1.1 Corporate Information

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

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

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of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, the DFCC Bank Act No. 35 of 1955 was repealed and the Bank was incorporated under the Companies Act No. 07 of 2007 as a public limited company listed in the Colombo Stock Exchange with the name “DFCC Bank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

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

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

Total staff strength of the Bank and the Group on 31 December 2023 was as follow:

Group	2,225 (31 December 2022 – 2,097)
Bank	2,109 (31 December 2022 – 1,989)

1.2 Consolidated Financial Statements

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

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

1.3 Parent Entity and Ultimate Parent Entity

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

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

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

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

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

1.5 Approval of Financial Statements

The financial statements for the year ended 31 December 2023 were authorised for issue by the Directors on
19 February 2024.

1.6 Responsibility for Financial Statements

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

2.1 Statement of Compliance

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

Further, the tax liability arising from the surcharge tax Act No. 40 of 2022 has been accounted as recommended by the Statement of Alternative Treatment (SoAT) issued by The Institute of Chartered Accountants of Sri Lanka.”

Considering the unprecedented changes in the macro-economic conditions, the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) has decided to issue the “Statement of Alternative Treatment (SoAT) on Reclassification of Debt Portfolio”. This SoAT will provide a temporary practical expedient to permit the entities to reclassify the debt portfolio measured at Fair Value through Other Comprehensive Income (FVOCI) to amortised cost.

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

Details of the Group’s material accounting policies followed during the year are given on Note 5.

These financial statements include the following components:

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

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

2.2 Basis of Measurement

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

Financial Instruments

Item	Basis of measurement	Note
Financial assets measured at fair value through profit or loss.	Fair value	29
Derivative financial assets and derivative financial liabilities.	Fair value	28
Financial assets measured at fair value through other comprehensive income.	Fair value	32

Non-Financial Assets/Liabilities

Item	Basis of measurement	Note
Employee benefits	Present value of defined benefit pension obligation less net pension assets of DFCC Bank Pension Fund, a trust separate from the Bank.	45
	Present value of the defined benefit gratuity obligation.	45

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

2.3 Materiality and Aggregation

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

2.4 Going Concern

The assessment carried out by the Board took into consideration the current economic developments in order to make projections for future economic conditions of the environment in which it operates. The main factors that cause uncertainties regarding the application of this principle relate to the unstable economic environment in the country.

Specifically, the high degree of uncertainty that characterises the internal economic environment led to deterioration in the creditworthiness of corporate and individuals, and an increase of non-performing loans and therefore to the recognition of significant impairment losses (Note 16) by the Bank and by the banking system in general. Based on the above and taking into account the Bank capital adequacy (Note 8.6.1) and the ability of the Bank to access the liquidity mechanisms (Note 8.3), the Bank estimates that the conditions for the application of the going concern principle for the preparation of its financial statements are met.

2.5 Comparative Information

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

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

These consolidated financial statements are presented in Sri Lankan Rupees, which is the Bank’s functional currency. All amounts have been rounded to the nearest thousand, except when otherwise indicated.

There was no change in the Group’s presentation and functional currency during the year under review.

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

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

Economic crisis

Sri Lanka is facing an economic crisis as the country has not been able to maintain a healthy level of Government revenue fueled by the Covid-19 pandemic, and due to the large public sector expenditure. As a result, central government debt increased to an unsustainable level and In April 2022, Sri Lanka announced an external debt service suspension as a measure to manage its depleted reserves. In March 2023, the International Monetary Fund (IMF) Executive Board approved a 48-month Extended Fund Facility (EFF) of approximately USD 3 Bn to support the government’s reform program. In May 2023, the program was approved in Parliament . In June 2023, Sri Lanka’s Cabinet approved a plan to restructure nearly half of its USD 42.1 Bn local debt following an agreement with IMF. Indicative terms of restructure were announced in June 2023. The Sri Lankan Government is actively addressing the economic challenges through a combination of policy measures and reforms. The IMF board completed the first review under the 48-month extended fund facility with Sri Lanka, to support its economic policies and reforms. As per IMF report Sri Lanka’s performance under the program was satisfactory. As per the IMF forecasts the real GDP growth rate of 1.8% for 2024 is forecasted whereas it was negative 3.6% in 2023. IMF is forecasting a real GDP growth rate of 3% by 2025.

