framework that starts with the Board approved Strategy, Risk Appetite, Capital, Funding and Operational Plans. Risk Appetite is translated and cascaded to different business activities qualitatively (through risk policies, standards and operating procedures) and quantitatively (through risk limits and decision making authorities).
The Bank's Risk Strategy focuses on managing principal risks assumed by the Bank while striking a fair balance between the risk return trade-off and the efficient capital allocation across the risk exposures. The Bank's risk strategy reinforces and supports the organisation in achieving its overall strategic objectives within a pre-defined risk environment in alignment with the Bank's overall risk profile.
Integrity and the effectiveness of the Risk Management Organisational Structure is well supported by the Bank's robust Risk Governance Framework which consists of Board and Senior Management oversight, independent risk management function, supporting policy framework, risk related committees etc. The Bank actively encourages the business managers as "risk owners" to assume calculated risks within the stipulated risk appetite and tolerance levels. Risk-based decisions taken by the Business Managers are complemented by the Risk Managers who provide independent risk evaluations on such proposals.
Such risk exposures are assumed after a rigorous process of risk identification/assessment against correct pricing to balance the ultimate risk return trade-off for the Bank. The "risk owners" give due consideration to risk mitigation and treatment options available, so that the residual risk exposures of the Bank could ultimately be reduced in an objective manner. Risk monitoring and reporting techniques facilitate the Bank to proactively monitor its risk exposures so that it can initiate corrective actions to mitigate potential losses, if required.
Risk decisions are always made in a transparent manner by authorised officers/committees after obtaining independent recommendations of the Risk Managers. The Bank also has processes for risk escalation/exceptional risk approvals for exposures that need more rigorous risk evaluations compared to its usual risk exposures.
The investments made by the Bank in acquiring comprehensive Risk Management Software Solutions to manage its principal risks namely credit, market and operational risks, corroborate the risks management framework of the Bank.
In progressing towards achieving Basel - II Pillar - 2 requirements, the Bank with the support of an overseas consultant, developed a comprehensive Internal Capital Adequacy Assessment Framework (i.e. ICAAP framework) during the period under review. This will support the Board of Directors and Senior Management to adopt risk management practices in alignment with the overall Risk Profile and Business Plan of the Bank. While supporting an effective supervisory review mechanism on the Bank's risk profile, ICAAP will also assist the Bank in assessing current and future capital needs taking into account its strategic objectives.
The Bank has progressed well towards compliance with disclosures in alignment with the regulatory requirements. To adopt best practices for market discipline, a set of disclosure requirements have been compiled through the Board approved "Disclosure Policy". These would allow the stakeholders to assess key information on financial position/performance, capital, risk exposures, risk assessment processes, risk management methodologies and hence the Bank's overall soundness.
The Bank adopts the policy of having "Three Lines of Defence" in assuming the risk exposures, where Business Managers, Risk Managers and Audit/Compliance contribute in assuming the risks in a prudent manner.
The Business Managers as 'risk owners' negotiate to assume risk exposures with potential clients within the risk management policies/risk appetite framework approved by the Board and Senior Management. The Integrated Risk Management Team complements these decisions by providing independent recommendations and monitors the Bank wide risk exposures against Policy Parameters on a continuous basis. The Audit and Compliance functions independently ensure that the risk-based decisions made by the Business Managers with the support of Risk Managers are in line with the established policies/procedures of the Bank in order to ensure the integrity of the decision making process.
The above robust risk management structure immensely contributes in risk-based decision making and the Senior Management oversight in managing the Bank's businesses in an objective manner.
The process of decision making is well-supported by the following risk related committees functioning within the Bank.
Committees | Key Objectives | Represented by | ||
Board Integrated Risk Management Committee (BIRMC) |
To ensure that the Bank - wide risks are managed within the risk strategy and appetite established by the Board of Directors | Please refer 'Board Integrated Risk Management Committee Report' | ||
Executive Integrated Risk Management Committee (EIRMC) | To monitor and review all the risk exposures and risk-related policies/procedures affecting credit, market and operational areas in line with the directives from BIRMC | Risk Management, Corporate Banking, Personal Banking, Treasury, Inspection, Compliance and Finance | ||
Assets and Liabilities Committee (ALCO) | To optimise the Bank's financial goals, while maintaining market and liquidity risks within the Bank's risk appetite. | Treasury, Corporate Banking, Personal Banking, Risk Management and Finance | ||
Credit Policy Committee | To review and approve credit policies/procedures to ensure that all credit portfolios are properly managed within the lending strategies of the Bank. | Corporate Banking, Personal Banking, Risk Management, Inspection, Recoveries and Branch Credit Monitoring | ||
Executive Committee on Monitoring NPAs | To review and monitor the Bank's Non-Performing Advances (NPAs) above Rs.5.0 Mn. classified within the preceding one-year period to initiate timely corrective actions to prevent/reduce credit losses. | Corporate Banking, Personal Banking, Recoveries and Risk Management | ||
Managing Director and Chief Operating Officer are members of all the above Committees. |
Risk Management framework in the Bank can be categorised under three main risks namely Credit, Market & Liquidity and Operational risks and discussed in detail in the following sections.
Credit risk is the risk of potential financial loss resulting from the failure of borrowers or counterparties to meet their debt or contractual obligations. Exposure to credit risk could arise from On-Balance Sheet and Off-Balance Sheet activities. The Bank's lending exposures are typically represented by the notional value or principal amount of On-Balance Sheet financial products such as loans, overdrafts etc. In addition to these, Letters of Credit, Letters of Guarantees, Credit Guarantees, Customs Guarantees, Shipping Guarantees, Bid and Performance Bonds, Documents Against Acceptance etc., which represent the Bank's contingent commitments on behalf of its customers, too create varying levels of credit risk compared to the On-Balance Sheet exposures. Deterioration of counterparty credit quality and/or market volatility can lead to potential credit risk-related losses for the Bank.
The core credit risk Management architecture of the Bank consists of established policies, procedures and processes including a well-defined approval hierarchy which is supported by high ethical standards. The Credit Policy and Lending Guidelines of the Bank outline the principles by which the Bank conducts its credit risk management activities. These policies ensure consistency in credit sanctioning across the Bank and provide guidance in formulation of business specific credit risk analysis to reflect different credit environments and portfolio specific risks. The Credit Policy and Lending Guidelines therefore, broadly reinforce prudent and effective credit risk management practices in order to ensure at all times quality, consistency and transparency in the credit risk approvals while promoting a disciplined credit culture in the Bank.
The Bank usually considers that credit risk management should be a value enhancing activity that goes beyond regulatory compliance, encompassing:
To ensure an optimum risk-reward payoff to the Bank, the credit exposures to be assumed by the Bank are subjected to a thorough risk evaluation. As a general policy, the Bank will assume credit exposures with short to medium term maturities thus reducing the overall credit risk in the portfolios, to a great extent. The overall credit risk exposure on certain risk categories (i.e., single borrower, industry sectors, products etc.) are monitored and controlled through a set of prudential exposure limits established by the Credit Policy Committee.
The Bank strives to optimise a well-structured credit risk management process through assessing, quantifying, pricing, monitoring and managing credit portfolios on a consistent basis. The Bank's credit risk management structure comprises the following;
Credit Risk Management Function |
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Credit Risk Review Function |
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Environmental Risk Review Function |
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To gain an early warning on any impending deterioration of the borrowers' creditworthiness, the Bank's credit portfolio is subjected to a robust post sanction monitoring process coupled with a continuous review process at various levels. This monitoring process is further strengthened by the Executive Committee on Monitoring of Non-Performing Advances [NPAs] which meets once a month and closely evaluates the progress made on recovering of high value NPAs.
The Bank adopts a systematic approach in granting/renewing of credit facilities. All the credit risk exposures in the Bank are first evaluated by the Lending Officers who are considered to be the risk owners of the credit mechanism. Presently, all the high valued credit proposals/new lending products are first referred to the Credit Risk Management Unit (CRMU) of the Integrated Risk Management Department (IRMD) for independent evaluation and comments. Such proposals are thereafter signed off by the IRMD after evaluating the risk profile of the final proposal. The Bank is managing the counterparty credit risk through individual credit limits which are approved by various layers of credit officers/credit committees depending on the size and the risk profile of such credit exposure.
The Credit Risk Review (CRR) function of the CRMU independently monitors the credit processes, quality of portfolios and the integrity of the risk grading system to ensure that high credit standards are maintained by the Lending Officers at all times. It undertakes independent review of credit evaluations carried out by the Lending Officers. In accordance with guidelines issued by the Central Bank of Sri Lanka, a minimum of 30% of the loan portfolio of the Bank are reviewed by the CRR function annually.
The main focus of the CRR function is to independently verify adherence to the Credit Policy/Lending Guidelines. It also encompasses the post-disbursement review of all substantial facilities on a periodic basis to identify performing advances where potential of emerging risks have not been identified. This ensures that the credit processes are managed in line with the Credit Policy of the Bank in order to maintain the quality of lending portfolios within the Bank's risk appetite framework.
The credit risk appetite of the Bank is set by the Board of Directors and contains a set of limits on maximum exposures to industry sectors, products and geographies to manage the risk within the approved parameters. The "Credit Risk Appetite" including the "Risk Acceptance Criteria" are clearly defined in the Lending Guidelines of the Bank and the Lending Officers are expected to follow these guidelines in evaluating and managing their credit exposures.
