Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be readily measured as defined in the Sri Lanka Accounting Standard – LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”.

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans.

Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless its occurrence is remote.

Operating lease commitments of the Group (as a lessor and as a lessee) form part of commitments and pending legal claims against the Group form part of contingencies.

Even though these obligations may not be recognised on the Statement of Financial Position, they do contain credit risk and are therefore part of the overall risk of the Bank as disclosed in Note 59.1.

In the normal course of business, the Bank makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers.

	Note	GROUP		BANK
As at December 31,		2018	2017	2018	2017
		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Contingencies		497,339,745	438,543,821	497,201,464	438,454,025
Guarantees		48,466,580	64,869,807	48,412,151	64,869,608
Performance bonds		45,115,711	30,604,509	45,112,151	30,601,521
Documentary credits		49,478,564	45,146,266	49,398,272	45,078,313
Other contingencies	59.1	354,278,890	297,923,239	354,278,890	297,904,583
Commitments		161,520,519	126,734,000	161,520,519	126,340,860
Undrawn commitments	59.2	161,062,099	124,977,782	161,062,099	124,594,675
Capital commitments	59.3	458,420	1,756,218	458,420	1,746,185
Total		658,860,264	565,277,821	658,721,983	564,794,885

59.1 Other contigencies

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Forward exchange contracts:	98,922,263	68,436,909	98,922,263	68,436,909
Forward exchange sales	52,853,513	24,380,254	52,853,513	24,380,254
Forward exchange purchases	46,068,750	44,056,655	46,068,750	44,056,655
Interest Rate Swap agreements/currency swaps:	182,984,415	164,800,830	182,984,415	164,800,830
Interest rate swaps	–	–	–	–
Currency swaps	182,984,415	164,800,830	182,984,415	164,800,830
Others:	72,372,212	64,685,500	72,372,212	64,666,844
Acceptances	41,931,557	40,336,138	41,931,557	40,321,501
Bills for collection	29,200,428	23,310,642	29,200,428	23,306,623
Stock of Travellers’ Cheques	1,230,582	1,030,549	1,230,582	1,030,549
Bullion on consignment	9,645	8,171	9,645	8,171
Subtotal	354,278,890	297,923,239	354,278,890	297,904,583

59.2 Undrawn commitments

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
On direct advances	106,223,235	105,053,514	106,223,235	104,670,407
On indirect advances	54,838,864	19,924,268	54,838,864	19,924,268
Subtotal	161,062,099	124,977,782	161,062,099	124,594,675

59.4 Movement in provision for impairment during the year

	Note	GROUP		BANK
		2018	2017	2018	2017
		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Movement in Stage 1 Impairment
Balance as at January 1,		656,764	–	656,764	–
Charge/(write back) to the Income Statement	19.1 & 19.2	(130,732)	–	(130,732)	–
Exchange rate variance on foreign currency provisions		2,900	–	2,900	–
Balance as at December 31,		528,932	–	528,932	–
Movement in Stage 2 Impairment
Balance as at January 1,		111,946	–	111,946	–
Charge/(write back) to the Income Statement	19.1 & 19.2	(22,769)	–	(22,769)	–
Balance as at December 31,		89,177	–	89,177	–
Movement in Stage 3 impairment
Balance as at January 1,		78,949	–	78,949	–
Charge/(write back) to the Income Statement	19.1 & 19.2	29,582	–	29,582	–
Balance as at December 31,		108,531	–	108,531	–
Movement in total impairment
Balance as at January 1,	12.1	847,659	–	847,659	–
Charge/(write back) to the Income Statement	19.1 & 19.2	(123,919)	–	(123,919)	–
Exchange rate variance on foreign currency provisions		2,900	–	2,900	–
Balance as at December 31,		726,640	–	726,640	–

59.5 Contingent liabilities and commitments of subsidiaries and associates

59.5 (a) Contingent liabilities and commitments of subsidiaries

Contingent liabilities and commitments of the subsidiary, Commercial Bank of Maldives Private Limited have been included in the Consolidated Financial Statements of the Group while other subsidiaries of the Group do not have any contingencies or commitments as at the reporting date.

59.5 (b) Contingent liabilities and commitments of associates

The associates of the Group do not have any contingencies as at the reporting date.

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
Amounts used as the numerator:
Total equity attributable to equity holders of the Bank (Rs. ’000)	119,397,849	107,994,800	118,405,949	107,099,360
Number of ordinary shares used as the denominator:
Total number of shares	1,010,722,577	995,899,302	1,010,722,577	995,899,302
Net assets value per share (Rs.)	118.13	108.44	117.15	107.54

Litigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol for dealing with such legal claims. In respect of pending legal claims where the Bank had already made provisions for possible losses in its Financial Statements or has a realisable security to cover the damages are not included below as the Bank does not expect cash outflows from such claims. However, further adjustments are made to the Financial Statements if necessary on the adverse effects of legal claims based on the professional advice obtained on the certainty of the outcome and also based on a reasonable estimate.

Set out below are the unresolved legal claims against the Bank as at December 31, 2018 for which, adjustments to the Financial Statements have not been made due to the uncertainty of its outcome. In addition, there are cases filed against the Bank that has not been listed here on the basis of non-materiality to operations.

1. Court action has been initiated by a customer in District Court, Colombo under proceedings number DMR 3/2014 for Rs. 14.000 Mn. to recover a sum of Rs. 13.063 Mn. including interest on cheques paid with a fraudulent signature. The case which was initially filed at the District Court was later referred to the Commercial High Court under proceedings number 315/2015/MR. The matter is fixed for trial on June 12, 2019.
2. Court action has been initiated in District Court, Colombo under proceedings number DMR/974/2016 to recover a sum of Rs. 26.237 Mn. together with interest as damages incurred by the plaintiff due to the delay by the Bank in refunding the amount with regard to a duplicated telegraphic transfer for USD 0.025 Mn. Further trial fixed for March 29, 2019.
3. Court action has been initiated in District Court, Colombo under proceedings number DMR/2274/2015 to recover a sum of Rs. 3.374 Mn. as parking charges and interest thereon due to a dispute over parking facility provided to the Bank. Trial is due on April 1, 2019.
4. Court action has been initiated in District Court, Kaduwela under proceedings number 584/L for Rs. 15.000 Mn. and interest thereon in seeking declaration that the plaintiff is the lawful owner of the property mortgaged by her daughter as security for a loan (currently in the Past-due section) obtained from the Bank. Further, trial is fixed for May 28, 2019.
5. An appeal was filed by the Bank under proceedings number HCALT 405/2014 in Provincial High Court of the Eastern Province against the order of the Labour Tribunal for payment of compensation and reinstatement in employment of an outsourced office helper. The office helper too filed a case in Provincial High Court in proceedings number HCALT 404/2014 refusing compensation and asking for reinstatement. Appeal made by the Bank was dismissed and case filed by outsourced office helper was decided in favour of him. Bank has appealed in the Supreme Court against the judgement of both cases under proceedings number SC/SPL/LA/220/15 and SC/SPL/LA/221/15. Next hearing of the cases fixed for September 24, 2019.
6. Court action has been initiated in Colombo High Court under proceedings number 112/2005 (1) to claim Rs. 5.584 Mn. and Rs. 10.000 Mn. as damages for disposing of shares owned by the plaintiff which were held under lien to the Bank. Plaintiff alleges that the transaction has taken place without obtaining her consent. Judgement was delivered in favour of the plaintiff. Bank has appealed in the Supreme Court (Appeal No. 09/2010) against the Judgement delivered. Appeal is fixed for argument on September 3, 2019.
7. Court action has been initiated by a customer in Colombo High Court under proceedings number 36/96 (1) to claim a sum of Rs. 183.050 Mn. regarding a forward exchange contract. Judgement was delivered in favour of the Bank dismissing the plaintiff’s action, but the plaintiff has appealed against the Judgement in the Supreme Court (Appeal No. 38/2006). Next hearing on June 28, 2019.
8. Court action has been initiated in the Commercial High Court of the Western Province under proceedings number 571/2008/MR to prevent the Bank from exercising the inherent rights of the Bank to set off a deposit of the plaintiff amounting to USD 15.000 Mn. against a sum due from the plaintiff in terms of a hedging agreement. Commercial High Court issued the Judgement in favour of the Bank and dismissed plaintiff’s application for an interim injunction. Presently the case is at the Trial stage. Written submissions due on March 18, 2019 .
9. Court action has been initiated by the Plaintiff in District Court, Colombo under proceedings number DMR/2855/18 to claim a sum of Rs. 1.688 Mn. being the 10% of the sale price deposited at a property auction held by the Bank, since the balance 90% was not deposited within 30 days of the auction. Plaintiff has also claimed Rs. 50.000 Mn. as damages. Answer by the Bank is due on March 29, 2019.
10. Court action has been initiated by a previous security services provider of the Bank in High Court under proceedings number 591/17/MR to recover a sum of Rs. 14.874 Mn., being the increment in salaries paid to the workers by the Company, under the Budgetary Relief Allowance of Workers Act No. 4 of 2016. Further trial fixed for June 20, 2019.

Group

(i) Remaining contractual period to maturity as at the date of Statement of Financial Position of the assets employed by the Group is detailed below:

As at December 31,	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at 31.12.2018	Total as at 31.12.2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest earning assets
Financial assets
Cash and cash equivalents	13,737,957	–	–	–	–	13,737,957	3,660,584
Balances with central banks	6,930,087	2,000,899	–	68,550	–	8,999,536	1,900,891
Placements with banks	19,898,515	–	–	–	–	19,898,515	17,633,269
Securities purchased under resale agreements	9,513,512	–	–	–	–	9,513,512	–
Financial assets recognised through profit or loss/ Held for trading – measured at fair value	4,751,360	–	–	–	–	4,751,360	4,096,168
Financial assets at amortised cost – Loans and advances to other customers	322,606,365	202,673,446	195,584,843	100,522,684	46,224,638	867,611,976	742,444,130
Financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and Loans and receivables	11,830,726	13,250,670	30,343,068	30,561,901	3,288,048	89,274,413	118,078,273
Financial assets measured at fair value through other comprehensive income/financial Investments – Available for sale	14,825,940	51,046,665	55,334,538	54,075,631	1,233,344	176,516,118	154,366,556
Total Interest earning assets as at 31.12.2018	404,094,462	268,971,680	281,262,449	185,228,766	50,746,030	1,190,303,387
Total Interest earning assets as at 31.12.2017	282,029,063	285,562,116	260,210,317	162,929,129	51,449,246		1,042,179,871
Non-Interest earning assets
Financial assets
Cash and cash equivalents	30,618,005	–	–	–	–	30,618,005	31,012,840
Balances with central banks	27,250,735	16,305,044	1,237,212	809,047	804,961	46,406,999	43,645,458
Derivative financial assets	3,304,750	3,982,426	589,427	–	33,359	7,909,962	2,334,536
Financial assets recognised through profit or loss/ Held for trading – measured at fair value	768,807	–	–	–	–	768,807	314,745
Financial assets at amortised cost – Loans and advances to banks	–	–	763,074	–	–	763,074	640,512
Financial assets measured at fair value through other comprehensive income/financial Investments – Available for sale	–	–	–	20,651	223,842	244,493	547,087
Non-Financial Assets
Investments in associates	–	–	–	–	105,320	105,320	109,844
Property, plant and equipment	–	–	–	–	17,015,236	17,015,236	16,317,044
Intangible assets	–	–	–	–	1,433,931	1,433,931	1,251,226
Leasehold property	–	–	–	–	103,064	103,064	104,516
Deferred tax assets	188,487	–	–	–	–	188,487	–
Other assets	17,943,295	225,991	1,890,106	530,631	3,461,449	24,051,472	17,362,977
Total non-interest earning assets as at 31.12.2018	80,074,079	20,513,461	4,479,819	1,360,329	23,181,162	129,608,850
Total non-interest earning assets as at 31.12.2017	71,622,392	15,953,121	2,669,183	1,253,731	22,142,358		113,640,785
Total assets – as at 31.12.2018	484,168,541	289,485,141	285,742,268	186,589,095	73,927,192	1,319,912,237
Total assets – as at 31.12.2017	353,651,455	301,515,237	262,879,500	164,182,860	73,591,604		1,155,820,656
Percentage – as at 31.12.2018 (*)	36.68	21.93	21.65	14.14	5.60	100.00
Percentage – as at 31.12.2017 (*)	30.60	26.09	22.74	14.20	6.37		100.00

(*) Total assets of each maturity bucket as a percentage of total assets employed by the Group.