The economic crisis has impacted the customers, operations and Group performance. The present economic environment necessitated the Government to respond at unprecedented levels to protect the local economy and livelihoods. Uncertainties in the economy have significantly increased the estimation uncertainty in the preparation of these financial statements including, the extent and duration of the disruption to businesses, expected economic downturn, and subsequent recovery.

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

4.1 Judgements

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

Item	Note
Establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining methodology for incorporating forward-looking information into measurement of Expected Credit Loss (ECL) and selection and approval models used to measure ECL	16
Classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial assets are Solely Payment of Principal and Interest (SPPI)	5.3.2
Determination of control over investees	34,35
Derivative Assets	28

4.2 Assumptions and Estimation Uncertainties

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

Item	Note
Impairment of financial instruments: determining inputs into the ECL measurement model, including incorporation of forward looking information and key assumptions used in estimating recoverable cash flows.	16,30
Determination of the fair value of financial instruments with significant unobservable inputs.	9.3.1
Measurement of defined benefit obligations: key actuarial assumptions.	45.2.2
Impairment testing for Cash Generating Units (CGU) containing goodwill: key assumptions underlying recoverable amounts.	5.4
Recognition and measurement of contingencies: key assumptions about the likelihood and magnitude of an outflow of resources.	55

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

These accounting policies have been applied consistently by Group entitles.

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

		Note
A.	Basis of consolidation	5.1
B.	Foreign currency	5.2
C.	Interest	11
D.	Fee and commission	12
E.	Net trading income	13
F.	Dividend income	15
G.	Leases	49
H.	Income tax	21
I.	Financial assets and financial liabilities	5.3
	– Recognition and initial measurement	5.3.1
	– Classification	5.3.2
	– Derecognition	5.3.4
	– Modification of financial assets and financial liabilities	5.3.5
	– Offsetting	5.3.6
	– Fair value measurement	5.3.7
	– Impairment	5.3.8
	– Designation at fair value through profit or loss	5.3.9
J.	Cash and cash equivalents	25
K.	Trading assets and liabilities	29
L.	Derivatives held for risk management purposes and hedge accounting	28
M.	Loans and advances	30
N.	Investment securities	29, 31, 32
O.	Property, plant and equipment	37
P.	Investment property	36
Q.	Intangible assets and goodwill	38
R.	Impairment of non-financial assets	5.4
S.	Deposits, debt securities in issue and subordinated liabilities	42, 44, 48
T.	Provisions	47
U.	Financial guarantees and loan commitments	55
V.	Employee retirement benefits	45
W.	Share capital, other equity and reserves	50
X.	Earnings per share	22
Y.	Segment reporting	57

5.1 Basis of Consolidation

5.1.1 Business Combinations

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

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

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

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

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

5.1.2 Subsidiaries

Details of the Bank’s subsidiaries, how they are accounted in the financial statements and their contingencies are set out in Note 33.

5.1.3 Non-controlling Interests (NCI)

Details of non-controlling interests are given in Note 54.

5.1.4 Loss of Control

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

5.1.5 Interests in Equity-Accounted Investees

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

Details of the Bank’s equity-accounted investees, how they are accounted in the financial statements and their contingencies are set out in Note 34 and 35.

5.1.6 Transactions Eliminated on Consolidation

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

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

5.1.7 Financial Statements of Subsidiaries, Associate Company, and Joint Venture Company included in the Consolidated Financial Statements

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

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

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

5.2 Foreign Currency

5.2.1 Foreign Currency Transactions

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

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

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

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

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

5.2.2 Foreign Operations

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

5.3 Financial Assets and Financial Liabilities

5.3.1 Recognition and Initial Measurement

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

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

5.3.2 Classification

5.3.2.1 Financial Assets

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

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

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

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

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

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

All other financial assets are classified as measured at FVTPL.