The Bank has classified the sectors which are of limited or no credit appetite into two main categories; i.e. "Prohibited Appetite" and "High Risk". The sectors which will not be entertained under any circumstances, either due to the very high levels of risks involved or because of negative social/ethical considerations are listed under the "Prohibited Appetite" category whereas the sectors which are perceived to be exceptionally risky have been listed under the "High Risk" category. The Lending Officers ensure that adequate risk mitigants and proper pricing are in place when entertaining proposals from such "High Risk" sectors under exceptional circumstances.
Bank has introduced a comprehensive and robust risk grading system compliant with Basel II and CBSL Directions. The new system encompasses the capability of representing diverse risk factors through a single point of indicator and potentiality of predicting the Probability of Default based on borrower and transaction specific criteria. These indicators would help the Lending Officers to measure the risk profile of the credit portfolios in an objective manner, while assisting the Bank in achieving its future aspiration of progressing from the present Standardised Approach towards Basel II Advanced Approaches in Credit Risk Management such as Foundation Internal Rating Based (FIRB) and Internal Rating Based (IRB), with the consent of the regulator.
The Bank obtains collaterals against its credit exposures wherever possible as a secondary recourse to the borrowers (primary source of repayment being the cash flows). Such collaterals generally include; cash, marketable securities, properties, stocks in trade, trade debtors, machinery, equipment and other physical/financial assets. In project lending, the Bank may take shares of the project as an additional security to overcome adverse legal implications that may arise in realising unsuccessful/defunct project related assets. The Bank may also take fixed and floating charges on assets of borrowers and as such has put in place clear guidelines to determine the suitable collateral for credit risk mitigation based on characteristics of different collaterals (such as the suitability, realisability in stressed conditions and the adequacy of security cover). Unsecured lending accommodated to borrowers of high repute/financial strength too are subjected to rigorous internal evaluation and approval. Collateral valuation procedures are established to ensure that they will continue to provide the anticipated secondary repayment source in an eventuality. Where collateral values are vulnerable to high volatility of market variables, stringent hair cuts or more frequent independent valuations are called for. The Bank has a number of approved professional valuers in order to obtain valuations for assets which would be taken as collaterals. Although, the existence of collateral by itself is no guarantee for repayment, its value in enhancing the commitment of the borrower for repayment has immense practical importance in case of a debt recovery.
The Bank revalues the tangibles such as properties, machinery and equipment at regular intervals and peruses the Stocks and Debtors Statements at very short intervals ranging from 1 - 3 months to ensure that value of such collaterals offer adequate cushion, in case of an eventuality. In addition, hair cuts are applicable to collateral valuations based on conservative and predetermined Loan: Collateral ratios in compliance with the Banking Act direction No. 3 of 2008 "Classification of Loans and Advances, Income Recognition & Provisioning". In certain instances much stringent internal policies are being adopted by disregarding collateral cover for NPA's as a prudent measure.
The Accounting Policy related to the collateral valuation is given in the Notes to the Financial Statements under No. 3.3.10.1 on Impairment of Financial Assets carried at Amortised Cost.
Similarly, the financial collaterals such as shares are marked to market on a daily basis by using daily market data. While the real estate properties constitute the largest percentage of collateral assets, the Bank generally expects that the portfolio of collateral assets to be well-diversified to reduce possible concentration risk.
It is common to obtain Personal/ Corporate Guarantees of the stakeholders of a business or guarantees from other banks as collaterals against credit exposures. In case of Personal/Corporate Guarantees, the financial strength of the guarantors vis á vis their cash flows, net worth etc. are taken into consideration to establish the capacity to repay in case of a default by the principal borrower. In case of bank guarantees issued against credit exposures, a comprehensive counterparty credit risk evaluation criteria is being adopted to establish the acceptability of such guarantees against the potential credit exposure.
The Bank has not dealt with any type of Credit Derivatives during the year 2012 and as such does not have any outstandings under this category as at December 31, 2012.
The total gross loans and receivables from other customers of the Bank stood at Rs. 343 Bn. as at December 31, 2012 and the breakdown of this exposure by major product types is given in the graph on on this section. In order to ensure that an acceptable level of risk diversification is maintained across the Bank on an ongoing basis, the Bank has set various concentration limits under different criteria within the risk appetite framework of the Bank (i.e., single borrower, industry sectors, product etc,). These limits are continuously monitored and periodically reviewed by the Credit Policy Committee (CPC), the Executive Integrated Risk Management Committee (EIRMC) and the Board Integrated Risk Management Committee (BIRMC) to strengthen the dynamic portfolio management practices and to provide an early warning on possible deterioration of the Bank's credit quality.
The Bank has established policies/procedures to manage the credit risks on local/foreign counterparty banks and the cross border exposures including a comprehensive set of limits which are monitored on a continuous basis against the financial/economic performance of these counterparties/countries. The concentration levels on the said limits are closely monitored by the CRMU and the exposures are reported to the above mentioned Senior Management/Board Committees on a regular basis.
The Western Province has recorded a higher percentage of lending based on geographical distribution of the Bank's lending portfolio which accounted for 70% (approx.) of total advances portfolio of the Bank as at December 31, 2012. Although Western Province is vested with highest credit concentration, we believe that a sizable portion of these lending has been utilised to facilitate industries scattered around the country. For example, most of the large corporates which have island-wide operations are being accommodated by the Branches and Corporate Banking Division situated in the Western Province thus reflecting a notional geographical concentration on such borrowers.
The Bank's philosophy of effective credit risk monitoring is based on a continuous close monitoring of the key credit risk indicators, behavioural and characteristics of individual credit portfolios and environment factors that may have an impact on the Bank's credit risk profile. This encompasses production and analysis of regular reports on significant risk exposures for review by various management committees . At Portfolio level, the Bank monitors the advances at the highest possible granularity to effectively capture portfolio characteristics and possible correlations between portfolios/environmental factors. This enables the Bank in managing its portfolio credit risk covering the potential adverse impact of over concentration on single parties, industry sectors, loan products etc. This process also enables the Bank to identify any emerging risks in the individual credit portfolios and to take suitable corrective action in a timely manner. Another main focus of this portfolio management process is to derive the maximum benefit associated with the diversification of the Bank's advances portfolio into a multitude of thriving economic segments in order to reduce the overall credit risk while optimising returns.
As part of the ICAAP, the Bank has also developed certain key stress tests which will be conducted at regular intervals to gauge the Bank's resilience for any significant deterioration in the credit quality of the Bank.
Further, the Bank tracks the quality of the loan book on a regular basis by analyzing the trends in different lending portfolios. Such indicators prompt the relevant risk management committees to take timely decisions in preserving the quality of loans and advances.
Following the convergence of Sri Lanka Accounting Standards with the International Financial Reporting Standards (IFRS), the classification criteria of loans and advances as NPA (impaired) have been changed and a comprehensive explanation of the Bank's policy is given under Note 3.3.10 on Impairment of Financial Assets in the Notes to the Financial Statements.
In the event of a default, the Bank generally can incur a loss equal to the amount owed by the borrower, less any recoveries resulting from foreclosure and the liquidation of the collateral held as security for the facilities granted. The Bank's provision buffer for loan losses is considered adequate to absorb any credit losses existing as at the dates of the consolidated Balance Sheets. This allowance is for probable credit losses inherent in existing exposures and the credit exposures specifically identified as impaired. As a prudential measure, the Bank makes 100% provisions on the net exposures on all the loans and advances which are in the "Substandard" and 'Doubtful' categories though the related regulatory guidelines required the Bank to make specific provisions at lower levels. Similarly, the loans and advances below Rs. 5.0 Mn which are in the non-performing category for more than a period of 1 year are fully provided disregarding the collateral values.
The Non-performing advances portfolio of the Bank broken down by major Industries and Geographic areas on given together with the respective Specific/General loan loss provisions and amounts written-off during the period under review, as per the regulatory disclosure requirements.
As per Basel II guidelines a bank may use the net exposure of loans and deposits as the basis for its capital adequacy computation only where a bank has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt. The Bank should also be able at any time to determine those assets (loans) and liabilities (deposits) with the same counterparty that are subject to the netting agreement; and monitor/controls its roll-off risks; and the relevant exposures on a net basis.
The Bank's accounting policy on 'offsetting of financial instruments' describes the extent to which it adopts netting off within the parameters laid down under Sri Lanka Financial Reporting Standards (SLFRS).
Social and environmental risks associated with lending activities of the Bank are reviewed by the IRMD.
A comprehensive analysis in managing credit risk in relation to Social and Environmental Management Policy of the Bank is given in the Management Discussion and Analysis.
The graphical presentationsdepict the analysis of the Bank's overall credit risk exposure as at December 31, 2012 based on different factors. Industry Sector distribution of the Advances Portfolio is given in the Note 26.1 to the Financial Statements on Financial Reports section.
Rs. '000 | |||
Province/Geographic Area | Total NPA | Specific Provisions for Bad Debts | General Provision |
Central | 611,314 | 186,755 | 68,186 |
Eastern | 163,835 | 69,763 | 13,605 |
North Central | 216,714 | 129,363 | 20,674 |
Northern | 673,105 | 205,841 | 26,724 |
North Western | 737,208 | 238,537 | 68,390 |
Sabaragamuwa | 326,928 | 160,600 | 25,914 |
Southern | 1,377,643 | 694,726 | 62,728 |
Uva | 127,520 | 56,520 | 15,514 |
Western | 8,412,005 | 3,245,594 | 1,067,816 |
Bangladesh | 205,778 | 90,048 | 66,342 |
Maldives | – | – | – |
Other Foreign Geographies | – | – | – |
Total | 12,852,050 | 5,077,747 | 1,435,893 |
Note: The above figures have been prepared as per SLAS and may differ from SLFRS figures.