(ii) Remaining contractual period to maturity as at the date of Statement of Financial Position of the liabilities and shareholders’ funds employed by the Group is detailed below:

	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at 31.12.2018	Total as at 31.12.2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest-bearing liabilities
Financial liabilities
Due to banks	11,867,462	17,259,154	918,605	490,220	–	30,535,441	52,078,375
Securities sold under repurchase agreements	38,705,156	6,974,167	3,272,071	–	–	48,951,394	49,532,385
Financial liabilities at amortised cost – Due to depositors	506,721,299	354,302,657	24,892,407	14,113,093	16,088,136	916,117,592	792,237,948
Financial liabilities at amortised cost – Other borrowings	266,300	1,499,941	8,463,641	8,507,200	6,624,830	25,361,912	23,786,094
Subordinated liabilities	739,373	387,827	9,477,720	22,104,087	5,283,450	37,992,457	25,165,924
Total Interest-bearing liabilities as at 31.12.2018	558,299,590	380,423,746	47,024,444	45,214,600	27,996,416	1,058,958,796
Total Interest-bearing liabilities as at 31.12.2017	526,595,425	308,076,794	39,503,405	31,118,593	37,506,509		942,800,726
Non-interest bearing liabilities
Financial liabilities
Due to banks	21,826,611	–	–	–	–	21,826,611	8,166,517
Derivative financial liabilities	3,404,297	4,432,899	184,587	–	–	8,021,783	3,678,494
Financial liabilities at amortised cost – Due to depositors	78,243,789	3,560	5,934	–	–	78,253,283	65,032,033
Non-financial liabilities
Current tax liabilities	1,443,988	5,292,009	–	–	–	6,735,997	4,202,850
Deferred tax liabilities	(229,610)	(328,268)	(515,164)	151,947	1,892,519	971,424	3,565,215
Other liabilities	15,865,542	2,387,328	2,045,280	838,683	3,410,680	24,547,513	19,508,115
Equity
Stated capital	–	–	–	–	39,147,882	39,147,882	37,143,541
Statutory reserves	–	–	–	–	7,444,178	7,444,178	6,492,552
Retained earnings	–	–	–	–	4,949,955	4,949,955	5,086,609
Other reserves	–	–	–	–	67,855,834	67,855,834	59,272,098
Non-controlling Interest					1,198,981	1,198,981	871,906
Total non-interest-bearing liabilities as at 31.12.2018	120,554,617	11,787,528	1,720,637	990,630	125,900,029	260,953,441
Total non-interest-bearing liabilities as at 31.12.2017	80,371,453	14,424,025	3,532,019	1,636,826	113,055,607		213,019,930
Total liabilities and equity – as at 31.12.2018	678,854,207	392,211,274	48,745,081	46,205,230	153,896,445	1,319,912,237
Total liabilities and equity – as at 31.12.2017	606,966,878	322,500,819	43,035,424	32,755,419	150,562,116		1,155,820,656
Percentage – as at 31.12.2018 (*)	51.44	29.71	3.69	3.50	11.66	100.00
Percentage – as at 31.12.2017 (*)	52.52	27.90	3.72	2.83	13.03		100.00

(*) Total liabilities and share holders’ funds of each maturity bucket as a percentage of total liabilities and shareholders’ funds employed by the Group.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are
reviewed regularly by the Corporate Management Team headed by the Managing Director/Chief Executive Officer (being the chief operating decision-maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

The Group has five strategic divisions which are reportable segments, namely:

Operating segment

• Personal banking
• Corporate banking
• International operations
• Investment banking
• Dealing and treasury

Segment performance is evaluated based on operating profits or losses which, in certain respects, are measured differently from
operating profits or losses in the Consolidated Financial Statements. Income taxes are managed on a group basis and are not allocated to operating segments.

The following table presents the income, profit and asset and liability information on the Group’s strategic business divisions for the year ended December 31, 2018 and comparative figures for the year ended December 31, 2017:

The Bank carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with parties who are defined as related Parties as per the Sri Lanka Accounting Standard – LKAS 24 – “Related Party Disclosures”, other than, transactions that the Key Management Personnel (KMP) have availed under schemes uniformly applicable to all staff at concessionary rates.

64.1 Parent and ultimate controlling party

The Bank does not have an identifiable parent of its own.

Key Management Personnel (KMP)

KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly.

KMP of the Bank

The Board of Directors of the Bank has been classified as KMP of the Bank.

KMP of the Group

As the Bank is the ultimate parent of the subsidiaries listed out in Note 1.1, the Board of Directors of the Bank has the authority and responsibility for planning, directing and controlling the activities of the Group directly or indirectly. Accordingly, the Board of Directors of the Bank is also KMP of the Group. Therefore, officers who are only Directors of the subsidiaries and not of the Bank have been classified as KMP only for that respective subsidiary.

64.2.1 Transactions with KMP

64.2.1.1 Compensation of KMP – Bank

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Short-term employment benefits	191,982	159,190
Post-employment benefits	8,481	7,831
Total	200,463	167,021

64.2.1.2 Compensation of KMP – Group

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Short-term employment benefits	194,031	161,282
Post-employment benefits	8,481	7,831
Total	202,512	169,113

64.2.2 Transactions, arrangements and agreements involving KMP and their Close Family Members (CFM)

CFM of a KMP are those family members who may be expected to influence, or be influenced by, that KMP in their dealings with the Bank. They may include KMP’s domestic partner and children, children of the KMP’s domestic partner and dependants of the KMP or the KMP’s domestic partner. CFM are related parties to the Group/Bank.

64.2.2.1 Statement of Financial Position – Bank

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	53,063	18,890	31,796	9,282
Credit cards	637	115	1,134	427
Total	53,700	19,005	32,930	9,709
Liabilities
Deposits	262,328	228,579	265,877	167,137
Securities sold under repurchase agreements	–	7,844	2,534	30,123
Debentures	2,000	2,000	2,000	2,000
Total	264,328	238,423	270,411	199,260

64.2.2.2 Commitments and contingencies – Bank

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Undrawn facilities	16,293	18,035	15,429	13,024
Total	16,293	18,035	15,429	13,024

64.2.2.3 Direct and indirect accommodation – Bank

	Year-end balance
	2018 %	2017 %
Direct and indirect accommodation as a % of the Bank’s regulatory capital	0.05	0.03

No impairment losses have been recorded against balances outstanding with KMP and CFM.

64.2.2.4 Income Statement

For the year ended December 31,	Note	2018	2017
		Rs. ’000	Rs. ’000
Interest income		3,597	777
Interest expense		24,594	17,226
Compensation to KMP	64.2.1.1	200,463	167,021

64.2.2.5 Share-based transactions of KMP and CFM

	Year-end balance
Year end balance	2018	2017
Number of ordinary shares held	866,367	1,206,569
Dividends paid (in Rs. ’000)	7,353	6,304
Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2008
Tranche II	–	50,270
Tranche III	35,341	105,695
Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2015
Tranche I	59,615	83,416
Tranche II	61,400	85,912
Tranche III	138,632	–

64.2.3 Transactions, arrangements and agreements involving entities which are controlled, and/or significantly influenced by the KMP or their CFM

No significant transactions during the year.

64.3 Transactions with Group entities

The Group entities include the subsidiaries and the associates of the Bank.

64.3.1 Transactions with subsidiaries

64.3.1.1 Statement of Financial Position

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	1,185,845	841,060	835,099	879,790
Other receivables	32,226	31,439	31,833	62,148
Credit card Advances	1	–	22	–
Total	1,218,072	872,499	866,954	941,938
Liabilities
Deposits	244,403	502,575	258,565	120,953
Securities sold under repurchase agreements	153,068	142,550	140,023	202,877
Other	18,293	74,523	46,039	47,292
Total	415,764	719,648	444,627	371,122

64.3.1.2 Commitments and contingencies

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Undrawn facilities	100,299	100,000	96,552	84,881
Total	100,299	100,000	96,552	84,881

64.3.1.3 Direct and indirect accommodation

	Year-end balance
	2018 %	2017 %
Direct and indirect accommodation as a % of the Bank’s Regulatory Capital	0.89	0.79

64.3.1.4 Income Statement

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Interest income	109,490	143,796
Interest expense	36,329	32,695
Other income	176,633	182,826
Expenses	596,795	523,214

64.3.1.5 Other transactions

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Payments made to OneZero Company Ltd. in relation to purchase of computer hardware and software	760	29,738

64.3.2 Transactions with associates

64.3.2.1 Statement of Financial Position

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	2	–	74	32
Total	2	–	74	32
Liabilities
Deposits	33,261	35,468	17,367	19,945
Securities sold under repurchase agreements	–	–	16,399	16,228
Total	33,261	35,468	33,766	36,173

64.3.2.2 Commitments and contingencies

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Undrawn facilities	1,000	1,000	1,000	–
Total	1,000	1,000	1,000	–

64.3.2.3 Income Statement

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Interest income	21	8
Interest expense	3,178	3,666
Other income	14,428	21,213
Expenses	–	71,194

64.3.2.4 Other transactions

	2018	2017
Number of ordinary shares of the Bank held by the associates as at the year-end	4,741	46,154
Dividend paid (Rs. ’000)	144	278

64.4 Transactions with other related entities

Other related entities include significant investors (either entities or individuals) that have control, joint control or significant influence,
post-employment benefit plans for the Bank’s employees.

