Impairment charges as per SLFRS 9
The Group recognises loss allowances for Expected Credit Loss (ECL) on the following financial instruments that are not measured at FVTPL:
- Cash and cash equivalents;
- Placements with banks;
- Loans and advances to banks;
- Loans and advances to other customers;
- Financial assets at amortised cost – Debt and other financial instruments;
- Debt instruments at fair value through other comprehensive income;
- Loan commitments and financial guarantee contracts.
No impairment loss is recognised on equity investments.
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.
Impairment charges on loans and advances to customers
For loans and advances above a predefined threshold, the Group individually assesses for significant increase in credit risk. If a particular loan is credit impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. If the Group determines that no provision is required under individual impairment, such financial assets are then collectively assessed for any impairments along with the remaining portfolio.
The Group computes ECL using three main components; a probability of default (PD), a loss given default (LGD), and the exposure at default (EAD) under the collective assessment. These parameters are generally derived from internally developed statistical models and historical data are then adjusted to reflect forward-looking information.
- PD – The probability of default represents the likelihood of a borrower defaulting on its financial obligation (as per “definition of default and credit impaired” above) either over the next 12 months (12mPD) or over the remaining lifetime (Lifetime PD) of the obligation. PD estimates are estimates at a certain date and days past due is the primary input into the determination of the term structure of PD for exposures. Days past due are determined by counting the number of days since the due date. The Group employs statistical models to analyse the data collected and generates estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.
- LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. The Group estimates LGD parameters based on historical recovery rates of claims against defaulted counterparties. They are calculated on a discounted cash flow basis using EIR as the discounting factor. LGD is usually expressed as a percentage of the EAD.
- EAD – The exposure at default represents the expected exposure in the event of a default. The Group estimates EAD, taking into account the repayment of principal and interest from the reporting date to the default event together with any expected drawdowns of committed facilities. To calculate EAD for a Stage 1 loan, the Group assesses the possible default events within 12 months. For all other loans EAD is considered for default events over the lifetime of the financial instrument.
Impairment charges on financial investments
Impairment charges on financial investments include ECL on debt instruments at FVOCI and financial assets at amortised cost.
The Group does not have historical loss experience on debt instruments at amortised cost and debt instruments at FVOCI. Thus the Group considers PDs published by the external sources i.e. – Bloomberg for external credit rating.
LGD for debt securities issued by the Government of Sri Lanka in rupees is considered as 0%, LGD for foreign currency denominated securities issued by the Government [Sri Lanka Development Bonds (SLDBs) and Sri Lanka Sovereign Bonds (SLSBs)] is considered as 20% and for all other instruments, LGD is considered as 45% in accordance with the guidelines issued by the Central Bank of Sri Lanka.
EAD of a debt instrument is its gross carrying amount.
Credit cards and revolving facilities
The Group’s product offering includes a variety of corporate and retail overdraft and credit cards facilities. The Group reviews the sanction limits at least annually and therefore has the right to cancel and/or reduce the limits. Therefore, the Group calculates only the 12-month ECL (12mECL) allowance on these facilities. The EAD is arrived by taking the maximum of either sanction limit adjusted for Credit Conversion Factor (CCF) and the gross carrying amount of the loan (utilised amount). EAD of Stage 3 contracts are limited to the gross carrying amount which is the utilised amount since the Group freeze the limits of those contracts up to the utilised amount. The expected 12-month default probabilities are applied to EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR.
Undrawn loan commitments
When estimating life time ECL (LTECL)s for undrawn loan commitments, the Group estimates the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. For loan commitments and letters of credit, the ECL is recognised within “other liabilities”.
Financial guarantee contracts
The Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the income statement, and the ECL provision. For this purpose, the Bank estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted interest rate relevant to the exposure. The ECLs related to financial guarantee contracts are recognised within “other liabilities”.
Forward-looking information
The Group incorporates forward-looking information into both its assessment as to whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group also obtained experienced credit judgement from economic experts and Credit and Risk Management Departments to formulate a base case, a best case and a worst case scenario. The base case represents a most-likely outcome and is aligned with information used by the Group for strategic planning and budgeting. The Group has identified and documented key drivers of credit risk both quantitative and qualitative for various portfolio segments. Quantitative economic factors are based on economic data and forecasts published by CBSL and supranational organisations such as IMF.