(Sri Lankan Operations) | Rs '000 | ||
Industry Sector | Outstanding | Specific Provision | Amount Written-Off |
Exports | 1,347,012 | 553,365 | 721 |
Imports | 1,568,095 | 557,798 | 4,823 |
Wholesale & Retail Trading | 722,891 | 286,938 | 4,579 |
Construction Industry | 788,521 | 140,373 | 5,060 |
Industrial | 1,398,392 | 598,769 | 2,207 |
Agriculture | 609,435 | 253,908 | 2,865 |
Housing | 637,376 | 258,078 | 752 |
Tourism & Allied | 987,446 | 424,652 | 9,790 |
Personal | 2,941,067 | 1,277,969 | 9,393 |
Services | 999,695 | 355,909 | 3,937 |
Holding Companies | 4,625 | 2,509 | – |
Non Banking Financial Institutions | 29,548 | 29,457 | 120 |
State Institutions | 135 | 135 | – |
Any other Commercial Activity | 420,879 | 153,770 | 3,343 |
Miscellaneous | 191,155 | 94,069 | 901 |
Total | 12,646,272 | 4,987,699 | 48,491 |
Note: The above figures have been prepared as per SLAS and may differ from SLFRS figures.
Market Risk is the likelihood of the Bank incurring losses as a result of values of assets and liabilities or revenues being adversely affected by changes in financial market conditions such as movements in interest rates, exchange rates, equity prices, or commodity prices. The Bank's exposure to Market Risk arises as a result of dealing in financial products including loans, deposits, securities, short term borrowings, long term debt etc., to facilitate both customer-driven and proprietary transactions.
The Bank did not have any exposure to Commodity Risk while it had only a negligible exposure on Equity Risk during 2012. (Refer Financial Statements Notes 24 and 27 for Bank's exposure on equity). The Market Risk exposure was therefore, mainly measured in terms of Interest Rate Risk (IRR) and Foreign Exchange (FX) Risk that affect traditional banking products.
Market Risk Management Unit (MRMU) of the Integrated Risk Management Department (IRMD) works in close relationship with various business units and control/monitoring units of the Bank in order to identify, measure, monitor, and report Market Risk related exposures in accordance with the Market Risk related policies of the Bank. Treasury Middle Office, an integral part of MRMU, independently evaluates and monitors transactions carried out by the Bank's Treasury from a risk perspective.
MRMU is entrusted with the task of reviewing Market Risk related policies and exposure limits facilitating efficient risk/return decisions within Board approved policy parameters and guidelines.
The Bank's risk governance structure is based on the principle that each business head is responsible for the comprehensive identification and verification of Market Risk sources, events, causes and consequences in relation to their business line together with the internal or external factors/events that could affect the business strategy and risk profile of the Bank, with appropriate Senior Management oversight. Risk assessment is conducted by incorporating both qualitative and quantitative measures including stress testing to identify areas of concern.
At a portfolio level, MRMU is primarily entrusted with the responsibility of identifying, measuring, monitoring, and reporting Market Risk related exposures of the Bank to assist effective management of same. Further, MRMU provides independent reviews on new investment proposals/products originated from different business units in order to evaluate such products from a Market Risk perspective.
Management of two main components of Market Risk by the Bank is discussed in detail below.
As per the Basel Committee on Banking Supervision, IRR is the exposure of the Bank's financial condition to adverse movements in interest rates. Excessive change in interest rates could pose a severe threat to the Bank's Net Interest Income (NII) and also affect the underlying value of assets, liabilities and Off-Balance Sheet items.
IRR is a major component of the market risk exposure of the Bank which arises from trading activities as well as banking activities such as granting of credit facilities, accepting deposits and issuing debt. The Bank uses several tools to monitor IRR on an ongoing basis taking into consideration re-pricing characteristics of all assets and liabilities of the Bank's Balance Sheet. The Bank assesses IRR exposure based on both the Earnings At Risk (EAR) perspective focusing on the impact of interest rate changes on its near-term earnings and the Economic Value of Equity (EVE) perspective, focusing on the value of the Bank's net cash flows.
The Bank manages interest rate exposure relating to its assets and liabilities on a consolidated basis. Business units transfer their interest rate risk to Treasury through a transfer-pricing mechanism, which takes into account the elements of interest rate exposure that can be risk-managed in financial markets.
Impact of the market changes on the NII of the Bank is assessed by forecasting the Bank's Balance Sheet for a 12 months period taking into consideration expected future business growth based on the budget, Asset and Liability Management (ALM) positioning and the projections of interest rate movements as implied by the market-based rates/macro economic forecasts. These factors are then used to measure and evaluate the potential impact on the Bank's profitability resulting from alternative interest rate scenarios for both LKR and foreign currency.
Interest Rate Risk in Banking Book (IRRBB) refers to the risk of loss in earnings or economic value of the Bank's assets and liabilities that are not actively traded, as a result of adverse movement in interest rates. The Bank has significant portion of its assets and liabilities portfolio not marked to market and is carried on the books of the Bank at historical values. Thus, the economic value of such assets and liabilities is generally not ascertained on a regular basis and can be a significant source of risk if the asset or liability is not held till maturity.
As a part of ICAAP, the Bank has adopted the Modified Duration Gap approach for analysing the changes in Economic Value of Equity (EVE), which requires the mapping of assets and liabilities into different time buckets. While doing so the following assumptions are made by the Bank:
Bank compares the weighted average of durations of assets and weighted average of durations of liabilities to arrive at the duration gap of equity. Modified duration of equity is then given a rate shock to measure the change in economic value of equity, which is continuously monitored by the Bank.
In addition to the EVE approach the Bank also uses Earnings at Risk (EAR) approach to analyse the impact on NII resulting from changes in interest rates. In this approach Rate Sensitive Liabilities (RSL) are subtracted from the Rate Sensitive Assets (RSA) to produce the 'Gap' for each time bucket, which is further used to compute the impact on NII. The assets and liabilities are classified as rate sensitive if:
Interest Rate Risk to which the Bank is exposed usually derives from associated factors such as repricing risk, yield curve risk, and basis risk.
Re-pricing risk occurs due to differences in amounts of assets and liabilities that get re-priced at the same time or due to timing differences in the fixed rate maturities and re-pricing of floating rate assets, liabilities and certain Off-Balance-Sheet instruments such as interest rates SWAPs, forward contracts etc. Bank monitors these mismatches on a regular basis against the internally set limit structure giving due cognisance to behavioural patterns of relevant assets and liabilities.
Upto
1 Month |
1-3
Months |
3-6
Months |
6-9
Months |
9-12 Months | 1-3
Years |
3-5
Years |
More than 5 Years | Non- Sensitive | Total
Rs. Mn. |
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Assets and Off-Balance Sheet Exposures | |||||||||||
Cash on Hand | – | – | – | – | – | – | – | – | 11,075 | 11,075 | |
Deposits with Central Banks | 515 | – | – | – | – | – | – | 1,867 | 15,787 | 18,169 | |
Balances due from Head Office, Affiliates and own branches |
– | – | – | – | – | – | – | – | – | – | |
Balances due from other banks | 19,466 | 5,702 | 125 | – | – | – | – | – | – | 25,293 | |
Investments | 30,632 | 19,794 | 17,141 | 15,101 | 4,182 | 11,537 | 5,326 | 1,648 | 647 | 106,008 | |
Bills of Exchange | 5,671 | – | – | – | – | – | – | – | – | 5,671 | |
Overdrafts | 23,011 | 6,574 | 4,931 | 4,931 | 26,298 | – | – | – | – | 65,745 | |
Loans and Advances | 102,567 | 30,444 | 24,786 | 15,115 | 14,217 | 43,258 | 16,784 | 5,969 | – | 253,140 | |
Non-Performing Loans | – | – | – | – | – | – | – | – | 811 | 811 | |
Fixed Assets | – | – | – | – | – | – | – | – | 8,718 | 8,718 | |
Net Inter-Branch Transactions | – | – | – | – | – | – | – | – | – | – | |
Accrued Interest | – | – | – | – | – | – | – | – | – | – | |
Other Assets | – | – | – | – | – | – | – | – | 13,678 | 13,678 | |
Reverse Repo | 2,693 | – | 1,004 | – | – | – | – | – | – | 3,697 | |
Forward Rate Agreements | – | – | – | – | – | – | – | – | – | – | |
Swaps | – | – | – | – | – | – | – | – | – | – | |
Futures | – | – | – | – | – | – | – | – | – | – | |
Options | – | – | – | – | – | – | – | – | – | – | |
Others | – | – | – | – | – | – | – | – | – | – | |
Total | 184,555 | 62,514 | 47,987 | 35,147 | 44,697 | 54,795 | 22,110 | 9,484 | 50,716 | 512,005 | |
Liabilities and Off-Balance Sheet Exposures |
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Demand Deposits | 36,025 | – | – | – | – | – | – | – | – | 36,025 | |
Savings Deposits | 133,917 | – | – | – | – | – | – | – | – | 133,917 | |
Time Deposits | 36,462 | 59,825 | 34,084 | 38,177 | 18,726 | 5,457 | 5,421 | 6,820 | – | 204,972 | |
Other Deposits | – | – | – | – | – | – | – | – | – | – | |
Balances due to Head Office, Affiliates and own branches |
– | – | – | – | – | – | – | – | – | – | |
Balances due to other banks | 4,711 | 40 | 3 | – | – | 1,664 | 3,328 | 3,328 | – | 13,074 | |
Certificates of Deposit | 1,008 | 1,412 | 1,774 | 2,997 | – | 375 | 245 | – | – | 7,811 | |
Other Borrowings | – | 98 | 1,884 | 768 | – | 2,412 | 943 | 1,518 | – | 7,623 | |
Net Inter-Branch Transactions | – | – | – | – | – | – | – | – | – | – | |
Bills Payable | – | – | – | – | – | – | – | – | – | – | |
Interest Payable | – | – | – | – | – | – | – | – | 16,194 | 16,194 | |
Provisions (Others) | – | – | – | – | – | – | – | – | – | – | |
Capital | – | – | – | – | – | – | – | – | 18,009 | 18,009 | |
Reserves | – | – | – | – | – | – | – | – | 27,212 | 27,212 | |
Retained Earnings | – | – | – | – | – | – | – | – | 8,423 | 8,423 | |
Subordinated Debt | – | – | – | – | – | – | 973 | – | – | 973 | |
Other Liabilities | – | – | – | – | – | – | – | – | 6,012 | 6,012 | |
Repos | 16,843 | 7,219 | 4,030 | 2,428 | 1,240 | – | – | – | – | 31,760 | |
Forward Rate Agreements | – | – | – | – | – | – | – | – | – | – | |
Futures | – | – | – | – | – | – | – | – | – | – | |
Swaps | – | – | – | – | – | – | – | – | – | – | |
Options | – | – | – | – | – | – | – | – | – | – | |
Total | 228,966 | 68,594 | 41,775 | 44,370 | 19,966 | 9,908 | 10,910 | 11,666 | 75,850 | 512,005 | |
Period Gap | (44,411) | (6,080) | 6,212 | (9,223) | 24,731 | 44,887 | 11,200 | (2,182) | |||
Cumulative Gap | (44,411) | (50,491) | (44,279) | (53,502) | (28,771) | 16,116 | 27,316 | 25,134 | |||
RSA/RSL | 0.81 | 0.91 | 1.15 | 0.79 | 2.24 | 5.53 | 2.03 | 0.81 |
Note 1: The above figures have been prepared as per SLAS and may differ from SLFRS figures given in the Statement of Financial Position.