64.4.1 Transactions with post-employment benefit plans for the employees of the Bank

64.4.1.1 Statement of Financial Position

	Year-end balance		Annual average balance
	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	–	–	15	474
Total	–	–	15	474
Liabilities
Deposits	10,478,031	9,427,494	9,971,838	8,452,541
Securities sold under repurchase agreements	–	–	–	83,265
Total	10,478,031	9,427,494	9,971,838	8,535,806

64.4.1.2 Income Statement

For the year ended December 31,	2018	2017
	Rs. ’000	Rs. ’000
Interest income	4	114
Interest expense	1,204,076	1,075,241
Contribution made/taxes paid by the Bank	1,114,613	1,005,342

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Depreciation of property, plant and equipment	1,383,581	1,185,698	1,279,378	1,097,096
Amortisation of leasehold property	1,452	1,452	942	942
Amortisation of intangible assets	218,076	229,764	188,789	209,766
Impairment charges and other losses	8,832,396	989,315	8,574,233	720,126
Other impairment	–	–	–	(42,484)
Contributions to defined benefit plans – Unfunded schemes	361,272	288,791	349,667	279,249
Provision made o/a of leave encashment	103,868	79,128	103,868	79,128
Equity-settled share-based payments	68,581	138,341	68,581	138,341
Unamortised interest payable o/a subordinated liabilities	12,210	12,211	12,210	12,211
Mark to market on other financial instruments at fair value through profit or loss	(55,580)	(85,627)	(55,580)	(85,627)
Loss on written off intangible assets	–	7,241	–	–
Effect of exchange rate variances on investment in subsidiaries	–	–	56,485	(26,349)
Effect of exchange rate variances on loans and receivables to banks	(122,562)	(16,054)	(122,562)	(16,054)
Effect of exchange rate variances on property, plant and equipment	(32,310)	(168)	(18,705)	882
Effect of exchange rate variances on intangible assets	(11,076)	(3,208)	(1,840)	429
Effect of exchange rate variances on defined benefit plans	52,568	(7,279)	52,568	(7,279)
Effect of exchange rate variances on subordinated liabilities	2,205,000	288,750	2,205,000	288,750
Net effect of exchange rate variances on net deferred tax liability	(29,952)	995	(26,803)	4,626
Net effect of exchange rate variances on income tax liability	492,139	(45,703)	471,717	(45,820)
Grossed up notional tax and withholding tax credits	(1,098,978)	(1,985,107)	(1,081,737)	(1,961,769)
Total	12,380,685	1,078,540	12,056,211	646,164

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Net (increase)/decrease in derivative financial instruments	(5,542,067)	(1,281,707)	(5,542,067)	(1,281,707)
Net increase in debt securities, treasury bills & bonds and equity shares held at fair value through profit and loss	–	–	–	–
Net (increase)/decrease in balances with central banks	(9,860,186)	(1,611,091)	(9,583,144)	(928,241)
Net (increase)/decrease in placements with banks	(2,276,030)	(5,914,770)	(2,276,030)	(5,914,770)
Net (increase)/decrease in securities purchased under resale agreements	(9,513,512)	–	(9,513,512)	–
Net (increase)/decrease in other financial assets – Recognised through profit or loss/ held for trading	(1,068,607)	683,448	(1,068,607)	683,448
Net (increase)/decrease in loans and receivables to customers	(138,148,203)	(123,303,957)	(135,934,002)	(122,148,465)
Net (increase)/decrease in financial assets measured at fair value through other comprehensive income/financial investments – Available for sale	(23,381,080)	12,820,870	(23,324,699)	12,951,296
Net (increase)/decrease in financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and loans and receivables	27,099,075	(6,002,245)	26,717,096	(2,844,501)
Net (increase)/decrease in other assets	(6,688,495)	(880,418)	(6,612,960)	(859,996)
Total	(169,379,105)	(125,489,870)	(167,137,925)	(120,342,936)

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Net increase/(decrease) in due to banks	(7,882,840)	(10,853,499)	(7,019,910)	(10,487,820)
Net increase/(decrease) in derivative financial instruments	4,347,751	2,158,997	4,347,751	2,158,997
Net increase/(decrease) in securities sold under repurchase agreements	(580,991)	(20,096,576)	(572,305)	(20,190,702)
Net increase/(decrease) in deposits from banks, customers and debt securities issued	137,100,894	113,959,368	132,909,803	110,564,017
Net increase/(decrease) in other borrowings	1,575,818	14,515,940	1,575,818	14,515,940
Net increase/(decrease) in other provisions	–	(1,874)	–	(1,874)
Net increase/(decrease) in other liabilities	4,315,867	583,523	4,266,292	633,847
Net increase/(decrease) in due to subsidiaries	–	–	(33,568)	54,462
Total	138,876,499	100,265,879	135,473,881	97,246,867

68.1 Operating lease commitments (payables)

The Group has taken on leased a number of branches and office premises under operating leases. These leases have an average life of between five to ten years. Lease agreements include clauses to enable upward revision of the rental payments on a periodic basis to reflect market conditions. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals payable under non-cancellable operating leases are as follows:

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Less than one year	1,068,724	937,070	1,013,801	890,519
Between one to five years	3,018,540	2,510,540	2,829,454	2,352,812
Over five years	2,367,826	2,186,383	2,265,638	2,076,645
Total	6,455,090	5,633,993	6,108,893	5,319,976

68.2 Operating lease commitments (receivables)

The Group has entered into operating leases to rent its own properties, (mainly consisting of areas not currently occupied by the branch). Lease agreements include clauses to enable upward revision of the rental income on a periodic basis to reflect market conditions. These leases have an average life of between five to ten years. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals receivable under non-cancellable operating leases are as follows:

	GROUP		BANK
As at December 31,	2018	2017	2018	2017
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Less than one year	9,597	7,327	6,380	3,140
Between one to five years	20,471	13,589	15,840	5,740
Over five years	6,941	2,800	6,941	2,800
Total	37,009	23,716	29,161	11,680

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

For information on the Bank’s financial risk management framework		Page No.
Introduction
69.1	Credit risk	320
69.1.1	Credit quality analysis	320
69.1.2	Credit-impaired financial assets	332
69.1.3	Sensitivity of impairment provision on loans and advances to other customers	333
69.1.4	Collateral held	333
69.1.5	Concentration of credit risk	334
69.2	Liquidity risk	339
69.2.1	Exposure to liquidity risk	339
69.2.2	Maturity analysis of financial assets and financial liabilities	340
69.2.3	Liquidity reserves	343
69.2.4	Financial assets available to support future funding	344
69.3	Market risk	345
69.3.1	Exposure to market risk – Trading and non-trading portfolio	345
69.3.2	Exposure to interest rate risk – Sensitivity analysis	347
69.3.3	Exposure to currency risks – Non-trading portfolio	349
69.3.4	Exposure to equity price risk	351
69.4	Operational risk	351
69.5	Capital management and pillar III disclosures as per Basel III	352
69.5.1	Regulatory capital	352
69.5.2	Capital allocation	353
69.5.3	Pillar III disclosures as per Basel III	353

Introduction

As a financial intermediary, the Bank is exposed to various types of risks including credit, market, liquidity and operational risks which are inherent in the Bank’s activities. Managing these risks is critical for the sustainability of the Bank and plays a pivotal role in all activities of the Bank. Risk management function strives to identify potential risks in advance, analyse them and take precautionary steps to mitigate the impact of risk whilst optimising through risk adjusted returns within the risk appetite of the Bank.

Risk management framework

The overall responsibility and oversight of the risk management framework of the Bank is vested with the Board of Directors (BOD). The Board Integrated Risk Management Committee (BIRMC), a mandatory subcommittee set up by the Board, in turn is entrusted with the development of the Bank’s Risk Management Policies and monitoring of due compliance of same through the Executive Integrated Risk Management Committee (EIRMC).

The Risk Management Policies spell out the risk appetite of the Bank and has incorporated risk exposure limits and controls to monitor adherence to the limits in force. These Policies and Systems are reviewed regularly to reflect the changing market conditions and the products and services offered.

The Bank strives to inculcate a risk management culture through continuous training, work ethics and standards.

Refer Note 3.2 for more information on the risk management framework of the Bank.

Integrated Risk Management Department (IRMD)

Business Units are the risk owners and have the primary responsibility for risk management. The IRMD acts as the second line of defence in managing the risk. The IRMD through Chief Risk Officer reports to the BIRMC thus ensuring its independence.

Risk measurement and reporting

The Bank uses robust risk measurement techniques based on the type of risk and industry best practices. The Bank also carries out stress testing which is a key aspect of the Internal Capital Adequacy Assessment Process (ICAAP). The risk management framework of the Bank provides an insight on the impact of extreme, but plausible scenarios on the Bank’s risk profile. The results are reported to the EIRMC and to the BIRMC on a periodic basis.

The Bank establishes policies, limits and thresholds within the risk appetite of the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept (risk appetite). The monitoring and control mechanism therefore, is based on risk appetite of the Bank.

69.1 Credit risk

The financial loss resulting from a borrower or counterparty to a financial instrument failing or delaying to meet its contractual obligations is referred to as credit risk. It arises principally from the loans and advances to banks and other customers, investments in debt securities and other financial instruments. In addition to the credit risk from direct funding exposure (i.e. on-balance sheet exposure), indirect liabilities such as Letters of Credit, Guarantees etc. also would expose the Bank to credit risk.

The Bank ensures stringent credit risk management practices overall elements of credit risk exposures (such as individual obliger default risk, country and sector concentration risks).

69.1.1 Credit quality analysis

69.1.1 (a) Maximum exposure to credit risk by risk rating (as per SLFRS 9)

The following table sets out information about the credit quality of financial assets measured at amortised cost, measured at FVOCI and contingent liabilities and commitments.