Quantitative drivers of credit risk |
Qualitative drivers of credit risk |
GDP growth |
Status of industry business |
Unemployment rate |
Regulatory impact |
Interest rate (AWPLR) |
Government policies |
Rate of inflation |
|
Exchange rate |
|
The calculation of ECLs
The Group measures loss allowance at an amount equal to LTECL, except for following, which are measured as 12mECL.
- Loans and receivables on which credit risk has not increased significantly since the initial recognition.
- Debt instruments that are determined to have low credit risk at the reporting date.
The Group considers a debt instrument to have a low credit risk when they have an “investment grade” credit risk rating.
ECLs 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 expected 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;
- Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover.
Financial assets that are not credit-impaired at the reporting date
As described above, the Group calculates 12mECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to EAD and multiplied by the economic factor adjustment, expected LGD and discounted by an approximation to the original EIR. When loan has shown a significant increase in credit risk since origination, the Group records an allowance for LTECLs based on PDs estimated over the lifetime of the instrument.
Financial assets that are credit-impaired at the reporting date
Impairment allowance on credit impaired financial assets assessed on individual basis is computed as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows. The expected future cash flows are based on the estimates made by credit officers as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. The Group regularly reviews the assumptions for projecting future cash flows.
Further, for loans identified in Note 7.1.12.3 definition of default and credit impaired assets (Stage 3) will be assessed for
impairment with 100% PD.
Impairment charges as per LKAS 39
For financial assets carried at amortised cost (such as amounts due from banks, loans and advances to customers as well as held-to-maturity investments), the Group first assessed whether objective evidence of impairment existed for individually significant financial assets or collectively for financial assets that are not individually significant. Assets that are individually assessed for impairment and for which an impairment loss was not recognised were included in a collective assessment of impairment together with the financial assets that are not individually significant.
Individual assessment of impairment
For financial assets above a predetermined threshold (i.e. for individually significant financial assets), if there is objective evidence that an impairment loss had been incurred, the amount of the loss was measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that had not been incurred). The carrying amount of the asset was reduced through the use of a provision account and the amount of impairment loss was recognised in profit or loss. Interest income continued to be accrued and recorded in “interest income” on the reduced carrying amount/impaired balance and was accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The present value of the estimated future cash flows was discounted at the financial asset’s original EIR. If a loan had a variable interest rate, the discount rate for measuring any impairment loss was the current EIR. If the Bank had reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss was the new EIR determined at the reclassification date.
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure was probable.
Collective assessment of impairment
Those financial assets for which, the Group determined that no provision was required under individual impairment, are then collectively assessed for any impairments that had been incurred but not identified. For the purpose of a collective evaluation of impairment, financial assets were grouped on the basis of similar risk characteristics such as internal credit ratings, asset type, industry, geographical location, collateral type, past-due status, etc. Future cash flows on a group of financial assets that were collectively evaluated for impairment, are estimated based on the historical loss experiences of assets with similar credit risk characteristics to those in the group.
Collateral valuation*
The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, gold, Government Securities, Letters of Credit/Guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements, etc.
Collateral repossessed*
The Bank’s policy is to carry collaterals repossessed at fair value at the repossession date and such assets will be disposed at the earliest possible opportunity. These assets are recorded under assets held for sale as per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-Current Assets Held for Sale and Discontinued Operations”.
Write-off of financial assets*
Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank 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. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due.
*The policies mentioned above on collateral valuation, collateral repossessed, and write-off of financial assets remain unchanged in both SLFRS 9 and LKAS 39.