Note 2: Prepared as per disclosure requirement given in the Banking Act Direction No. 7 of 2011 on "Integrated Risk Management Framework".
Note 3: RSA = Rate Sensitive Assets and RSL = Rate Sensitive Liabilities.
Bank's balance sheet consists mainly of assets and liabilities with relatively short average durations which are capable of withstanding any adverse rate movements in the market without any difficulty.
Bank monitors the sensitivity of NII due to changes in interest rates by giving 1% and 0.25% shocks to Rupee and Foreign Currency portfolios respectively and ensures that the variations are managed within the internal exposure limits. The graph above indicates the sensitivity of NII to rate shocks, during the last year.
The IRR of the Bank is measured centrally at IRMD and managed by the Treasury through Funds Transfer Pricing (FTP) mechanism under the guidance of the Asset and Liability Committee (ALCO). By adopting this mechanism, business units are only expected to manage non-market risk related factors.
Yield curve risk arises when unanticipated shifts of the yield curve have adverse effects on the Bank's income or underlying economic value, which the Bank manages by rebalancing portfolios as necessary.
Basis risk results from differences in the relative movements of rate indices which are used for pricing instruments with similar characteristics. ALCO assesses the potential contribution of basis risk towards IRR by monitoring movements in indices such as Prime Lending Rate (PLR), Sri Lanka Inter Bank Offered Rate (SLIBOR), and rates of Government Securities thereby making appropriate decisions to re-price or rebalance the portfolios as necessary.
Foreign Exchange Risk is the potential impact on earnings or capital of the Bank due to adverse fluctuations in exchange rates arising as a result of maturity mismatches in foreign currency positions. This exposure is created when the Bank transacts in a currency other than the base currency - i.e. Sri Lankan Rupee (LKR). Bank has set stringent risk tolerance limits for FX exposures within the regulatory parameters of the Central Bank of Sri Lanka (CBSL), to ensure that potential losses arising out of fluctuations in FX rates are within the Bank's risk appetite.
USD/LKR market fluctuated between a low of Rs. 113.81 and a high of Rs. 134.00 (source: Bloomberg) during the period under review resulting in a Rupee depreciation of approximately 12% during the year. Such volatile movements in the exchange rate may result in losses to the Bank, if Net Open Position (NOP) is not managed within the established policy limits. Therefore, the Bank regularly monitors the sensitivity of the NOP to changes in USD/LKR exchange rates by applying appropriate shocks.
Un-hedged portion of the FX Open Position (Net Open Position) of the Bank is regulated through statutory limits imposed by the CBSL. FX translation risk arises from the consolidation of Bank's Foreign Currency investments overseas into Local Currency. Any other reserves held in Foreign Currency are being monitored through Sensitivity Analysis carried out on the USD/LKR exchange rate.
Currency | Spot | Forward | Net Open Position | Net Position in Other Exchange Contracts | Overall Exposure In Respective Foreign Currency | Overall Exposure In Rs. '000 | |||||||
Assets | Liabilities | Net | Assets | Liabilities | Net | ||||||||
1 | 2 | 3 | 4=2-3 | 5 | 6 | 7=5-6 | 8 | 9 | 10 | 11 | |||
US Dollars | 16,796.2 | 14,845.0 | 1,951.2 | 1,761.3 | 2,961.9 | (1,200.6) | 1,350.9 | – | 4,502.8 | 576,355.6 | |||
Pound Sterling | 399.6 | 389.1 | 10.5 | – | – | – | (22.8) | – | 33.3 | 6,880.7 | |||
EURO | 2,358.4 | 2,314.9 | 43.5 | 1,250.0 | 1,250.0 | – | (20.9) | – | 64.4 | 10,889.3 | |||
Japanese Yen | 9,014.9 | 3,636.3 | 5,378.6 | – | – | – | (2,063.5) | – | 7,442.1 | 11,082.8 | |||
Indian Rupee | – | – | – | – | – | – | – | – | – | – | |||
Australian Dollar | 430.7 | 434.9 | (4.2) | – | – | – | (8.7) | – | 12.9 | 1,719.8 | |||
Canadian Dollar | 25.2 | 4.7 | 20.5 | – | – | – | 13.5 | – | 34.0 | 4,376.6 | |||
Other Currencies in USD | 605.8 | 477.1 | 128.7 | – | 108.9 | (108.9) | 35.8 | – | 273.4 | 34,996.6 | |||
Total Exposure | 646,301.4 | ||||||||||||
Total Capital Funds as per the latest Audited Financial Statements (capital base as at December 31, 2012) | 49,327,280 | ||||||||||||
Total Exposure as a % of total Capital Funds as per the latest Audited Financial Statements | 1.31% |
Up to
1 Month |
1-3
Months |
3-6
Months |
6-9
Months |
9-12 Months |
1-3
Years |
3-5
Years |
More than
5 Years |
Total | |
Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | |
Total Assets | 36,382 | 17,497 | 15,225 | 3,334 | 2,576 | 35,569 | 9,679 | 4,030 | 124,293 |
Total Liabilities | 44,344 | 29,828 | 19,708 | 18,313 | 7,068 | 20,043 | 21,055 | 27,809 | 188,167 |
Period Gap | (7,962) | (12,330) | (4,483) | (14,978) | (4,492) | 15,526 | (11,376) | (23,780) | |
Cumulative Gap | (7,962) | (20,292) | (24,775) | (39,753) | (44,245) | (28,719) | (40,095) | (63,875) |
With the implementation of Internal Capital Adequacy Assessment Process (ICAAP), a comprehensive stress testing framework has been developed by the Bank incorporating various plausible scenarios for changes in exchange/interest rates to measure the impact on earnings as well as capital. Regular stress testing is being conducted on Foreign Exchange portfolio and Interest Rate Risk on Banking Book (IRRBB) using both Economic Value of Equity (EVE) and Earnings at Risk (EAR) perspectives and the Fixed Income Securities (FIS) portfolio held for trading to estimate the changes in such portfolios that may result from abnormal market movements. MRMU in conjunction with the business units develops both systemic and specific stress scenarios. The basis for deciding on the level of stress depends on the changing positions and new economic and/or socio political variables.
Stress test results provide the senior management with a clear perspective of the trend of risk being taken. Stress testing for the trading portfolio is monitored through the limits framework available for Market Risk Management.
Stress testing for IRRBB is carried out separately for LKR exposure and other currencies, considering the fact that total size of USD exposure is more than 5% of the total portfolio. Other material currencies, considering their insignificant exposure, are combined with the USD items for risk management purposes. The Interest rate scenarios are constructed for the purpose of stress testing taking into account positive and negative parallel shifts ranging from 1% to 3%.
Bank performs stress testing on FX Open Positions including reserves by stressing the aggregate value by 6%, 10% and 15% under low, medium and high scenarios.