		Carrying amount	Not subject to ECL	Subject to
As at December 31, 2018				12-month ECL (Stage 1)	Life time ECL – not credit impaired (Stage 2)	Life time ECL – credit impaired (Stage 3)
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents
Risk free Investments		24,272,784	24,272,784	–	–	–
Rating 0-4: Investment grade		10,392,621	–	10,392,621	–	–
Rating 5-6: Moderate risk		4,873,484	–	4,873,484	–	–
Rating 7-8: High risk		–	–	–	–	–
Rating 9: Extreme risk		–	–	–	–	–
Gross carrying amount		39,538,889	24,272,784	15,266,105	–	–
Less : Provision for impairment		4,413	–	4,413	–	–
Net carrying amount	29	39,534,476	24,272,784	15,261,692	–	–
Placements with banks
Government Securities (Risk free investments)
Rating 0-4: Investment grade		15,471,661	–	15,471,661	–	–
Rating 5-6: Moderate risk		4,437,638	–	4,437,638	–	–
Rating 7-8 : High risk		–	–	–	–	–
Rating 9: Extreme risk		–	–	–	–	–
Gross carrying amount		19,909,299	–	19,909,299	–	–
Less: Provision for impairment		10,784	–	10,784	–	–
Net carrying amount	31	19,898,515	–	19,898,515	–	–
Financial assets at amortised cost – Loans and advances to banks
Government Securities (Risk free investments)		–	–	–	–	–
Rating 0-4: Investment grade		–	–	–	–	–
Rating 5-6: Moderate risk		763,110	–	763,110	–	–
Rating 7-8: High risk		–	–	–	–	–
Rating 9: Extreme risk		–	–	–	–	–
Gross carrying amount		763,110	–	763,110	–	–
Less: Provision for impairment		36	–	36	–	–
Net carrying amount	34	763,074	–	763,074	–	–
Financial assets at amortised cost – Loans and advances to other customers
Government Securities (Risk free investments)		–	–	–	–	–
Rating 0-4: Investment grade (*)		686,400,750	–	622,743,394	56,950,508	6,706,848
Rating 5-6: Moderate risk		159,144,668	–	119,388,804	32,390,548	7,365,316
Rating 7-8: High risk		8,209,350	–	3,485,765	1,911,451	2,812,134
Rating 9: Extreme risk		36,474,600	–	33,654	347,685	36,093,261
Gross carrying amount		890,229,368	–	745,651,617	91,600,192	52,977,559
Less: Provision for impairment		29,129,053	–	2,659,185	5,873,226	20,596,642
Net carrying amount	35	861,100,315	–	742,992,432	85,726,966	32,380,917
Financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and loans and receivables
Government Securities (Risk free investments)		42,521,906	42,521,906	–	–	–
Rating 0-4: Investment grade (*)		41,026,809	–	41,026,809	–	–
Rating 5-6: Moderate risk		416,346	–	416,346	–	–
Rating 7-8: High risk		156,627	–	–	156,627	–
Rating 9: Extreme risk		–	–	–	–	–
Gross carrying amount		84,121,688	42,521,906	41,443,155	156,627	–
Less: Provision for Impairment		266,252	–	262,381	3,871	–
Net carrying amount	36	83,855,436	42,521,906	41,180,774	152,756	–
Financial assets measured at fair value through other comprehensive income/ financial Investments – Available for sale
Government Securities (Risk free investments)		95,458,096	95,458,096	–	–	–
Rating 0-4: Investment grade		81,405,180	5,222	81,399,958	–	–
Rating 5-6: Moderate risk		239,147	239,147	–	–	–
Rating 7-8: High risk		–	–	–	–	–
Rating 9: Extreme risk		–	–	–	–	–
Gross carrying amount		177,102,423	95,702,465	81,399,958	–	–
Less: Provision for impairment		595,694	–	595,694	–	–
Net carrying amount	37	176,506,729	95,702,465	80,804,264	–	–
Off-balance sheet (**)
Contingent liabilities and commitments
(i) Lending commitments
Grade 0-6: Investment grade to moderate risk		161,062,099	54,838,863	104,605,989	1,142,947	474,300
Grade 7-9: High risk to extreme risk		–	–	–	–	–
Gross carrying amount		161,062,099	54,838,863	104,605,989	1,142,947	474,300
(ii) Contingencies
Grade 0-6: Investment grade to moderate risk		497,201,464	312,347,334	183,121,065	1,643,105	89,960
Grade 7-9: High risk to extreme risk		–	–	–	–	–
Gross carrying amount		497,201,464	312,347,334	183,121,065	1,643,105	89,960
Total contingent liabilities and commitments	59	658,263,563	367,186,197	287,727,054	2,786,052	564,260
Provision for Impairment	59.4	726,640	–	528,932	89,177	108,531

(*) Investment grade also include Cash, Gold.

(**) Amounts reported above does not include capital commitments disclosed in the Note 59 on “Contingent Liabilities and Commitments”.

Financial assets at amortised cost – Loans and advances to other customers and contingent liabilities and commitments categorised based on Bank’s internal risk rating and other financial assets are categorised based on external credit rating of respective counterparties.

69.1.1 (b) Maximum exposure to credit risk by risk rating (as per LKAS 39)

The following table sets out information about the credit quality of financial assets classified as available for sale, held to maturity and loans and receivables.

As at December 31, 2017		Loans and receivables to other customers	Loans and receivables to banks	Financial investments	Lending commitments and contingencies
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Maximum exposure to credit risk
Carrying amount	34 to 37	737,446,567	640,512	271,400,274	–
Amount committed/contingencies	59	–	–	–	563,048,700
At amortised cost – Loans and receivable		–	–	–	–
Government Securities (Risk free investments)		–	–	40,566,702	–
Rating 0-4: Investment grade (*)		476,843,647	–	8,145,775	–
Rating 5-6: Moderate risk		249,066,153	640,512	–	–
Rating S: High risk		2,035,633	–	–	–
Rating 7-9: Extreme risk		26,762,544	–	–	–
Gross carrying amount		754,707,977	640,512	48,712,477	–
Less: Provision for impairment (individual and collective)		17,261,410	–	–	–
Net carrying amount	34, 35 and 36	737,446,567	640,512	48,712,477
Financial investments – Available for sale		–	–	–	–
Government Securities (Risk free investments)		–	–	154,167,169	–
Rating 0-4: Investment grade		–	–	546,963	–
Rating 5-6: Moderate risk		–	–	–	–
Rating S: High risk		–	–	–	–
Rating 7-9: Extreme risk		–	–	–	–
Gross/net carrying amount	37	–	–	154,714,132	–
Financial investments – Held to maturity		–	–		–
Government Securities (Risk free investments)		–	–	53,555,302	–
Rating 0-4: Investment grade		–	–	–	–
Rating 5-6: Moderate risk		–	–	10,007,450	–
Rating S: High risk		–	–	–	–
Rating 7-9: Extreme risk		–	–	–	–
Gross/net carrying amount	36	–	–	63,562,752	–
Other financial instruments – Held for trading		–	–		–
Government Securities (Risk free investments)		–	–	2,357,876	–
Rating 0-4: Investment grade		–	–	314,745	–
Rating 5-6: Moderate risk		–	–	1,738,292	–
Rating S: High risk		–	–	–	–
Rating 7-9: Extreme risk		–	–	–	–
Gross/net carrying amount	33	–	–	4,410,913	–
Total net carrying amount		737,446,567	640,512	271,400,274	–
Off-balance sheet (**)
Maximum exposure
Lending commitments
Grade 0-6: Investment grade to moderate risk		–	–	–	124,594,675
Contingencies		–	–	–	–
Grade 0-6: Investment grade to moderate risk		–	–	–	438,454,025
Total exposure	59	–	–	–	563,048,700

(*) Investment grade also include Cash, Gold.

(**) Amounts reported above does not include capital commitments disclosed in the Note 59 on “Contingent Liabilities and Commitments”.

69.1.1 (c) Credit exposure movement – ECL stage-wise

The following tables show reconciliations from the opening to closing balance of the gross carrying amounts by class of financial instrument.

	Carrying amount	Not subject to ECL	12-month ECL (Stage 1)	Life time ECL – not credit impaired (Stage 2)	Life time ECL – credit impaired (Stage 3)
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents
Gross carrying amount as at January 1, 2018	33,224,619	23,280,599	9,944,020	–	–
Transfer to Stage 1	–	–	–	–	–
Transfer to Stage 2	–	–	–	–	–
Transfer to Stage 3	–	–	–	–	–
New assets originated or purchased	9,557,624	992,185	8,565,439	–	–
Financial assets derecognised or repaid (excluding write-offs)	(3,243,354)	–	(3,243,354)	–	–
As at December 31, 2018	39,538,889	24,272,784	15,266,105	–	–
Placements with banks
Gross carrying amount as at January 1, 2018	17,633,269	–	17,633,269	–	–
Transfer to Stage 1	–	–	–	–	–
Transfer to Stage 2	–	–	–	–	–
Transfer to Stage 3	–	–	–	–	–
New assets originated or purchased	19,909,299	–	19,909,299	–	–
Financial assets derecognised or repaid (excluding write-offs)	(17,633,269)	–	(17,633,269)	–	–
As at December 31, 2018	19,909,299	–	19,909,299	–	–
Financial assets at amortised cost – Loans and advances to banks
Gross carrying amount as at January 1, 2018	640,512	–	640,512	–	–
Transfer to Stage 1	–	–	–	–	–
Transfer to Stage 2	–	–	–	–	–
Transfer to Stage 3	–	–	–	–	–
Foreign exchange adjustments	122,598	–	122,598	–	–
As at December 31, 2018	763,110	–	763,110	–	–
Financial assets at amortised cost – Loans and advances to other customers
Gross carrying amount as at January 1, 2018	754,707,977	–	653,127,277	69,036,479	32,544,221
Transfer to Stage 1	–	–	18,306,726	(18,002,628)	(304,098)
Transfer to Stage 2	–	–	(31,715,554)	37,146,989	(5,431,435)
Transfer to Stage 3	–	–	(11,470,573)	(12,389,882)	23,860,455
New assets originated or purchased	422,014,584	–	389,231,399	29,382,680	3,400,505
Financial assets derecognised or repaid (excluding write-offs)	(308,833,738)	–	(271,826,591)	(27,858,893)	(9,148,254)
Write-offs	(1,107,207)	–	(1,067)	(9,567)	(1,096,573)
Changes to contractual cash flows due to modifications not resulting in derecognition	23,447,752	–	–	14,295,014	9,152,738
As at December 31, 2018	890,229,368	–	745,651,617	91,600,192	52,977,559
Financial assets at amortised cost – Debt and other financial instruments/ financial investments – Held to maturity and loans and receivables
Gross carrying amount as at January 1, 2018	71,708,527	48,683,362	23,025,165	–	–
Transfer to Stage 1	–	–	–	–	–
Transfer to Stage 2	–	–	(156,627)	156,627	–
Transfer to Stage 3	–	–	–	–	–
New assets originated or purchased	23,331,446	5,578,738	17,752,708	–	–
Financial assets derecognised or repaid (excluding write-offs)	(14,583,193)	(12,252,573)	(2,330,620)	–	–
Foreign exchange adjustments	3,664,908	512,379	3,152,529	–	–
As at December 31, 2018	84,121,688	42,521,906	41,443,155	156,627	–
Financial assets measured at fair value through other comprehensive income/financial investments – Available for sale
Gross carrying amount as at January 1, 2018	195,279,170	151,910,811	43,368,359	–	–
Transfer to Stage 1	–	–	–	–	–
Transfer to Stage 2	–	–	–	–	–
Transfer to Stage 3	–	–	–	–	–
New assets originated or purchased	85,700,610	34,181,954	51,518,656	–	–
Financial assets derecognised or repaid (excluding write-offs)	(108,535,424)	(90,390,300)	(18,145,124)	–	–
Foreign exchange adjustments	4,897,118	–	4,897,118	–	–
Changes to contractual cash flows due to modifications not resulting in derecognition	(239,051)	–	(239,051)	–	–
As at December 31, 2018	177,102,423	95,702,465	81,399,958	–	–
Contingent liabilities and commitments
Gross carrying amount as at January 1, 2018	563,048,700	257,583,082	300,521,203	3,932,984	1,011,431
Transfer to Stage 1	–	–	2,382,299	(2,322,013)	(60,286)
Transfer to Stage 2	–	–	(3,329,668)	3,335,220	(5,552)
Transfer to Stage 3	–	–	(530,422)	(175,917)	706,339
New assets originated or purchased	533,541,252	327,020,220	204,279,007	1,897,507	344,518
Financial assets derecognised or repaid (excluding write-offs)	(438,326,389)	(217,417,105)	(215,595,365)	(3,881,729)	(1,432,190)
As at December 31, 2018	658,263,563	367,186,197	287,727,054	2,786,052	564,260

Opening balances as at January 1, 2018 reported as per SLFRS 9 and reconciliation between SLFRS 9 and LKAS 39 are given in Note 12 on “Transition disclosures”.

69.1.1 (d) Provision for impairment (ECL) movement

The following table shows reconciliations from the opening to closing balance of the provision for impairment by class of financial instrument.