|
|
GROUP |
Bank |
For the year ended December 31, |
|
2018 |
2017 |
2018 |
2017 |
|
Note |
Rs. ’000 |
Rs. ’000 |
Rs. ’000 |
Rs. ’000 |
Loans and advances to other customers |
|
8,379,540 |
988,639 |
8,123,248 |
719,450 |
Individual impairment (**) |
35.2 (d) |
(1,002,000) |
(223,174) |
(1,002,000) |
(223,174) |
Collective impairment (**) |
|
9,381,540 |
1,211,813 |
9,125,248 |
942,624 |
Other financial assets |
|
452,856 |
– |
450,985 |
– |
Total impairment charges |
19.1 &
19.2 |
8,832,396 |
988,639 |
8,574,233 |
719,450 |
Investments in subsidiaries |
38.1 |
– |
– |
– |
(42,484) |
Direct write-offs |
|
966 |
676 |
966 |
676 |
Total |
|
8,833,362 |
989,315 |
8,575,199 |
677,642 |
(**) For a better presentation and to be comparable with the current year classification, the Group and the Bank has netted off the recoveries against provision amounting to Rs.1,236.599 Mn. for the year ended December 31, 2017, under “individual/collective impairment for financial assets at amortised cost – Loans and advances to other customers” within the “Impairment charges”. Until December 31, 2017, this amount had been reported separately under “Recoveries of loans written off” (previously classified as “recoveries of loan written off and provision reversals”) within “Net other operating income”.
19.1 Impairment charge to the Income Statement – Group
For the year ended December 31, |
|
2018 |
2017 |
|
Note |
Stage 1
Rs. ’000 |
Stage 2
Rs. ’000 |
Stage 3
Rs. ’000 |
Total
Rs. ’000 |
Total
Rs. ’000 |
Cash and cash equivalents |
29.1 |
(1,450) |
– |
– |
(1,450) |
– |
Placements with banks |
31.1 |
(21,553) |
– |
– |
(21,553) |
– |
Financial assets at amortised cost – Loans and advances to banks |
34.1 |
(103) |
– |
– |
(103) |
– |
Financial assets at amortised cost – Loans and advances to
other customers |
35.2 &
35.3 |
(324,074) |
1,632,467 |
7,071,147 |
8,379,540 |
988,639 |
Individual impairment |
|
– |
– |
(1,002,000) |
(1,002,000) |
(223,174) |
Collective impairment |
|
(324,074) |
1,632,467 |
8,073,147 |
9,381,540 |
1,211,813 |
Financial assets at amortised cost – Debt and other financial instruments/
Financial Investments – Held to maturity and loans and receivables |
36.1 |
198,443 |
– |
– |
198,443 |
– |
Financial assets measured at fair value through other comprehensive
income/financial investments – Available for sale |
37.2 |
401,438 |
– |
– |
401,438 |
– |
Contingent liabilities and commitments |
59.4 |
(130,732) |
(22,769) |
29,582 |
(123,919) |
– |
Total |
|
121,969 |
1,609,698 |
7,100,729 |
8,832,396 |
988,639 |
19.2 Impairment charge to the income statement – Bank
For the year ended December 31, |
|
2018 |
2017 |
|
Note |
Stage 1
Rs. ’000 |
Stage 2
Rs. ’000 |
Stage 3
Rs. ’000 |
Total
Rs. ’000 |
Total
Rs. ’000 |
Cash and cash equivalents |
29.1 |
(1,450) |
– |
– |
(1,450) |
– |
Placements with banks |
31.1 |
(21,553) |
– |
– |
(21,553) |
– |
Financial assets at amortised cost – Loans and advances to banks |
34.1 |
(103) |
– |
– |
(103) |
– |
Financial assets at amortised cost – Loans and advances to
other customers |
35.2 &
35.3 |
(393,953) |
1,704,548 |
6,812,653 |
8,123,248 |
719,450 |
Individual impairment |
|
– |
– |
(1,002,000) |
(1,002,000) |
(223,174) |
Collective impairment |
|
(393,953) |
1,704,548 |
7,814,653 |
9,125,248 |
942,624 |
Financial assets at amortised cost – Debt and other financial instruments/
financial investments – Held to maturity and loans and receivables |
36.1 |
196,572 |
– |
– |
196,572 |
– |
Financial assets measured at fair value through other comprehensive
income/financial investments – Available for sale |
37.2 |
401,438 |
– |
– |
401,438 |
– |
Contingent liabilities and commitments |
59.4 |
(130,732) |
(22,769) |
29,582 |
(123,919) |
– |
Total |
|
50,219 |
1,681,779 |
6,842,235 |
8,574,233 |
719,450 |