ALCO is responsible for appropriate pricing of products and maintaining a balanced portfolio to suit current interest rate and exchange rate scenarios, market competition, etc. to manage Market Risk efficiently. ALCO thus regularly assesses the suitability of such mechanisms to mitigate overall Market Risk exposure of the Bank's Balance Sheet.
Market Risk related limits are set out in the Board approved FX Risk Management Policy, Asset and Liability Management (ALM) Policy, and Derivative Policy which are periodically reviewed by ALCO and Executive Integrated Risk Management Committee (EIRMC). In addition to these limits, the Bank has set up Management Action Triggers (MATs) to notify the ALCO of impending limit breaches or recurring loss events so that proactive and timely preventive measures could be initiated to mitigate potential losses.
Treasury Back Office monitors risk exposures created as a result of various Treasury transactions against both internal and regulatory policies, procedures and limits. Treasury Middle Office independently monitors adherence to internally set Market Risk limits and reports any exceptions to Senior Manager Market Risk on a daily basis.
MRMU carries out sensitivity analysis related to market risk factors, analyses Key Market Risk Indicators and reports the findings to risk related management committees periodically for necessary decisions.
Risk exposures created as a result of offering retail or wholesale banking products or services are managed within the Board approved ALM Policy parameters by the ALCO.
Liquidity risk is the potential vulnerability of a financial institution for not being able to fund increases in assets and meet contractual and contingent financial obligations, On-or Off-Balance Sheet, as they fall due without incurring unacceptable losses.
Banks in the business of financial intermediation are by nature vulnerable to liquidity and solvency problems resulting from asset and liability mismatches. Thus, the Bank's primary objective in liquidity risk management is to ensure adequate funding for its businesses throughout market cycles, including periods of financial stress. To achieve this objective, the Bank continuously analyses and monitors liquidity risk, maintains an adequate margin of safety in liquid assets and maintains access to diverse funding sources to meet liquidity requirements.
The Bank's liquidity risk governance process is designed to ensure that its liquidity position is optimised to support its business requirements while maintaining healthy earnings.
Bank's Treasury Division is entrusted with the task of monitoring daily liquidity requirement of the Bank. ALCO meets at least fortnightly and is responsible for managing and controlling the overall liquidity of the Bank and reviews the impact of strategic decisions on Bank liquidity. This process ensures maintenance of sufficient resources to meet daily liquidity obligations and ability to withstand a period of Bank specific/market specific liquidity stress.
MRMU reviews the Bank's ALM policy, Liquidity policy, Contingency Funding Plan, and Liquidity Risk tolerance limits at least annually and obtains Board approval through ALCO for the adoption of suitable policy parameters and processes for managing liquidity risk of the Bank.
Liquidity of the Bank is measured using both stock (based on key ratios) and flow (based on cash inflows/ outflows in time bands) approaches.
A variety of key liquidity risk indicators are used by the Bank to assess the adequacy of the liquidity position namely, Statutory Liquid Asset Ratio (SLAR), Net Advances to Deposits Ratio, Dynamic and Static (Structural) Liquidity Gap Summary, Core Funding Ratio, Funding Concentration, and Commitments Vs Funding Sources.
The Bank has in place a more stringent internal limit for maintaining SLAR as compared to the statutory requirement of 20% of total liabilities excluding contingent liabilities.
Net Advances to Deposits Ratio is regularly monitored by ALCO to ensure that the assets and liability portfolios of the Bank are geared to maintain a healthy liquidity position. The graph depicts the movement in Net Advances to Deposits Ratio during the year 2012.
Liquidity mismatches are reviewed on a regular basis by evaluating both dynamic and static liquidity positions of the Bank. Dynamic Liquidity Gap report prepared for all major currencies uses certain behavioural assumptions on asset and liability classifications when projecting cash flows considering general behaviour patterns inherent to different asset and liability products.
Up to
1 month Rs. Mn. |
1-3 months Rs. Mn. | 3-6 months Rs. Mn. | 6-9 months Rs. Mn. | 9-12 months Rs. Mn. | 1-3
years Rs. Mn. |
3-5
years Rs. Mn. |
Over 5
years
Rs. Mn. |
Total
Rs. Mn. |
|
Cash on Hand | 11,075 | – | – | – | – | – | – | – | 11,075 |
Deposits with Central Banks | 1,941 | 2,802 | 1,832 | 1,586 | 1,460 | 1,627 | 1,595 | 5,325 | 18,168 |
Balances due from Head Office, Affiliates and own branches |
– | – | – | – | – | – | – | – | – |
Balances due from other banks | 19,466 | 5,702 | 125 | – | – | – | – | – | 25,293 |
Investments | 24,472 | 10,657 | 10,374 | 15,123 | 4,202 | 33,881 | 5,326 | 1,972 | 106,007 |
Bills of Exchange | 5,671 | – | – | – | – | – | – | – | 5,671 |
Overdrafts | 4,931 | 4,931 | 4,931 | 4,931 | 4,931 | 13,642 | 13,642 | 13,806 | 65,745 |
Loans and Advances | 30,846 | 39,303 | 31,286 | 13,732 | 12,980 | 73,338 | 31,771 | 19,883 | 253,139 |
NPLs (Net of Interest Receivables, Interest in Suspense and Specific Loan Loss Provision) | – | – | – | – | 203 | – | – | 608 | 811 |
Net Inter–Branch Transactions | – | – | – | – | – | – | – | – | – |
Other Assets | 12,536 | 18 | 25 | 24 | 24 | 149 | 102 | 9,516 | 22,394 |
Lines of Credit committed from institutions | 1,000 | – | – | – | – | – | – | – | 1,000 |
Others (Reverse Repo) | 2,693 | – | 1,004 | – | – | – | – | – | 3,697 |
Total Assets | 114,631 | 63,413 | 49,577 | 35,396 | 23,800 | 122,637 | 52,436 | 51,110 | 513,000 |
Demand Deposits | 7,205 | 7,205 | 5,404 | 3,603 | 3,603 | – | – | 9,006 | 36,026 |
Savings Deposits | 6,696 | 6,696 | 6,696 | 6,696 | 6,696 | 33,479 | 33,479 | 33,479 | 133,917 |
Balances due to Head Office, Affiliates and own branches |
– | – | – | – | – | – | – | – | – |
Balances due to other banks | 4,711 | 40 | 3 | – | – | 1,664 | 3,328 | 3,328 | 13,074 |
Time Deposits | 25,524 | 41,877 | 23,859 | 21,106 | 18,726 | 3,820 | 3,794 | 66,265 | 204,971 |
Certificates of Deposit, Borrowings and Bonds | 705 | 1,130 | 1,902 | 1,512 | 1,434 | 2,992 | 2,402 | 4,330 | 16,407 |
Net Inter–Branch Transactions | – | – | – | – | – | – | – | – | – |
Bills payable | – | – | – | – | – | – | – | – | – |
Interest payable | 9,833 | 1,854 | 1,727 | 916 | 831 | 749 | 271 | 12 | 16,193 |
Provisions other than NPLs & Depreciation of Investments | – | – | – | – | – | – | – | – | – |
Other Liabilities | 429 | 1,112 | 1,581 | 12 | 468 | 2,094 | 265 | 50 | 6,011 |
Lines of Credit committed to institutions | 1,000 | – | – | – | – | – | – | – | 1,000 |
Unutilised portion of ODs and Advances | 14,221 | 2,817 | 2,817 | 2,817 | 2,817 | 7,795 | 7,795 | 9,942 | 51,021 |
Letters of Credit/Guarantee/Acceptance | 6,234 | 10,053 | 3,827 | 1,550 | 89 | 252 | – | – | 22,005 |
Repo/Bills Rediscounted/Swaps/Forward contracts | 16,843 | 7,219 | 4,030 | 2,428 | 1,240 | – | – | – | 31,760 |
Others | – | – | – | – | – | – | – | – | – |
Total Liabilities | 93,401 | 80,003 | 51,846 | 40,640 | 35,904 | 52,845 | 51,334 | 126,412 | 532,385 |
Period Gap | 21,230 | (16,590) | (2,269) | (5,244) | (12,104) | 69,792 | 1,101 | (75,302) | |
Cumulative Gap | 21,230 | 4,640 | 2,371 | (2,873) | (14,977) | 54,815 | 55,917 | (19,385) |
Note 1: The above figures have been prepared as per SLAS and may differ from SLFRS figures given in the Statement of Financial Position.
Note 2: Prepared as per disclosure requirement given in Banking Act Direction No. 7 of 2011 on "Integrated Risk Management Framework".
Structural Liquidity Gap Report (Refer Note 50) uses only contractual cash flows. The Bank has incorporated appropriate thresholds for tenors up to 12 months in both Static and Dynamic reports as well as Management Action Triggers which indicate any significant changes to liquidity profile, the Senior Management should be aware of.
The Structural Liquidity Gap Report prepared for the Bank does not indicate any adverse situation giving due cognisance to the fact that overnight bucket related cash out flows include savings deposits which can be considered as quasi stable source of funds based on historical behavioural patterns of such depositors. Core Funding Ratio reflects the stability of funding sources compared to loans and advances granted, an indicator that the Bank's asset base is funded by sufficiently long term liabilities. The Bank has maintained its Core Funding Ratio above the policy threshold of 90% during the year under review which is considered healthy.
Funding concentration is monitored by ALCO for both LKR and Foreign Currencies, where distribution of main deposit account types are measured against the appropriate deposit base to ascertain potential risks and rebalance the portfolios.