		12-month ECL (Stage 1)	Life time ECL – not credit impaired (Stage 2)	Life time ECL – credit impaired (Stage 3)	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents
Provision for impairment (ECL) as at January 1, 2018		5,286	–	–	5,286
Transfer to Stage 1		–	–	–	–
Transfer to Stage 2		–	–	–	–
Transfer to Stage 3		–	–	–	–
Net remeasurement of impairment		(1,577)	–	–	(1,577)
New assets originated or purchased		4,989	–	–	4,989
Financial assets derecognised or repaid (excluding write-offs)		(4,862)	–	–	(4,862)
Foreign exchange adjustments		577	–	–	577
As at December 31, 2018	29.1	4,413	–	–	4,413
Placements with banks		–	–	–	–
Provision for impairment (ECL) as at January 1, 2018		31,533	–	–	31,533
Transfer to Stage 1		–	–	–	–
Transfer to Stage 2		–	–	–	–
Transfer to Stage 3		–	–	–	–
New assets originated or purchased		9,980	–	–	9,980
Financial assets derecognised or repaid (excluding write-offs)		(31,533)	–	–	(31,533)
Foreign exchange adjustments		804	–	–	804
As at December 31, 2018	31.1	10,784	–	–	10,784
Financial assets at amortised cost – Loans and advances to banks
Provision for impairment (ECL) as at January 1, 2018		139	–	–	139
Transfer to Stage 1		–	–	–	–
Transfer to Stage 2		–	–	–	–
Transfer to Stage 3		–	–	–	–
Net remeasurement of impairment		(103)	–	–	(103)
As at December 31, 2018	34.1	36	–	–	36
Financial assets at amortised cost – Loans and advances to other customers
Provision for impairment (ECL) as at January 1, 2018		3,041,886	4,165,027	14,211,503	21,418,416
Transfer to Stage 1		631,565	(552,887)	(78,678)	–
Transfer to Stage 2		(360,245)	627,849	(267,604)	–
Transfer to Stage 3		(96,237)	(852,199)	948,436	–
Net remeasurement of impairment		(1,174,547)	611,267	2,971,392	2,408,112
New assets originated or purchased		1,148,995	643,753	1,595,640	3,388,388
Financial assets derecognised or repaid (excluding write-offs)		(543,484)	(891,569)	(660,184)	(2,095,237)
Write-offs and recoveries		(800)	(819)	(355,284)	(356,903)
Foreign exchange adjustments		12,052	4,470	278,179	294,701
Unwinding of discount		–	–	(360,876)	(360,876)
Other movements		–	–	10,466	10,466
Changes to contractual cash flows due to modifications not resulting in derecognition		–	2,118,334	2,303,652	4,421,986
As at December 31, 2018	35.2	2,659,185	5,873,226	20,596,642	29,129,053
Financial assets at amortised cost – Debt and other financial instruments/ financial investments – Held to maturity and loans and receivables
Provision for impairment (ECL) as at January 1, 2018		69,680	–	–	69,680
Transfer to Stage 1		–	–	–	–
Transfer to Stage 2		(691)	691	–	–
Transfer to Stage 3		–	–	–	–
Net remeasurement of impairment		65,916	3,180	–	69,096
New assets originated or purchased		128,049	–	–	128,049
Financial assets derecognised or repaid (excluding write-offs)		(573)	–	–	(573)
As at December 31, 2018	36.1	262,381	3,871	–	266,252
Financial assets measured at fair value through other comprehensive income/financial investments – Available for sale
Provision for impairment (ECL) as at January 1, 2018		194,256	–	–	194,256
Transfer to Stage 1		–	–	–	–
Transfer to Stage 2		–	–	–	–
Transfer to Stage 3		–	–	–	–
Net remeasurement of impairment		109,424	–	–	109,424
New assets originated or purchased		372,576	–	–	372,576
Financial assets derecognised or repaid (excluding write-offs)		(80,562)	–	–	(80,562)
As at December 31, 2018	37.2	595,694	–	–	595,694
Contingent liabilities and commitments
Provision for impairment (ECL) as at January 1, 2018		656,764	111,946	78,949	847,659
Transfer to Stage 1		52,852	(27,051)	(25,801)	–
Transfer to Stage 2		(9,201)	9,557	(356)	–
Transfer to Stage 3		(559)	(3,920)	4,479	–
Net remeasurement of impairment		(47,426)	20,362	24,163	(2,901)
New assets originated or purchased		343,083	72,898	97,571	513,552
Financial assets derecognised or repaid (excluding write-offs)		(469,481)	(94,615)	(70,474)	(634,570)
Foreign exchange adjustments		2,900	–	–	2,900
As at December 31, 2018	59.4	528,932	89,177	108,531	726,640

69.1.1 (e) Age analysis by class of financial assets

The maximum exposure to credit risk for class of financial assets by risk rating and by age are
given below:

As at December 31, 2017	Loans and receivables to other customers	Loans and receivables to banks	Financial investments	Lending commitments and contingencies
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Government Securities (Risk free investments)	–	–	250,647,049	–
Gross carrying amount	–	–	250,647,049	–
Neither past due nor individually impaired
Rating 0-4: Investment grade	472,230,045	–	9,007,483	282,344,809
Rating 5-6: Moderate risk	244,352,749	640,512	11,745,742	280,703,891
Gross carrying amount	716,582,794	640,512	20,753,225	563,048,700
Past due but not individually impaired
Less than 3 months	8,160,289	–	–	–
3 to 6 months	856,410	–	–	–
6 to 12 months	724,801	–	–	–
12 to 18 months	469,520	–	–	–
More than 18 months	4,870,915	–	–	–
Gross carrying amount	15,081,935	–	–	–
Individually impaired
Less than 3 months	12,533,705	–	–	–
3 to 6 months	1,292,185	–	–	–
6 to 12 months	404,605	–	–	–
12 to 18 months	1,209,297	–	–	–
More than 18 months	7,603,456	–	–	–
Gross carrying amount	23,043,248	–	–	–
Total gross carrying amount	754,707,977	640,512	271,400,274	563,048,700
Less: Provision for impairment
Individual	7,853,654	–	–	–
Collective	9,407,756	–	–	–
Total provision for impairment	17,261,410	–	–	–
Total net carrying amount	737,446,567	640,512	271,400,274	563,048,700

The methodology of the impairment assessment is explained in the Note 19.

69.1.1 (f) Credit quality by class of financial assets

The table below shows the credit quality by the class of asset for all financial assets exposed to credit risk, based on the Bank’s internal credit rating:

		Neither past due nor individually impaired
As at December 31, 2017		Government guarantee	Investment grade	Moderate risk	Past due but not individually impaired	Individually impaired	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents	29	–	33,224,619	–	–	–	33,224,619
Balances with central banks	30	44,801,446	–	–	–	–	44,801,446
Placements with banks	31	–	17,633,269	–	–	–	17,633,269
Securities purchased under resale agreements		–	–	–	–	–	–
Derivative financial assets	32	–	2,334,536	–	–	–	2,334,536
Other financial instruments – Held for trading	33	2,357,876	314,745	1,738,292	–	–	4,410,913
Loans and receivables to banks	34	–	–	640,512	–	–	640,512
Loans and receivables to other customers	35	–	469,669,456	242,786,716	9,800,801	15,189,594	737,446,567
Corporate banking		–	249,817,145	86,639,832	5,776,899	3,931,899	346,165,775
Amortised cost		–	251,613,579	87,342,167	6,116,798	6,517,529	351,590,073
Less: Provision for impairment		–	1,796,434	702,335	339,899	2,585,630	5,424,298
Personal banking		–	219,852,311	156,146,884	4,023,902	11,257,695	391,280,792
Amortised cost		–	220,616,463	157,010,582	8,965,140	16,525,719	403,117,904
Less: Provision for impairment		–	764,152	863,698	4,941,238	5,268,024	11,837,112
Financial investments – Held to maturity	36	63,562,752	–	–	–	–	63,562,752
Government Securities		63,562,752	–	–	–	–	63,562,752
Other investments		–	–	–	–	–	–
Financial investments – Loans and receivables	36	40,566,702	8,145,775	–	–	–	48,712,477
Government securities		40,566,702	–	–	–	–	40,566,702
Other investments		–	8,145,775	–	–	–	8,145,775
Financial investments – Available for sale	37	154,167,169	546,963	–	–	–	154,714,132
Government Securities		154,167,169	–	–	–	–	154,167,169
Quoted shares		–	500,278	–	–	–	500,278
Unquoted shares		–	46,685	–	–	–	46,685
Investment in unit trusts		–	–	–	–	–	–
Total		305,455,945	531,869,363	245,165,520	9,800,801	15,189,594	1,107,481,223

69.1.1 (g) Financial assets recognised through profit or loss(FVTPL)/ held-for-trading measured at fair value

Held-for-trading investments in debt and equity securities

The table below sets out the credit quality of debt and equity securities classified as financial assets recognised through profit or loss/held-for-trading measured at fair value. Debt securities include investments made by the Bank in Government Securities of Sri Lanka and Bangladesh. The analysis of equity securities is based on Fitch Rating Nomenclature or Equivalent Ratings, where applicable.

	Note	2018	2017
		Rs. ’000	Rs. ’000
Debt instruments at FVTPL
Government Securities – Sri Lanka
Treasury bills		1,947,069	654,438
Treasury bonds		729,974	1,703,438
Government Securities – Bangladesh
Treasury bills		1,722,637	278,618
Treasury bonds		351,680	1,459,674
Subtotal – Debt instruments at FVTPL		4,751,360	4,096,168
Equity instruments at FVTPL
Rated AAA		21,958	12,341
Rated AA+ to AA-		12,798	16,492
Rated A+ to A		523,574	60,879
Rated BBB+		7,138	5,710
Unrated		203,339	219,323
Subtotal – Equity instruments at FVTPL		768,807	314,745
Total	33	5,520,167	4,410,913

Credit exposure arising from derivative transactions

Credit risk arising from derivative financial instruments at any time is limited to those with positive fair values, as reported in the Statement of Financial Position. With gross settled derivatives, the Bank is also exposed to a settlement risk, being the risk that the counterparty failing to deliver the counter value.