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

5.3.2.1.1 Business Model Assessment

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

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

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

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

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

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL.

5.3.2.1.2 Assessment of whether Contractual Cash Flows are Solely Payments of Principal and Interest (SPPI)

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

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

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

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

5.3.2.2 Financial Liabilities

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

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

5.3.2.2.1 Financial Liabilities at Amortised Cost

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

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

5.3.2.2.2 Financial Liabilities at Fair Value through Profit or Loss

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

5.3.3 Reclassifications

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

5.3.4 Derecognition

5.3.4.1 Financial Assets

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

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

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

5.3.4.2 Financial Liabilities

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

5.3.5 Modifications of Financial Assets and Financial Liabilities

5.3.5.1 Financial Assets

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

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

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

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

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

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

5.3.5.2 Financial Liabilities

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

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

5.3.6 Offsetting

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

5.3.7 Fair Value Measurement

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

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

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

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

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

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

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

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

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

5.3.8 Impairment

Details of impairment is given in Note 16 on page 299.

5.3.9 Designation at Fair Value through Profit or Loss

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

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

5.4 Impairment of Non-Financial Assets

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

Goodwill is tested annually for impairment.

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

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

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

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

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

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

A. Deferred tax related to assets and liabilities arising from a single transaction

The Group has adopted deferred tax related to assets and liabilities arising from a single transaction (Amendments to LKAS 12) from 1 January 2023. The amendments narrow the scope of the initial recognition exemption to exclude transactions that give rise to equal and offsetting temporary differences – e.g. leases. For leases, an entity is required to recognise the associated deferred tax assets and liabilities from the beginning of the earliest comparative period presented, with any cumulative effect recognised as an adjustment to retained earnings or other components of equity at that date. For all other transactions, an entity applies the amendments to transactions that occur on or after the beginning of the earliest period presented.

The Group previously accounted for deferred tax on leases by applying the “integrally linked” approach, resulting in a similar outcome as under the amendments, except that the deferred tax assets or liabilities was recognised on a net basis. Following the amendments, the Group has recognised a separate deferred tax assets in relation to its lease liabilities and a deferred tax liabilities in relation to its right-of-use asset. However, there was no impact on the statement of financial position because the balances qualify for offset under paragraph 74 of LKAS 12. There was also no impact on the opening retained earnings as at 1 January 2022 as a result of the change. The key impact for the Group relates to disclosure of the deferred tax assets and liabilities recognised (see Note 39).

B. Material Accounting Policy Information

The Group also adopted Disclosure of Accounting Policies (Amendments to LKAS 1 and SLFRS Practice Statement 2) from 1 January 2023. Although the amendments did not result in any changes to the accounting policies themselves, they impacted the accounting policy information disclosed in the financial statements.

The amendments require the disclosure of “material”, rather than “significant”, accounting policies. The amendments also provide guidance on the application of materiality for disclosure of accounting policies, with a view to provide useful, entity-specific accounting policy information that users need to understand other information in the financial statements.

Management reviewed the accounting policies and made updates to the information disclosed in Note 5 Material Accounting Policies.

A number of amendments to standards are effective for periods beginning after 1 January 2024 and earlier application is permitted; however, the Group has not adopted the following amended standards in preparing these consolidated financial statements:

Accounting standard	Descriptions	Effective date
Classification of liabilities as current or non-current with covenants (Amendments to LKAS 1)	Amendments to LKAS 1 alter the classification of liabilities like convertible debt and introduce new disclosure requirements for liabilities subject to covenants.	1 January 2024
Lease liability in a sale and leased back (Amendment to SLFRS 16)	The amendments specifically affect seller-lessee accounting in sale and leaseback transactions that qualify as a sale under SLFRS 15, especially those involving variable lease payments not based on an index or rate. They modify how a seller-lessee accounts for these leasebacks, preventing recognition of gains on retained rights of use due to lease term modifications or changes, which previously could occur when variable payments not defined as “lease payments” were excluded	1 January 2024
Supplier Finance Arrangements (Amendments to LKAS 7 and SLFRS 7)	The amendments require enhanced disclosures in financial statements about liabilities and supply chain finance arrangements, focusing on their impact on liabilities, cash flows, and liquidity risk, and specifying additional details about terms, conditions, and amounts related to these arrangements.	1 January 2024
Lack of Exchangeability (Amendments to LKAS 21)	The amendments provide guidance on how an entity should evaluate the exchangeability of a currency and establish a spot exchange rate in cases where exchangeability is absent. They also mandate disclosures that help users of Financial Statements comprehend the effects of a currency’s non-exchangeability	1 January 2025

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

8.1 Introduction and Overview

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

• credit risk
• liquidity risk
• market risk
• operational risk

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

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

Risk Management Framework

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

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

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

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

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

8.2 Credit Risk

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

8.2.1 Settlement Risk

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

8.2.2 Management of Credit Risk

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

1. Formulating credit policies in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements.
2. Establishing the authorisation structure for the approval and renewal of credit facilities are vested with the Board of Directors. Authorisation limits are allocated to business unit heads.
3. Reviewing and assessing credit risk: Bank assesses all credit exposures in excess of designated limits, before facilities are committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.
4. Limiting concentration of exposure to counterparties, industries (for loans and advances, financial guarantees and similar exposures), credit ratings and countries.
5. Developing and maintaining the Bank’s processes for measuring ECL: This includes processes for:
• initial approval, regular validation and back-testing of the models used;
• determining and monitoring significant increase in credit risk; and
• incorporation of forward-looking information.
6. Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of portfolios are provided to bank credit, which may require appropriate corrective action to be taken. These include reports containing estimates of Expected Credit Loss( ECL) allowances.
7. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.
8. Determining risk rating for each lending client based on financial risk, non financial risk and industry risk parameters.

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

Regular audits of business units and bank credit processes are undertaken by internal audit.

Credit risk management approaches as described in 1 to 8 above are revised periodically and strengthened as required in line with the regulatory requirements and economic environment. During the year, all relevant policies, guidelines and processes have been reviewed and updated accordingly.

8.2.3 Credit Quality Analysis – Bank

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

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

As at 31 December	2023
In LKR ’000	Stage 1	Stage 2	Stage 3	Total
Current	223,498,686	26,914,014	10,607,068	261,019,768
Overdue < 30 days	33,106,631	10,548,682	811,872	44,467,185
Overdue > 30 days	–	29,275,389	59,922,380	89,197,769
Total	256,605,317	66,738,085	71,341,320	394,684,722

As at 31 December	2022
In LKR ’000	Stage 1	Stage 2	Stage 3	Total
Current	227,418,588	7,450,885	2,128,905	236,998,378
Overdue < 30 days	58,876,794	14,042,076	1,010,958	73,929,828
Overdue > 30 days	–	49,313,022	42,734,602	92,047,624
Total	286,295,382	70,805,983	45,874,465	402,975,830

8.2.3.1 The following table shows an analysis of counterparty credit exposures arising from derivative transactions. Derivative transactions of the Bank are generally fully collateralised by cash.