The Bank monitors its potential liquidity commitments by way of loan disbursements and undrawn overdrafts compared to the available funding sources on a regular basis, to properly plan its cash flows. However, generally Bank does not have any credit limits having irrevocable commitments and therefore, potential liquidity risk from undrawn commitments is considered to be very remote.
The graphs below depicts the trends in various liquidity related ratios of the Bank during the period from December 2011 to December 2012.
Trend in purchased funds to Total Assets is depicted in the graph below:
The Bank also performs regular liquidity stress tests and scenario analysis as part of its liquidity monitoring activities. These are intended to quantify potential impact of liquidity related events to proactively identify viable funding alternatives that can be utilised to manage such stress situations with minimum financial and/or reputational impact on the Bank. The Bank has in place a Liquidity Contingency Plan (LCP) to address unlikely events of both short term and long term funding crisis and forecasts funding needs as well as funding sources under different market scenarios including aggressive asset growth or loan rollover, rapid liability erosion or sharp decline in deposits. These scenarios measure the Bank's liquidity position across a 3-month horizon by analysing the net funding gaps resulting from contractual and contingent cash and collateral outflows versus the ability to generate additional liquidity by pledging or selling excess collateral and utilising contingency borrowing agreements with other counterparty banks.
In liquidity stress testing the Bank uses several scenarios that could potentially lead to liquidity stress which include sharp decline in deposits and loan roll-overs for low, medium and high stress situations.
The potential impact of a sharp decline in deposits and loan roll-over on the Bank's Asset & Liability gap would invoke the Contingency Plan in case a negative cumulative gap is observed in the up to 3 months maturity bucket.
Liquidity risk management framework of the Bank has been designed in compliance with the regulatory guidelines. Bank has developed certain funding and liquidity risk management policies such as maintaining excess liquidity at appropriate levels, determining amounts of excess liquidity required based on analysis of debt maturities and other potential cash outflows, including those that may result during stressed market conditions. The liquidity policy has established parameters to continuously maintain diversified funding sources including liquidity contingency planning so that the Bank could meet its cash flow requirements without over constraining resources/earnings.
Exposures to liquidity tolerance limits, and relevant ratios are regularly monitored by ALCO in order to take informed decisions with regard to Bank's liquidity position/potential requirements. ALCO is responsible for monitoring liquidity risks and ensuring the liquidity risk remains within the established policy parameters and tolerance levels.
The Operational Risk has been identified as a distinct category of risk with a growing importance in the financial industry. Management of Operational Risk is a key feature of sound risk management practices in modern financial markets.
Operational Risk is the risk of losses resulting from inadequate or failed internal processes, people, and systems or from external events. This definition includes Legal Risk, but excludes Strategic and Reputational Risk. The Legal Risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
Broad Objectives of the Operational Risk Management function of the Bank are to:
Key Processes of the Management of Operational Risk in the Bank are based on the concept of 'Risk vs Service vs Cost'. Operational Risk is managed with least inconvenience to the clients in a cost effective manner so that the risk exposures of the Bank's operations are optimised to enhance business opportunities.
A comprehensive set of risk related policies and procedures are adopted to formalise the Bank's approach to Operational Risk Management, and to comply with the Basel II as well as regulatory guidelines for defining, measuring and managing Operational Risk.
The Operational Risk Management Policy of the Bank addresses the following key areas:
The Bank recognises that Operational Risk is inherent in all business activities and can bring unprecedented losses or damages to its business through direct or indirect financial loss, brand or reputational damage, customer dissatisfaction, or legal or regulatory penalties if such risks are not objectively managed.
The management of Operational Risk is therefore, an important priority of the Bank. The Bank has a comprehensive Operational Risk Management Mechanism that enables the identification, measurement, monitoring, controlling and reporting of inherent and emerging Operational Risks.
The Bank's Operational Risk governance structure includes the Board Integrated Risk Management Committee (BIRMC) which is overseeing the Operational Risk Management programme implemented by business units under the supervision of the Executive Integrated Risk Management Committee (EIRMC). The business units of the Bank are responsible for implementing the framework as well as the day-to-day management of Operational Risks, creating a partnership with the Risk Managers that ensures close monitoring and increasing awareness of Operational Risk.
Operational Risk assessment is a systematic process of identifying and evaluating events that could affect the achievement of objectives of the Bank, positively or negatively. Such events can be identified in the external environment as well as within an organisation's internal environment (e.g., people, processes, and infrastructure).
Risk identification is the primary component of Risk Management and the Bank adopts several techniques to identify Operational Risk associated with the products and processes of the banking operations. Once the risk events have been clearly identified, a combination of qualitative and quantitative assessment of risks is carried out to evaluate the potential impact of such risks. The following tools are used to identify and assess risk events under Operational Risk:
Risk assessment assists the Bank to consider how potential events might affect the achievement of objectives and estimates the impact of such events on the overall Operational Risk profile of the Bank.
The Bank assesses the identified Operational Risk events from two perspectives; Impact and Likelihood. Likelihood represents possibility that a given event will occur, while the Impact represents the effect of materialising such event. A '5x5' Risk Measurement Matrix is being used by the Bank to assess the operational risk events in order to identify the potential risk. Risks can then be prioritised based on the score derived for each risk that helps the Bank to adopt suitable risk responses/mitigatory measures for identified risks.
The Bank's Operational Risk Management team is entrusted with the task of tracking and analysing of Operational Loss data relating to various business units. The Operational Risk Management Unit (ORMU) of Integrated Risk Management Department (IRMD) maintains the loss event database of the Bank. ORMU analyses such data to ascertain trends, patterns of recurring losses in order to identify potential risks in advance and adopts mitigatory measures to prevent/minimise potential losses of such events in a proactive manner.
The loss data has been recorded according to the "Basel event types" under each business line as per the guidelines issued by the Central Bank of Sri Lanka. The Bank has successfully collected loss data for a period of five years which is one of the major components in moving towards Basel II advanced approaches in Operational Risk capital calculations as prescribed by the regulator.
Following charts indicate the percentages of Operational Risk Losses incurred by the Bank under each business line/category during the year 2012.
The following graphs depict the comparison of operational losses reported during the last three years under each "Basel loss event type" in terms of value and number of occurrences:
As experienced throughout the last few years, a high frequency of loss events of the Bank is with low financial impact. Individual events with monetary values less than Rs. 100,000 are accounted for more than 99% of the total loss events which is similar to losses experienced during the past years. Loss category of "Execution, Delivery and Process Management" which mainly consists of lower value losses relating to cash and ATM operations in nearly 800 delivery points (both in Sri Lanka and Bangladesh) accounted for the highest number of loss events for this year as well. However, average Operational Loss Events for year 2012 as a percentage of average number of transactions carried out in the year is negligible at 0.002%.
Loss type of 'Execution, Delivery and Process Management' also accounts for the highest percentage of loss values for the year 2012, followed by loss types of 'External Frauds' and 'Damages to Physical Assets'. However, gross value of the total Operational Losses for the year 2012 (which includes reported 'near miss' incidents) as a percentage of average gross income for the last three years (based on the income considered for the calculation of capital requirement for Operational Risk) is a mere 0.12%. This is a further improvement from the last year figure of 0.27%. The Bank has been able to maintain these losses at extremely lower levels compared to the mandatory capital allocation of 15% of the average gross income for last three years under Basic Indicator Approach of capital computation as per Basel II, mainly due to the application of sound and effective systems and controls.
The Bank's risk mitigation function is based on clear strategies approved by the Board of Directors and close supervision exercised by the EIRMC. The risk mitigation model adopted by the Bank to respond to various operational risks could be graphically illustrated as follows:
As reflected in its negligible Operational Risk related losses, the Bank has been able to maintain a strong internal Operational Risk culture. Various internal controls have been established to mitigate the Operational Risk of the Bank. Sound internal control system is a key component in managing Operational Risks. Internal controls established within the Bank can be classified into the following categories:
The Bank adopts a 'risk transfer strategy' for low frequency – high impact events and uncontrollable Operational Risk events such as damages to physical assets by natural disasters, fire etc. Accordingly, the Bank has transferred insurable risks by obtaining insurance policies from reputed insurance providers. Losses incurred due to natural causes and other hazards, external and internal frauds have been comprehensively insured while errors and omissions, information security and losses incurred in facilitating electronic payment mechanisms have been insured where the possible loss value exceeds a certain threshold.
Further, comprehensive independent review of insurance policies obtained by the Bank is carried out by the Integrated Risk Management Department (IRMD) on a periodic basis to ascertain the adequacy of insurance covers on various risks associated with banking operations.
Outsourced functions and responsibilities of outsourcing are governed by the Outsourcing Policy of the Bank. Certain banking functions have been outsourced after carefully evaluating the risk factors and carrying out cost-benefit analysis of such alternatives. All these outsourced functions are covered through legal agreements which are subject to periodic reviews. Basis of payments have also been incorporated under these agreements.
Details of outsourcing activities including service providers, nature of the service, cost of the service etc., are submitted to the regulator on a periodic basis.
Due diligence tests of third party service providers are carried out through on-site inspections. These exercises which include assessments of vendor's capability to carry out particular services and security measures adopted by them are carried out at the time of entering into new service agreements or renewal of existing service agreements.
In addition to the above, Business Continuity Plans of the service providers are reviewed at the time of entering into contracts with them to ensure that the activities of the Bank are not disrupted due to possible extreme risk events encountered by the outsourced service providers.