The tables below show analysis of credit exposures arising from derivative financial assets and liabilities:

As at December 31, 2018	Derivative type
	Forward		SWAPS		Spot		Total
	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Derivative financial assets (Note 1)	53,846,072	3,340,657	97,890,850	4,567,868	4,189,939	1,437	155,926,861	7,909,962
Derivative financial liabilities (Note 2)	38,630,808	(2,069,807)	85,093,565	(5,946,484)	2,255,444	(5,492)	125,979,817	(8,021,783)
Note 1
Derivative financial assets by counterparty type
With banks	11,448,568	502,967	97,019,953	4,560,325	1,808,638	613	110,277,159	5,063,905
Other customers	42,397,504	2,837,690	870,897	7,543	2,381,301	824	45,649,702	2,846,057
Total	53,846,072	3,340,657	97,890,850	4,567,868	4,189,939	1,437	155,926,861	7,909,962
Note 2
Derivative financial liabilities by counterparty type
With banks	24,576,549	(1,219,725)	79,194,194	(5,308,624)	703,977	(474)	104,474,720	(6,528,823)
Other customers	14,054,259	(850,082)	5,899,371	(637,860)	1,551,467	(5,018)	21,505,097	(1,492,960)
Total	38,630,808	(2,069,807)	85,093,565	(5,946,484)	2,255,444	(5,492)	125,979,817	(8,021,783)

As at December 31, 2017	Derivative type
	Forward		SWAPS		Spot		Total
	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Derivative financial assets (Note 1)	35,831,935	1,264,900	80,896,084	1,067,259	4,432,721	2,377	121,160,740	2,334,536
Derivative financial liabilities (Note 2)	26,602,410	(1,015,648)	83,904,746	(2,660,838)	1,569,843	(2,008)	112,076,999	(3,678,494)
Note 1
Derivative financial assets by counterparty type
With banks	10,081,268	170,229	78,629,102	972,827	3,617,099	2,375	92,327,469	1,145,431
Other customers	25,750,667	1,094,671	2,266,982	94,432	815,622	2	28,833,271	1,189,105
Total	35,831,935	1,264,900	80,896,084	1,067,259	4,432,721	2,377	121,160,740	2,334,536
Note 2
Derivative financial liabilities by counterparty type
With banks	3,146,244	(61,900)	83,904,746	(2,660,838)	1,569,843	(2,008)	88,620,833	(2,724,746)
Other customers	23,456,166	(953,748)	–	–	–	–	23,456,166	(953,748)
Total	26,602,410	(1,015,648)	83,904,746	(2,660,838)	1,569,843	(2,008)	112,076,999	(3,678,494)

69.1.2 Credit-impaired financial assets

Reconciliation of changes in the net carrying amount of life time ECL credit impaired (Stage 3) loans and advances as detailed below:

As at December 31,	2018
	Rs. ’000
Stage 3 loans and advances to other customers as at January 1,	18,332,717
Newly classified as impaired loans and advances during the year	23,569,470
Net change in already impaired loans and advances during the year	(1,055,006)
Net payment, write-off and recoveries and other movement during the year	(8,466,264)
Impaired loans and advances to customers as at December 31,	32,380,917

Reconciliation of changes in the net carrying amount of individually impaired loans and advances as detailed below:

As at December 31,		2017
		Rs. ’000
Impaired loans and advances to other customers as at January 1,		13,648,620
Newly classified as impaired loans and advances during the year		8,177,859
Net change in already impaired loans and advances during the year		361,095
Net payment, write-off and recoveries and other movement during the year		(6,997,980)
Impaired loans and advances to customers as at December 31,		15,189,594

Refer Note 19 for methodology of impairment assessment, on “Impairment losses on loans and advances to other customers”.

Details of provision for impairment for loans and advances to other customers, are detailed in Note 35.

Set out below is an analysis of the gross and net carrying amounts of life time ECL credit impaired (Stage 3) loans and advances to other customers by risk rating:

As at December 31,	2018
	Gross carrying amount	Net carrying amount
	Rs. ’000	Rs. ’000
Rating 0-4: Investment grade	6,706,848	6,473,040
Rating 5-6: Moderate risk	7,365,316	7,093,268
Rating 7-8 : High risk	2,812,134	2,320,231
Rating 9: Extreme risk	36,093,261	16,494,378
Total	52,977,559	32,380,917

Set out below is an analysis of the gross and net carrying amounts of individually impaired loans and advances to other customers by risk rating.

As at December 31,	2017
	Gross carrying amount	Net carrying amount
	Rs. ’000	Rs. ’000
Rating 0-4: Investment grade	4,613,603	4,470,693
Rating 5-6: Moderate risk	4,713,404	4,600,908
Rating S : High risk	763,567	642,017
Rating 7-9: Extreme risk	12,952,674	5,475,976
Total	23,043,248	15,189,594

69.1.4 Collateral held

Loan-to-value ratio of residential mortgage lending

The table below stratifies eligible credit exposures by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan to the value of the collateral, which is used for the computation of Capital Adequecy Ratios. The value of the collateral for residential mortgage loan is based on the forced sale value determined by professional valuers.

As at December 31,	2018		2017
	Rs. ’000	Composition (%)	Rs. ’000	Composition (%)
LTV ratio
Less than 50%	10,948,270	27.20	11,804,905	29.83
51% – 70%	8,888,518	22.08	8,952,662	22.62
71% – 90%	11,025,696	27.39	10,466,905	26.45
91% – 100%	1,807,976	4.50	1,600,415	4.04
More than 100% *	7,576,759	18.83	6,745,986	17.06
	40,247,219	100.00	39,570,873	100.00

* LTV ratio of more than 100% has been arisen due to subsequent disbursements made to the borrower after the initial valuation of the property (the denominator).

Assets obtained by taking the possession of collaterals

Repossession of collaterals is resorted to in extreme situations where action is necessitated to recover the dues. The repossessed assets are disposed, in an orderly and transparent manner and the proceeds are used to reduce or recover the outstanding claims and the amount recovered in excess of the dues is refunded to the customer.

69.1.5 Concentration of credit risk

By setting various concentration limits under different criteria within the established risk appetite framework (i.e., single borrower/group, industry sectors, product, counterparty and country etc.), the Bank ensures that an acceptable level of risk diversification is maintained on an ongoing basis. These limits are continuously monitored and periodically reviewed by the Credit Policy Committee, the Executive Integrated Risk Management Committee and the Board Integrated Risk Management Committee to capture the developments in the market, political and economic environment both locally and globally to strengthen the dynamic portfolio management practices and to provide an early warning on possible credit concentrations.

The maximum exposure to credit risk in respect of each item of financial assets in the Statement of Financial Position as at December 31, as per industry sector and by geographical region of financial assets is given below:

69.1.5 (a) Industry wise distribution

* Loans and advances to other customers referred above do not agree with the Note 35.1 (c-i) since the amounts presented are net of impairment provisions.

In 2018, industry-wise distribution note has been prepared based on the new CBSL classification.

(*) Loans and advances to other customers referred above do not agree with the Note 35.1 (c-i) due to impairment provisions.

69.1.5 (b) Geographical distribution of loans and advances

The Western Province has recorded a higher percentage of lending based on geographical distribution of the Bank’s lending portfolio. It has accounted for 77% (approximately) of total advances portfolio of the Bank (excluding Bangladesh operations) as at December 31, 2018. Although, Western Province is attracted 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 and thereby reflecting a fairly diversified geographical concentration contrary to the figures given below:

As at December 31, 2018 As at December 31, 2017

Please refer Note 35 for the gross carrying amount of the loans and advances to other customers.

69.2 Liquidity risk

Liquidity risk is the Bank’s inability to meet on or off-balance sheet contractual and contingent financial obligations, as they fall due without incurring unacceptable losses. The principal objective in liquidity risk management is to assess the need for funds to meet such obligations and to ensure the availability of adequate funding to fulfil those needs at the appropriate time, under both normal and stressed conditions.

Therefore, the Bank continuously analyses and monitors its liquidity profile, maintains adequate levels of high quality liquid assets, ensures access to diverse funding sources and has contingency funding agreements with peer banks to meet any unforeseen liquidity requirements. Exposures and ratios against tolerance limits as well as stressed scenarios are regularly monitored in order to identify the Bank’s liquidity position and potential funding requirements.

Assets and Liability Management Committee (ALCO)

ALCO chaired by the Managing Director, has representatives from Treasury, Corporate Banking, Personal Banking, Risk and Finance Departments. The Committee meets fortnightly or more frequently to monitor and manage the assets and liabilities of the Bank and also the overall liquidity position to keep the Banks’ liquidity at healthy levels, whilst satisfying the regulatory requirements.

69.2.1 Exposure to liquidity risk

The key measure used by the Bank for managing liquidity risk is the ratio of liquid assets to total liabilities excluding shareholders’ funds. For this purpose, “liquid assets” include cash and cash equivalents, placements with banks and Government Securities (net). Details of the reported ratio of liquid assets to external liabilities of the Domestic Banking Unit (DBU) and the Off shore Banking Centre (OBC) as at reporting dates are as follows:

	Domestic Banking Unit		Off shore Banking Centre
	2018 %	2017 %	2018 %	2017 %
As at December 31,	24.47	27.28	30.20	30.95
Average for the period	25.43	26.66	30.81	31.72
Maximum for the period	28.82	27.98	39.21	37.00
Minimum for the period	23.80	25.75	27.30	27.80
Statutory minimum requirement	20.00	20.00	20.00	20.00

The graph below depicts the trends in liquidity ratios of the Bank calculated on a quarterly basis during the period from December 2017 to December 2018:

69.2.2 Maturity analysis of financial assets and financial liabilities

69.2.2 (a) Remaining contractual period to maturity – Bank

(i) Remaining contractual period to maturity of the assets employed by the Bank as at December 31, is detailed below:

As at December 31,	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at December 31, 2018	Total as at December 31, 2017
	Rs. ’000	Rs.’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest earning assets:
Financial assets
Cash and cash equivalents	8,959,135	–	–	–	–	8,959,135	3,457,539
Balances with central banks	5,908,142	2,000,899	–	68,550	–	7,977,591	1,155,988
Placements with banks	19,898,515	–	–	–	–	19,898,515	17,633,269
Securities purchased under resale agreements	9,513,512	–	–	–	–	9,513,512	–
Derivative financial assets	–	–	–	–	–	–	–
Financial assets recognised through profit or loss/ held for trading – Measured at fair value	4,751,360	–	–	–	–	4,751,360	4,096,168
Financial assets at amortised cost – Loans and advances to banks	–	–	–	–	–	–	–
Financial assets at amortised cost – Loans and advances to other customers	320,738,308	201,409,774	193,654,783	99,943,495	45,353,955	861,100,315	737,446,567
Financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and Loans and receivables	8,599,196	11,063,223	30,343,068	30,561,901	3,288,048	83,855,436	112,275,229
Financial assets measured at fair value through other comprehensive income/financial Investments – Available for sale	14,825,940	50,792,907	55,334,538	54,075,631	1,233,344	176,262,360	154,167,169
Total interest earning assets as at December 31, 2018	393,194,108	265,266,803	279,332,389	184,649,577	49,875,347	1,172,318,224
Total Interest earning assets as at December 31, 2017	277,041,769	281,538,977	258,419,287	162,241,360	50,990,536		1,030,231,929
Non-interest earning assets:
Financial assets
Cash and cash equivalents	30,575,341	–	–	–	–	30,575,341	29,767,080
Balances with central banks	27,250,735	16,305,044	1,237,212	809,047	804,961	46,406,999	43,645,458
Placements with banks	–	–	–	–	–	–	–
Securities purchased under resale agreements	–	–	–	–	–	–	–
Derivative financial assets	3,304,750	3,982,426	589,427	–	33,359	7,909,962	2,334,536
Financial assets recognised through profit or loss/ held for trading – Measured at fair value	768,807	–	–	–	–	768,807	314,745
Financial assets at amortised cost – Loans and advances to banks	–	–	763,074	–	–	763,074	640,512
Financial assets at amortised cost – Loans and advances to other customers	–	–	–	–	–	–	–
Financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and loans and receivables	–	–	–	–	–	–	–
Financial assets measured at fair value through other comprehensive income/financial investments – Available for sale	–	–	–	20,651	223,718	244,369	546,963
Non-financial assets
Investments in subsidiaries	–	–	–	–	4,263,631	4,263,631	3,065,935
Investments in associates	–	–	–	–	44,331	44,331	44,331
Property, plant and equipment	–	–	–	–	15,301,246	15,301,246	14,634,710
Intangible assets	–	–	–	–	906,112	906,112	776,810
Leasehold property	–	–	–	–	71,652	71,652	72,594
Deferred tax assets	–	–	–	–	–	–	–
Other assets	17,802,945	225,991	1,890,106	530,631	3,461,449	23,911,122	17,298,162
Total Non-interest earning assets as at December 31, 2018	79,702,578	20,513,461	4,479,819	1,360,329	25,110,459	131,166,646	–
Total Non-interest earning assets as at December 31, 2017	70,311,817	15,953,121	2,669,183	1,253,732	22,953,983		113,141,836
Total assets – As at December 31, 2018	472,896,686	285,780,264	283,812,208	186,009,906	74,985,806	1,303,484,870
Total assets – As at December 31, 2017	347,353,586	297,492,098	261,088,470	163,495,092	73,944,519		1,143,373,765
Percentage – As at December 31, 2018*	36.29	21.92	21.77	14.27	5.75	100.00
Percentage – As at December 31, 2017*	30.38	26.02	22.83	14.30	6.47		100.00

(*) Total assets of each maturity bucket as a percentage of total assets employed by the Bank.