	Derivative type
As at 31 December 2023	Forward		SWAP		Spot		Cross currency SWAP		Interest rate SWAP		Total
In LKR ’000	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	7,248,934	10,704	62,074,342	16,487,547	612,042	920	–	–	–	–	69,935,318	16,499,171
Derivative financial liabilities (Note 2)	7,304,692	(48,202)	47,917,115	(333,282)	611,310	(169)	–	–	–	–	55,833,117	(381,653)
Note 1
Derivative financial assets by counterparty type
With banks	6,488,690	8,310	62,074,342	16,487,547	612,042	920	–	–	–	–	69,175,074	16,496,777
With other customers	760,244	2,394	–	–	–	–	–	–	–	–	760,244	2,394
Total	7,248,934	10,704	62,074,342	16,487,547	612,042	920	–	–	–	–	69,935,318	16,499,171
Note 2
Derivative financial liabilities by counterparty type
With banks	6,540,395	(41,709)	47,917,115	(333,282)	611,310	(169)	–	–	–	–	55,068,820	(375,160)
With other customers	764,297	(6,493)	–	–	–	–	–	–	–	–	764,297	(6,493)
Total	7,304,692	(48,202)	47,917,115	(333,282)	611,310	(169)	–	–	–	–	55,833,117	(381,653)

	Derivative type
As at 31 December 2022	Forward		SWAP		Spot		Cross currency SWAP		Interest rate SWAP		Total
In LKR ’000	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	7,256,643	185,831	59,177,339	20,287,713	29,072	–	–	–	–	–	66,463,054	20,473,544
Derivative financial liabilities (Note 2)	7,111,189	(62,011)	38,912,009	(22,606)	29,123	(53)	–	–	–	–	46,052,321	(84,670)
Note 1
Derivative financial assets by counterparty type
With banks	1,014,500	4,098	59,177,339	20,287,713	29,072	–	–	–	–	–	60,220,911	20,291,811
With other customers	6,242,143	181,733	–	–	–	–	–	–	–	–	6,242,143	181,733
Total	7,256,643	185,831	59,177,339	20,287,713	29,072	–	–	–	–	–	66,463,054	20,473,544
Note 2
Derivative financial liabilities by counterparty type
With banks	998,553	(7,545)	38,912,009	(22,606)	29,123	(53)	–	–	–	–	39,939,685	(30,204)
With other customers	6,112,636	(54,466)	–	–	–	–	–	–	–	–	6,112,636	(54,466)
Total	7,111,189	(62,011)	38,912,009	(22,606)	29,123	(53)	–	–	–	–	46,052,321	(84,670)

8.2.4 Collateral Held and Other Credit Enhancements – Bank

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

The following table sets out the principal types of collateral held by the Bank against loans and advances for each loan, the value of the collateral is capped at the amortised cost of the loan.

As at 31 December	2023		2022
	Gross loan balance LKR ’000	Mix %	Gross loan balance LKR ’000	Mix %
Stage 1
Cash collateral	17,367,912	6.99	18,971,263	6.81
Property, plant and machinery	50,083,170	20.17	65,289,880	23.44
Treasury guarantee	3,593,900	1.45	9,851,579	3.54
Others	126,010,107	50.75	145,601,279	52.26
Unsecured	51,248,731	20.64	38,874,768	13.95
Total	248,303,820	100.00	278,588,769	100.00
Stage 2
Cash collateral	2,034,481	3.29	1,674,779	2.62
Property, plant and machinery	18,481,436	29.92	19,821,329	31.05
Treasury guarantee	4,885,476	7.91	–	0.00
Others	31,661,955	51.26	37,821,508	59.26
Unsecured	4,706,993	7.62	4,513,544	7.07
Total	61,770,341	100.00	63,831,160	100.00
Stage 3
Cash collateral	598,168	0.86	480,046	1.11
Property, plant and machinery	16,998,429	24.56	13,126,419	30.31
Treasury guarantee	1,000	0.00	1,082	0.00
Others	43,012,353	62.16	22,089,904	50.99
Unsecured	8,595,644	12.42	7,620,547	17.59
Total	69,205,594	100.00	43,317,998	100.00