Comprehensive disaster recovery process covering all business units of the Bank is laid down under the Business Continuity Plan (BCP) which is regularly reviewed and reported to the Board. A Steering Committee of Business Continuity Management has been established and roles and responsibilities of the BCP Steering Committee and related Sub-committees are clearly defined in the BCP of the Bank.
Following areas are covered under the BCP:
In addition to the above, BCP of the Bank covers the relevant policies such as Staff Succession Policy, Staff Travel Policy, Staff Emergency Assistance Policy, Crisis Communication Policy, Supply Chain Management Policy, Awareness and Training Policy and Plan Testing and Updating Policy of the Bank.
Further, independent risk assessments of the BCP is carried out by the IRMD and reported to EIRMC/BIRMC while the Inspection Department of the Bank conducts regular internal audits of BCP.
To supplement the BCP, the Bank also has a Disaster Recovery Plan (DRP) that is focused on technical functionality and continuity of the IT systems and infrastructure. Events that can cause interruptions to key business processes and impact of such interruptions are identified in the DRP and redundancies are built-in to ensure uninterrupted service to customers during any such interruptions. A framework exists where the DRP is regularly reviewed, updated and tested by the DRP and BCP Committee, guided by the BCP Steering Committee.
An Information Technology disaster recovery site has been established in a geographically separate location from the primary site, allowing continuous operations in an event of the primary site becoming inaccessible or unavailable. The existing infrastructure is resilient to handle disaster situations and management of crisis. This DR facility is compliant with "ISO/IEC 27001:2005" Information Security Management Standard' and is annually verified by both external and internal Auditors. Alternate sites have also been established to carry out key business operations in case of an emergency and functionality of these sites are reviewed regularly by Internal Auditors, External Auditors and IRMD.
Other systems and controls adopted as risk mitigants are discussed under the 'Board Audit Committee Report', 'Internal Control Mechanism' and 'Directors' Statement on Internal Control' elsewhere in the Annual Report.
Key Risk Indicators (KRIs) and monitoring of tolerance levels in accordance with Risk Appetite are the major elements used in monitoring and reporting of Operational Risk of the Bank. All Operational Risk events (with or without monetary losses) of the Bank are reported by the 'risk owners' to compile KRIs by the IRMD which are reported to EIRMC. Events with financial losses above a certain threshold and other significant Operational Risk events are then reported to BIRMC on a monthly basis. All high impact Operational Risk events are comprehensively analysed by IRMD and discussed in detail at EIRMC/ BIRMC on a quarterly basis to derive suitable risk responses whenever necessary. Further, all Operational Risk events with financial impacts over certain thresholds are reported to the regulator on a quarterly basis.
In addition to the above measures, a well-developed 'regulatory compliance' monitoring mechanism is adopted by the Bank to monitor, report and comply with all mandatory banking and other statutory requirements. A centralised monitoring unit has also been established to detect transactions relating to Money Laundering and terrorist financing activities. This function is supported by the newly-acquired AML software solution. Further, the Bank is in the process of implementing a software solution to support monitoring and reporting of Operational Risk which will further strengthen the Operational Risk Management function.
Though Risk Appetite relating to Credit and Market Risks could be associated with returns, Risk Appetite for Operational Risk is more aligned with preventing potential losses and protect reputation rather than enhancing direct returns. Hence, ideal Risk Appetite level for Operational Risk is zero. However, if processes, systems, products etc are to be designed to achieve zero risk tolerance level, such processes are bound to be lengthy, time consuming, costly and causing great inconvenience to the Bank's internal and external customers. Thus in designing a process, system or a product, the Bank has to strike a balance between the need to minimise Operational Risk and inconvenience caused to clients/employees to keep in line with the Operational Risk concept of the Bank, 'Risk vs Cost Vs Service'. Hence, zero level tolerance for Operational Risk could not be practically achieved since all banking products, and processes are associated with various Operational Risks where some of those cannot be fully-mitigated unless the product or process is discontinued.
The Bank has a low appetite for material risks it is exposed to and accordingly has established tolerance levels for all material Operational Risk related losses. Following thresholds are used to monitor such losses:
Operational Risk Unit of the Bank closely monitors the above tolerance levels and notifies the management on the movements of the actual levels against the established thresholds. If any of the individual loss events reach the alert level, the Bank would take immediate action to review the processes and controls relating to the area where such losses have incurred.
Actual Operational Risk related losses for the current year as mentioned earlier is only 0.12% (of average-audited gross income for last three years) which is well within the internal alert level of 3% and maximum level of 5% as illustrated in the graph below. Further, as reflected in the graph, the Bank has been able to maintain the Operational Risk losses well under control over a considerable period.
Parallel computation of capital required for Operational Risk under The Standardized Approach (TSA) is being carried out along with the Basic Indicator Approach (BIA).
Capital required for Operational Risk of the Bank for the year 2012 as per TSA approach is computed as follows:
Business Line | Basel II Prescribed
Facctors (Beta Factors) |
Capital
Requirement
(Rs. Mn.) |
Corporate Finance | 18% | 47.1 |
Trading and Sales | 18% | 482.0 |
Retail Banking | 12% | 1,569.1 |
Commercial Banking | 15% | 967.6 |
Payment and Settlement | 18% | 111.8 |
Agency Services | 15% | Nil |
Asset Management | 12% | Nil |
Retail Brokerage | 12% | Nil |
Total Requirement | 3,177.6 |
However, Operational Risk Requirement as per Basic Indicator Approach for the year 2012 would be Rs.3,456.3 Mn.
Legal Risk, an integral part of Operational Risk, arises out of the legal implications of failed systems, people, processes or external events. All legal documents executed on behalf of the Bank are initially vetted by the Legal Department which consists of experienced and competent in house Legal Officers. Whenever required, services of the external lawyers are obtained. Legal actions filed against the Bank are handled by the internal Legal Officers or by the external lawyers under the close scrutiny of the Legal Department. External lawyers are selected carefully by studying their track records and capabilities on relevant subjects.
Further, Legal Risk relating to the Bank is reviewed through 'Half-yearly Review of Risk Management Measures' where Legal Risks relating to various business operations such as Corporate Banking, Personal Banking, Finance and Planning, Human Resources etc., have been included under the risks relevant for particular business units. Identification of key risks, evaluation of the impact of such risks and application of appropriate risk management measures to mitigate such risks are addressed when carrying out this exercise by the respective units. 'Half Yearly Review of Risk Management Measures' is reviewed by the Operational Risk Unit and verified by the Inspection Department before submitting the observations/recommendations to BIRMC and Board Audit Committee.
The Bank is highly reliant on its Information Technology (IT) infrastructure and the information they contain for its day-to-day operations and its long term strategies. Consequently, risk management plays a critical role in protecting the Bank's information assets, as well as processes in IT-related risk.
Realising this increasing importance of IT Risk as a growing component of total Operational Risk domain, the Bank introduced a dedicated, independent IT Risk Function under the Operational Risk Unit of IRMD in 2012.
This initiative has contributed in further strengthening the information security and risk management strategy of the Bank by introducing the 'second line of defence' to the existing 'third line of defence' of the IT function (i.e., the IS/ IT Audit and Compliance functions). The IT Risk function as the 'second line of defence' facilitates independent oversight of the IT Risk Management activities of the 'first line of defence', complemented by the 'third line of defence', that provides independent assurance and challenges across all business functions in respect of the integrity and effectiveness of the IT Risk Management framework.
The 'Three Lines of Defence Framework for IT Risk' is depicted in the diagram below:
Implementation of an appropriate Information Technology Risk Management Framework is paramount to sustain the operational continuity of mission critical IT Systems and resources of the Bank, whereby all significant IT Risks are identified, measured, assessed, prioritised, treated, managed and monitored in a consistent and effective manner across the organisation.
As part of the framework, the Bank has developed an IT Risk Management Policy which complements the Information Security Policy, the related processes, objectives and procedures relevant for managing IT Risk and improving information security to deliver results in accordance with the organisation's overall policies and objectives.
IT Risk function carries out continuous, independent risk evaluations and monitoring, which involves comparing estimated risks with criteria established by the Bank such as risk appetite and tolerance levels. Further, an array of automated tools such as Security Information and Event Management Systems, Intrusion Detection and Prevention Systems, Transaction Monitoring tools, etc, are utilised by the IT, IT Risk and IS Audit functions to continuously monitor the effectiveness of information security controls and understand potential vulnerabilities.
For greater effectiveness, IT Risk Management is integrated into the System Development Life Cycle (SDLC) process, where risk management is iteratively performed during each major phase of the SDLC. The IT Risk function provides necessary inputs from a risk perspective during these phases.
Strategic Risk of the Bank refers to the risk to its earnings and profitability that could arise from strategic decisions, changes in the business conditions and improper implementation of decisions. Thus, Strategic Risk could materialise due to internal or external factors that can cause reduction in shareholder value, loss of earnings, etc.
The Bank considers Strategic Risk as one of the key elements in its Risk Profile. The Board of Directors and the Senior Management critically review the strategic goals of the Bank in its well defined Corporate Planning and Budgeting process and the Vision and Mission statements are also well articulated to set a clear strategic direction. This robust process ensures that Strategic Risk is well managed in all activities/business lines of the Bank.
In addition to the above, a detailed scorecard based model aligned to ICAAP has been developed by the Bank to measure and monitor Strategic Risk. This scorecard based approach adopted by the Bank to measure its Strategic Risk takes into consideration a range of factors, including its size and sophistication, and the nature and complexity of its activities.