(ii) Remaining contractual period to maturity of the liabilities and shareholders’ funds employed by the Bank as at the date of Statement of Financial Position is detailed below:

As at December 31,	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at December 31, 2018	Total as at December 31, 2017
	Rs. ’000	Rs.’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest-bearing liabilities:
Financial Liabilities
Due to banks	11,625,888	16,648,582	–	–	–	28,274,470	48,954,474
Derivative financial liabilities	–	–				–	–
Securities sold under repurchase agreements	38,858,224	6,974,167	3,272,071	–	–	49,104,462	49,676,767
Financial Liabilities recognised through profit or loss – Measured at fair value	–	–	–	–	–	–	–
Financial liabilities at amortised cost – Due to depositors	504,105,648	352,184,128	24,892,407	14,112,967	16,088,136	911,383,286	789,533,286
Financial liabilities at amortised cost – Other borrowings	266,300	1,499,941	8,463,641	8,507,200	6,624,830	25,361,912	23,786,094
Subordinated liabilities	739,373	387,827	9,477,720	22,104,087	5,283,450	37,992,457	25,165,924
Total interest-bearing liabilities as at December 31, 2018	555,595,433	377,694,645	46,105,839	44,724,254	27,996,416	1,052,116,587
Total Interest-bearing liabilities as at December 31, 2017	524,871,276	306,214,684	38,492,219	30,031,857	37,506,509		937,116,545
Non-interest bearing liabilities:
Financial liabilities
Due to banks	21,826,611	–	–	–	–	21,826,611	8,166,517
Derivative financial liabilities	3,404,297	4,432,899	184,587	–	–	8,021,783	3,678,494
Securities sold under repurchase agreements	–	–	–	–	–	–	–
Financial liabilities recognised through profit or loss – measured at fair value	–	–	–	–	–	–	–
Financial liabilities at amortised cost – due to depositors	71,654,028	–	–	–	–	71,654,028	60,594,225
Financial liabilities at amortised cost – other borrowings	–	–	–	–	–	–	–
Subordinated liabilities	–	–	–	–	–	–	–
Non-financial liabilities
Debt securities issued	–	–	–	–	–	–	–
Current tax liabilities	1,274,349	5,292,009	–	–	–	6,566,358	4,143,911
Deferred tax liabilities	(554,786)	(328,268)	(515,164)	151,947	1,892,519	646,248	3,274,826
Other provisions	–	–	–	–	–	–	–
Other liabilities	15,524,380	2,387,328	2,045,280	838,683	3,410,680	24,206,351	19,225,364
Due to subsidiaries	40,955	–	–	–	–	40,955	74,523
Equity
Stated capital	–	–	–	–	39,147,882	39,147,882	37,143,541
Statutory reserves	–	–	–	–	7,354,143	7,354,143	6,476,952
Retained earnings	–	–	–	–	5,063,076	5,063,076	4,987,446
Other reserves	–	–	–	–	66,840,848	66,840,848	58,491,421
Total non-interest bearing liabilities as at December 31, 2018	113,169,834	11,783,968	1,714,703	996,630	123,709,148	251,368,283
Total non-Interest bearing liabilities as at December 31, 2017	75,376,089	14,424,025	3,532,019	1,636,826	111,288,261		206,257,220
Total liabilities and equity – as at December 31, 2018	668,765,267	389,478,613	47,820,542	45,714,884	151,705,564	1,303,484,870
Total liabilities and equity – as at December 31, 2017	600,247,365	320,638,709	42,024,238	31,668,683	148,794,770		1,143,373,765
Percentage – as at December 31, 2018*	51.30	29.88	3.67	3.51	11.64	100.00
Percentage – as at December 31, 2017*	52.50	28.04	3.68	2.77	13.01		100.00

(*) Total liabilities and shareholders’ funds of each maturity bucket as a percentage of total liabilities and shareholders’ funds employed by the Bank.

69.2.2 (b) Non-derivative financial assets and financial liabilities expected to be recovered or settled after 12 months from the reporting date

The table below sets out the carrying amounts of non-derivative financial assets and financial liabilities expected to be recovered or settled after 12 months from the reporting date:

As at December 31,	2018	2017
	Rs. ’000	Rs. ’000
Financial assets
Non-derivative financial assets
Balances with central banks	2,919,770	2,329,368
Financial assets at amortised cost – Loans and advances to banks	763,074	640,512
Financial assets at amortised cost – Loans and advances to other customers	338,952,233	307,676,926
Financial assets at amortised cost – Debt and other financial instruments/ financial investments – Held to maturity and Loans and receivables	64,193,017	73,901,390
Financial assets measured at fair value through other comprehensive income/ financial investments – Available for sale	110,887,882	49,613,501
Total	517,715,976	434,161,697
Financial liabilities
Non-derivative financial liabilities
Securities sold under repurchase agreements	3,272,071	2,746,663
Financial liabilities at amortised cost – Due to depositors	55,093,510	45,325,787
Financial liabilities at amortised cost – Other borrowings	23,595,671	21,036,561
Subordinated liabilities	36,865,257	24,630,973
Total	118,826,509	93,739,984

69.2.3 Liquidity reserves

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

As at December 31,	2018		2017
	Carrying amount	Fair value	Carrying amount	Fair value
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Balances with central banks	54,384,590	54,384,590	44,801,446	44,801,446
Balances with other banks	15,266,105	15,266,105	9,944,020	9,944,020
Coins and notes held	24,272,784	24,272,784	23,280,599	23,280,599
Unencumbered debt securities issued by sovereigns	219,505,833	216,080,931	172,149,322	171,675,912
Total	313,429,312	310,004,410	250,175,387	249,701,977

69.2.4 Financial assets available to support future funding

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

As at December 31, 2018		Encumbered		Unencumbered
		Pledged as collateral	Other	Available as collateral	Other	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents	29	–	–	39,534,476	–	39,534,476
Balances with central banks	30	–	39,412,442	14,972,148	–	54,384,590
Placements with banks	31	–	–	19,898,515	–	19,898,515
Securities purchased under resale agreements		–	–	9,513,512	–	9,513,512
Derivative financial assets	32	–	–	7,909,962	–	7,909,962
Financial assets recognised through profit or loss/ held for trading – Measured at fair value	33	–	–	5,520,167	–	5,520,167
Financial assets at amortised cost – Loans and advances to banks *	34	–	763,074	–	–	763,074
Financial assets at amortised cost – Loans and advances to other customers	35	–	–	861,100,315	–	861,100,315
Financial assets at amortised cost – Debt and other financial instruments/financial investments – Held to maturity and Loans and receivables	36	–	–	83,855,436	–	83,855,436
Financial assets measured at fair value through other comprehensive income/financial investments – Available for sale	37	49,267,013	–	127,239,716	–	176,506,729
Total		49,267,013	40,175,516	1,169,544,247	–	1,258,986,776

As at December 31, 2017		Encumbered		Unencumbered
		Pledged as collateral	Other	Available as collateral	Other	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents	29	–	–	33,224,619	–	33,224,619
Balances with central banks	30	–	39,766,630	5,034,816	–	44,801,446
Placements with banks	31	–	–	17,633,269	–	17,633,269
Securities purchased under resale agreements		–	–	–	–	–
Derivative financial assets	32	–	–	2,334,536	–	2,334,536
Other financial instruments – Held for trading	33	–	–	4,410,913	–	4,410,913
Loans and receivables to banks *	34	–	640,512	–	–	640,512
Loans and receivables to other customers	35	–	–	737,446,567	–	737,446,567
Financial investments – Held to maturity	36	–	–	63,562,752	–	63,562,752
Financial investments – Loans and receivables	36	–	–	48,712,477	–	48,712,477
Financial investments – Available for sale **	37	58,768,665	–	95,945,467	–	154,714,132
Total		58,768,665	40,407,142	1,008,305,416	–	1,107,481,223

(* ) Represents an amount where the Bank is prevented from exercising the right of lien against the claim made by the Bank due to a Court action.

( ** ) Market value of securities pledged as collateral is considered as encumbered.

69.3 Market risk

Market risk is the risk of losses in on or off-balance sheet positions arising out of movements in prices affecting foreign exchange exposures, interest rate instruments, equity/debt instruments and commodity exposures. The Bank monitors market risk in both trading and non-trading portfolios on an ongoing basis.