According to the definition under Basel II guidelines, Reputational Risk has been excluded in the definition of Operational Risk under Pillar I. However, for the purpose of the Bank, Reputational Risk will be managed under Pillar II ICAAP framework. Reputational Risk is multidimensional and it exists in the overall business model of the Bank. Further, it refers to the potential adverse effects, which can arise from the Bank's reputation being tarnished due to a wide array of actions, including failure to comply with regulatory or legal obligations, failure to deliver expected standards of service and product, unethical practices, failure to achieve financial performance targets, labour unrest and environmental breaches etc. Reputational Risk could also arise from external factors such as the actions of a competitor that cast a cloud over the entire sector.
The Bank has identified Reputational Risk as one of the major types of risks the Bank is exposed to in achieving its strategic objectives. Due consideration has been given by the Bank to manage Reputational Risk by adopting various measures which have been discussed under 'Operational Risk Mitigation'.
Further, a detailed scorecard-based model has been developed by the Bank to measure and monitor Reputational Risk under ICAAP. The Bank has been successful in managing its Reputational Risk in the past which is evident from the sound position maintained by the Bank in the market and awards, accolades and ratings conferred on the Bank (details are stated under 'Awards & Accolades' elsewhere of this Annual Report). The Bank remains committed to continuously strive to maintain and improve reputation in all the activities it undertakes.
Banking business is highly regulated and the Bank could be adversely affected by failure to comply with existing laws and regulations or by failing to adopt changes in laws, regulations and regulatory policy. The Bank is also supervised by a number of different regulatory authorities which have broad administrative power over the Bank's businesses. The Board is responsible for ensuring that Bank complies with all applicable legal and regulatory requirements (including accounting standards) and industry codes of practice in the jurisdictions in which the Bank operates or obtains funding, as well as meeting the Bank's ethical standards. Compliance Risk arises from these legal and regulatory requirements. If the Bank fails to comply with applicable laws and regulations, it may be subject to fines, penalties or restrictions on its ability to carry out banking business. Any such costs and restrictions could adversely affect the Bank's business, reputation, prospects, financial performance or financial condition. In addition, the Bank could face increased supervision and regulation, particularly in the areas of funding, liquidity, capital adequacy and prudential regulations when compared to the competitors. Other areas of potential change that could impact the Bank include changes to accounting and reporting requirements, tax legislations, consumer protection & competition legislations, bribery, anti-money laundering and terrorist financing laws. In addition, further changes may occur driven by policy, prudential or political factors.
The nature and impact of future changes are not predictable and are beyond the control of the Bank. Regulatory compliance and the management of regulatory change has been identified as an increasingly important part of the Bank's strategic planning. The Bank expects that it will be required to continue to invest significantly in compliance, management and implementation of regulatory change. At the same time, significant management attention and resources will be required to update existing processes and procedures or develop new processes and procedures to comply with the new regulations. Regulatory change may also impact the operations of the Bank by requiring to have increased levels of liquidity and higher levels of, and better quality, capital as well as restrictions on the businesses the Bank conducts.
A well drafted Compliance Policy is in place to govern the Compliance function of the Bank. Compliance Risk is defined in this policy as the risk of legal or regulatory sanctions, material financial losses, or loss of reputation, the Bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct, applicable to the banking activities. The measures adopted by the Bank to mitigate the Compliance Risk have been defined in the policy. Further, a well developed regulatory monitoring mechanism is adopted by the Bank to monitor reporting and compliance with all Mandatory Banking and other Statutory Requirements which have been discussed under 'Operational Risk Reporting and Monitoring'.
Risk Category & Parameter | Description | Policy Parameter | Actual Position
as at 31.12.2012 |
Compliance | ||
Credit Risk Criteria | ||||||
Quality of the Lending Portfolio | Gross NPA Ratio** | Below | 4% | 3.37% | ✓ | |
Net NPA Ratio** | Below | 2.5% | 1.84% | ✓ | ||
Provision Cover | Above | 35% | 45.46% | ✓ | ||
Aggregate Loans & Advances in the Risk Grades 'C - A5' | Above | 75% | 87.05% | ✓ | ||
Weighted Average Rating of the overall lending portfolios to be better than 'A5' | Above | 40% | 44.14% | ✓ | ||
Concentration | Loans & Advances by Product *** (using HHI) | 0.15 | - | 0.20 | 0.1675 | ✓ |
Advances by Economic sub-sector (using SIC) *** (using HHI) |
0.015 | - | 0.025 | 0.016 | ✓ | |
Exposures exceeding 5% of the Eligible Capital *** (using HHI) |
0.05 | - | 0.10 | 0.05 | ✓ | |
Exposures exceeding 15% of the Eligible Capital *** (using HHI) |
0.10 | - | 0.20 | 0.1 | ✓ | |
Exposure to any sub-sector (SIC) to be maintained | 4% | - | 5% | 4.6 | ✓ | |
Aggregate of exposures exceeding 15% of the Eligible Capital |
20% | - | 30% | 23.79% | ✓ | |
Lending in the Maldives | Maximum 20% of Networth |
8.74% | ✓ | |||
Lending to Bangladesh Operations | Maximum US $ 15 Mn. | 0 | ✓ | |||
Cross border exposure | S & P - AAA to BBB - | Over 75% | 92.78% | ✓ | ||
Exposure to FCY Bonds | FCY Investments in Bonds | Maximum US $ 260 Mn. | US $ 260 Mn. | ✓ | ||
Cumulative stop loss for FCY trading portfolio | Maximum US $ 3.75 Mn. | No loss | ✓ | |||
Market Risk Criteria | ||||||
Interest Rate Risk | Interest Rate Shock: (Impact to NII as a result of parallel rate shock) |
Maximum of
Rs. 1,000 Mn. |
850.97 | ✓ | ||
Re-pricing Gaps (LKR and Foreign Currency for Sri Lankan Operations) (RSA /RSL in each maturity bucket - upto 1 year period) |
1.5 (Times) | 0.07-1.66 | Ο |
Risk Category & Parameter | Description | Policy Range | Actual Position as at 31.12.2012 | Compliance | |||
Liquidity Risk | Statutory Liquid Assets Ratio DBU | Minimum of 22% | 25.79% | ✓ | |||
Net Advances to Deposits Ratio | Below 90% | 82.52% | ✓ | ||||
Structured Liquidity Gap Report (1-7 days Bucket) |
(-)PG/CO | Less than 0.5 (Times) | -0.29 | ✓ | |||
(8-30 days Bucket) | Less than 0.5 (Times) | (+)PG | ✓ | ||||
(Up to 1 year Bucket) | Less than 1 (Times) | -0.07 | ✓ | ||||
Dynamic Liquidity Report - (1 Month Bucket) - (-) PG/CO |
Less than 50% | (+) PG | ✓ | ||||
- ( 2-3 Months Bucket) | (-)CG/CO | Less than 15% | (+) CG | ✓ | |||
- ( 4-6 Months Bucket) (-) CG/CO | Less than 20% | (+) CG | ✓ | ||||
- ( 7-12 Months Bucket) | Less than 20% | (+) CG | ✓ | ||||
FX Risk | Exchange Rate Shocks (Losses as a result of 1% change in FX Rate) |
Maximum of 100 Rs. Mn. | 94.1 | ✓ | |||
Concentration Risk | Rupee Deposit Concentration as a % of Total Rupee Deposit Base |
✓ | |||||
- Demand Deposits above Rs. 5.0 Mn. | Below 5% | <4.00% | ✓ | ||||
- Savings Deposits above Rs. 5.0 Mn. | Below 5% | <4.00% | ✓ | ||||
- Fixed Deposits above Rs. 10.0 Mn. | Below 6% | <5..00% | ✓ | ||||
FCY Deposit Concentration as a % of Total Foreign Currency Deposit Base
(Above US $ 100,000/- or equivalent) |
Below 60% | 57.09% | ✓ | ||||
Operational Risk Criteria | ✓ | ||||||
Internal Frauds | Acts of a type intended to defraud, misappropriate property or circumvent regulations etc., by an employee | Below 0.50% # | 0.00% | ✓ | |||
External Frauds | Acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party | Below 2.5% # | 0.04% | ✓ | |||
Employment Practices and Workplace Safety | Acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity/discrimination events | Below 0.1% # | – | ✓ | |||
Clients, Products & Business Practices |
Unintentional or negligent failure to meet a professional obligation to specific clients etc. | Below 0.15% # | – | ✓ | |||
Damage to Physical Assets | Loss or damage to physical assets from natural disasters or other events |
Below 0.50% # | 0.01% | ✓ | |||
Business Disruptions & System Failures | Disruption of business or system failures | Below 0.25% # | 0.00% | ✓ | |||
Execution, Delivery & Process Management | Failed transactions processing or process management | Below 1.00% # | 0.06% | ✓ | |||
Overall-Operational Risk | Operational Loss Tolerance Limit (Total Loss Value as a percentage of last three years' average gross income) | Below 5% | 0.12% | ✓ |
** | For the Total Bank | |||
*** | (Using Herfindahl - Hirschman Index - HHI). RSA - Rate Sensitive Assets ; RSL - Rate Sensitive Liabilities; PG - Period Gap; CO - Cash Outflows; CG - Cumulative Gap # Value as a percentage of maximum Operational Loss Tolerence Limit. |
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Ο | Due to majority of index based loans being repriced within 3 months. |