69.3.1 Exposure to market risk – trading and non-trading portfolio

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

As at December 31, 2018			Market risk measurement
		Carrying amount	Trading portfolios	Non-trading portfolios
	Note	Rs. ’000	Rs. ’000	Rs. ’000
Assets subject to market risk
Cash and cash equivalents	29	20,050,789	–	20,050,789
Balances with central banks	30	14,517,678	–	14,517,678
Placements with banks	31	19,898,515	–	19,898,515
Securities purchased under resale agreements		9,513,512	–	9,513,512
Derivative financial assets	32	7,909,962	7,909,962	–
Financial assets recognised through profit or loss/held for trading – Measured at fair value	33	5,520,167	5,520,167	–
Financial assets at amortised cost – Loans and advances to banks	34	763,074	–	763,074
Financial assets at amortised cost – Loans and advances to other customers	35	861,100,315	–	861,100,315
Financial assets at amortised cost – Debt and other financial instruments/ financial investments – Held to maturity and Loans and receivables	36	83,855,436	–	83,855,436
Financial assets measured at fair value through other comprehensive income/ Financial Investments – Available for sale	37	176,506,729	–	176,506,729
Total		1,199,636,177	13,430,129	1,186,206,048
Liabilities subject to market risk
Due to banks	45	50,101,081	–	50,101,081
Derivative financial liabilities	46	8,021,783	8,021,783	–
Securities sold under repurchase agreements		49,104,462	–	49,104,462
Financial liabilities at amortised cost – Due to depositors	47	937,860,201	–	937,860,201
Financial liabilities at amortised cost – Other borrowings	48	25,361,912	–	25,361,912
Subordinated liabilities	52	37,992,457	–	37,992,457
Total		1,108,441,896	8,021,783	1,100,420,113

As at December 31,2017			Market risk measurement
		Carrying amount	Trading portfolios	Non-trading portfolios
	Note	Rs. ’000	Rs. ’000	Rs. ’000
Assets subject to market risk
Cash and cash equivalents	29	12,387,967	–	12,387,967
Balances with central banks	30	4,601,606	–	4,601,606
Placements with banks	31	17,633,269	–	17,633,269
Derivative financial assets	32	2,334,536	2,334,536	–
Other financial instruments – Held for trading	33	4,410,913	4,410,913	–
Loans and receivables to banks	34	640,512	–	640,512
Loans and receivables to other customers	35	737,446,567	–	737,446,567
Financial investments – Available for sale	37	154,714,132	–	154,714,132
Financial investments – Held to maturity	36	63,562,752	–	63,562,752
Financial investments – Loans and receivables	36	48,712,477	–	48,712,477
Total		1,046,444,731	6,745,449	1,039,699,282
Liabilities subject to market risk
Due to banks	45	57,120,991	–	57,120,991
Derivative financial liabilities	46	3,678,494	3,678,494	–
Securities sold under repurchase agreements		49,676,767	–	49,676,767
Due to other customers/deposits from customers	47	807,630,072	–	807,630,072
Other borrowings	48	23,786,094	–	23,786,094
Subordinated liabilities	52	25,165,924	–	25,165,924
Total		967,058,342	3,678,494	963,379,848

69.3.2 Exposure to interest rate risk – Sensitivity analysis

69.3.2 (a) Exposure to interest rate risk – Non-trading portfolio

The possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments gives rise to interest rate risk. The Bank’s policy is to continuously monitor portfolios and adopt hedging strategies to ensure that interest rate risk is maintained within prudent levels.

The tables below analyse the Bank’s interest rate risk exposure on financial assets and financial liabilities. The Bank’s assets and liabilities are included at carrying amounts and categorised by the earlier of contractual re-pricing or maturity dates.

Interest rate gap position of the non-trading portfolio of the Bank is given below:

As at December 31, 2018	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Non-sensitive	Total
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	7,899,330	–	–	–	–	31,635,146	39,534,476
Balances with central banks	14,517,678	–	–	–	–	39,866,912	54,384,590
Placements with banks	19,898,515	–	–	–	–	–	19,898,515
Securities purchased under resale agreements	9,513,512	–	–	–	–	–	9,513,512
Derivative financial assets	–	–	–	–	–	–	–
Other financial instruments held for trading	–	–	–	–	–	–	–
Loans and receivables to banks	–	–	–	–	–	763,074	763,074
Financial assets at amortised cost – Loans and advances to other customers	533,455,698	150,401,109	84,419,598	45,481,563	39,900,194	7,442,153	861,100,315
Financial assets measured at amortised cost – Debt and other financial instruments/ financial investments – Held to maturity and Loans and receivables	6,812,657	11,090,082	25,554,127	35,456,787	3,292,181	1,649,602	83,855,436
Financial assets measured at fair value through other comprehensive income/financial investments – Available for sale	71,716,497	50,398,511	46,968,746	4,400,562	1,235,701	1,786,712	176,506,729
Total financial assets	663,813,887	211,889,702	156,942,471	85,338,912	44,428,076	83,143,599	1,245,556,647
Financial liabilities
Due to banks	26,297,708	4,574,999	7,320,000	7,320,000	–	4,588,374	50,101,081
Derivative financial liabilities	–	–	–	–	–	–	–
Securities sold under repurchased agreements	39,075,611	6,771,810	3,257,041	–	–	–	49,104,462
Financial liabilities at amortised cost – Due to depositors	512,016,994	351,834,901	23,818,232	13,279,035	13,153,783	68,934,369	983,037,314
Financial liabilities at amortised cost – Other borrowings	19,559,972	514,797	1,005,084	737,950	3,544,109	–	25,361,912
Subordinated liabilities	14,566,489	–	9,748,678	8,393,840	5,283,450	–	37,992,457
Total financial liabilities	611,516,774	363,696,507	45,149,035	29,730,825	21,981,342	73,522,743	1,145,597,226
Interest rate sensitivity gap	52,297,113	(151,806,805)	111,793,436	55,608,087	22,446,734	9,620,856	99,959,421
Cumulative gap	52,297,113	(99,509,692)	12,283,744	67,891,831	90,338,565	99,959,421

As at December 31, 2017	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Non-sensitive	Total
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	3,952,578	–	–	–	–	29,272,041	33,224,619
Balances with central banks	4,601,606	–	–	–	–	40,199,840	44,801,446
Placements with banks	16,097,269	1,536,000	–	–	–	–	17,633,269
Securities purchased under resale agreements	–	–	–	–	–	–	–
Derivative financial assets	–	–	–	–	–	–	–
Other financial instruments – Held for trading	–	–	–	–	–	–	–
Loans and receivables to banks	–	–	–	–	–	640,512	640,512
Loans and receivables to other customers	460,905,113	134,400,971	65,554,128	38,341,792	31,537,815	6,706,748	737,446,567
Financial investments – Available for sale	10,573,104	68,317,215	46,631,198	28,638,006	–	554,609	154,714,132
Financial investments – Held to maturity	4,077,406	9,871,844	12,885,242	29,661,660	7,066,600	–	63,562,752
Financial investments – Loans and receivables	41,140,625	1,893,522	5,678,330	–	–	–	48,712,477
Total financial assets	541,347,701	216,019,552	130,748,898	96,641,458	38,604,415	77,373,750	1,100,735,774
Financial liabilities
Due to banks	44,703,696	5,366,253	–	–	–	7,051,042	57,120,991
Derivative financial liabilities	–	–	–	–	–	–	–
Securities sold under repurchase agreements	36,290,396	10,652,592	2,733,779	–	–	–	49,676,767
Due to other customers/Deposits from customers	457,830,953	286,182,073	16,482,261	12,360,297	10,739,911	66,532,016	850,127,511
Other borrowings	18,293,434	814,083	1,002,777	908,493	2,767,307	–	23,786,094
Subordinated liabilities	11,664,201	327,156	–	9,500,724	3,673,843	–	25,165,924
Total financial liabilities	568,782,680	303,342,157	20,218,817	22,769,514	17,181,061	73,583,058	1,005,877,287
Interest rate sensitivity gap	(27,434,979)	(87,322,605)	110,530,081	73,871,944	21,423,354	3,790,692	94,858,487
Cumulative gap	(27,434,979)	(114,757,584)	(4,227,503)	69,644,441	91,067,795	94,858,487

69.3.4 Exposure equity price risk

Equity price risk arises as a result of any change in market prices and volatilities of individual equities. The Bank conducts mark-to-market calculations on a daily, quarterly and on a need basis to identify the impact due to changes in equity prices.

The table below summarises the impact (both to Income Statement and to equity) due to a change of 10% on equity prices.

	2018			2017
	Financial assets recognised through profit or loss Rs. ’000	Financial assets fair value through other comprehensive income Rs. ’000	Total Rs. ’000	Held for trading Rs. ’000	Available for sale Rs. ’000	Total Rs. ’000
Market value of equity securities as at December 31,	768,807	195,149	963,956	314,745	500,278	815,023
Stress Level	Impact on Income Statement	Impact on OCI	Impact on equity	Impact on Income Statement	Impact on OCI	Impact on equity
Shock of 10% on equity prices (upward)	76,881	19,515	96,396	31,475	50,028	81,503
Shock of 10% on equity prices (downward)	(76,881)	(19,515)	(96,396)	(31,475)	(50,028)	(81,503)

69.4 Operational risk

Operational risk arises due to inadequate or failed internal processes, people and systems or from external events. Operational risk events which include legal and regulatory implications could lead to financial and reputational losses to the Bank.

The operational risk management framework of the Bank has been defined under the Board-approved operational risk management policy. Operational risk is managed by establishing an appropriate internal control system that requires a mechanism for segregation of related responsibilities within the Bank, and a detailed testing and verification of the Bank’s overall operational systems, and achieving a full harmony between internal and external systems and establishing a fully independent backup facility for business continuity planning.

69.5 Capital management and Pillar III disclosures as per Basel III

Objective

The Bank is required to manage its capital taking into account the need to meet the regulatory requirements as well as the current and future business needs, stakeholder expectations and available options for raising capital.

69.5.1 Regulatory capital

Capital adequacy ratio (CAR) is calculated based on the CBSL directions stemming from Basel III accord. These guidelines require the Bank to maintain a CAR not less than 8.875% with minimum Tier 1 capital with buffers in relation to total risk weighted assets and a minimum total CAR with buffers of 12.875% in relation to total risk weighted assets.

As at December 31,	2018	2017
	Rs. ’000	Rs. ’000
Common equity Tier 1 (CET1) capital after adjustments	107,110,518	94,151,253
Total common equity Tier 1 (CET1) capital	110,822,797	96,696,269
Equity capital (stated capital)/assigned capital	39,147,882	37,143,541
Reserve fund	7,354,143	6,476,952
Published retained earnings/(accumulated retained losses)	5,726,294	1,798,112
Published accumulated other comprehensive income (OCI)	352,491	(1,522,156)
General and other disclosed reserves	58,241,987	52,799,820
Unpublished current year’s profit/(losses) and gains reflected in OCI	–	–
Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–
Total adjustments to CET1 capital	3,712,279	2,545,016
Goodwill (net)	–	–
Other intangible assets (net)	906,114	776,812
Revaluation losses of property, plant and equipment	3,813	3,813
Significant investments in the capital of financial institutions where the Bank owns more than 10% of the issued ordinary share capital of the entity	2,802,352	1,764,391
Additional Tier 1 (AT1) capital after adjustments	–	–
Total additional Tier 1 (ATI) capital	–	–
Qualifying additional Tier 1 capital instruments	–	–
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–
Total adjustments to AT1 capital	–	–
Investment in own shares	–	–
Others (Specify)	–	–
Tier 2 Capital after adjustments	40,287,823	28,264,629
Total Tier 2 Capital	40,287,823	28,264,629
Qualifying Tier 2 capital instruments	33,103,574	22,799,002
Revaluation gains	3,087,658	2,024,804
Loan loss provisions	4,096,591	3,440,823
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–
Total adjustments to Tier 2 capital	–	–
Investment in own shares	–	–
Others (specify)	–	–
CET1 capital	107,110,518	94,151,253
Total Tier 1 capital	107,110,518	94,151,253
Total capital	147,398,341	122,415,882

69.5.2 Capital allocation

The Management monitors the capital adequacy ratio on a regular basis to ensure that it operates well above the internal limit set by the Bank. The allocation of capital between specific operations and activities, to a large extent, driven by optimisation of return on capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements, but in some cases, the regulatory requirements do not fully reflect the varying degree of risks associated with different activities. In such cases, the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required level by the regulator.

69.5.3 Pillar III disclosures as per Basel III

Disclosures under these requirements mainly include the regulatory capital requirements and liquidity, risk weighted assets, discussion on adequacy to meet current and future capital requirements of banks and linkages between financial statements and regulatory exposures. It is required to disclose the templates specified by the Central Bank of Sri Lanka as per Basel III – Minimum disclosure requirements with effective from July 1, 2017.