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

8.2.4.1 Derivatives, Reverse Sale-and-Repurchase Agreements and Securities Borrowing

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

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

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

8.2.4.2 Loan to Value Ratio of Residential Mortgage Lending

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

	BANK/GROUP
As at 31 December	2023 LKR ’000	2022 LKR ’000
LTV ratio
Stage 1
Less than 50%	3,771,841	3,803,529
51%-70%	2,741,797	3,301,538
71%-90%	518,490	893,429
More than 90%	1,521,158	2,470,955
Total	8,553,286	10,469,451
Stage 2
Less than 50%	896,929	1,018,064
51%-70%	834,575	1,122,642
71%-90%	327,011	573,291
More than 90%	421,399	817,611
Total	2,479,914	3,531,608
Stage 3
Less than 50%	726,615	688,928
51%-70%	530,997	414,826
71%-90%	578,062	410,020
More than 90%	604,584	385,528
Total	2,440,258	1,899,302
Carrying amount – amortised cost	13,473,458	15,900,361

8.2.4.3 Assets Obtained by Taking Possession of Collateral

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

8.2.4.4 Analysis of Credit Risk by Risk Rating

Bank		High Grade				Standard Grade				Sub – Standard Grade					Low Grade				Unrated				Exposures not subject to Rating
As at 31 December 2023	Note	Stage 1	Stage 2	Stage 3	Exposures not subject to ECL	Stage 1	Stage 2	Stage 3	Exposures not subject to ECL	Stage 1	Stage 2	Stage 3	Exposures not subject to ECL		Stage 1	Stage 2	Stage 3	Exposures not subject to ECL	Stage 1	Stage 2	Stage 3	Exposures not subject to ECL	Stage 1	Stage 2	Stage 3	Exposures not subject to ECL	Total
		LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000		LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000	LKR ’000
Financial assets
Cash and cash equivalents	25	–	–	–	11,240,140	–	–	–	3,238,328	–	–	–	–		–	–	–	–	–	–	–	–	–	–	–	–	14,478,468
Placement with banks	27	–	–	–	5,186,081	–	–	–	23,952,017	–	–	–	–		–	–	–	–	–	–	–	–	–	–	–	–	29,138,098
Balances with Central Bank of Sri Lanka	26	–	–	–	2,107,776	–	–	–	–	–	–	–	–		–	–	–	–	–	–	–	–	–	–	–	–	2,107,776
Derivative financial instruments	28	–	–	–	16,485,173	–	–	–	9,230	–	–	–	–		–	–	–	–	–	–	–	4,768	–	–	–	–	16,499,171
Financial assets measured at fair value through profit and loss	29	882,635	–	–	–	545,876	–	–	–	20,000	–	–	–		–	–	–	–	292,417	–	–	–	–	–	–	–	1,740,928
Financial assets measured at amortised cost loans and advances to customers (gross)*	30	56,736,906	7,497,201	42,275	–	121,600,669	23,803,447	193,727	–	45,560,791	18,836,470	11,002,523	–		13,292,938	15,952,354	58,518,102		1,368,864	186,251	13,046	–	18,045,150	462,363	1,571,645	–	394,684,722
Financial assets measured at amortised cost debt and other instruments	31	65,517,216	4,593,551	–	–	217,340	–	–	–	–	–	–	–		–	–	–	–	–	–	–	–	–	–	–	–	70,328,107
Financial assets measured at fair value through other comprehensive income	32	119,481,050	–	–	–	14,654,906	–	–	–	–	–	–	–		–	–	–	–	–	766,809	–	–	–	–	–	–	134,902,765
Other financial assets	40	7,926,054	–	–	–	–	–	–	–	–	–	–	–		–	–	–	–	–	–	–	–	–	–	–	2,643,496	10,569,550
Off balance sheet exposures
Contingent liabilities and commitments*	55	38,508,392	749,657	843	–	52,975,382	7,880,571	74,646	–	8,933,205	3,836,938	577,714	–		1,899,198	2,958,571	591,770	–	2,352,547	2,247	–	–	7,392,313	189,775	244,918	–	129,168,687

* Categorisation based on Bank’s internal risk rating. Accordingly, AAA to AA- considered as “High grade”,
A+ to BBB- as “Standard Grade”, BB+ to B- as “Sub Standard Grade”, CCC+ and below as “Low Grade”.

Contingent liabilities and commitments includes Guarantees and Bonds, Documentary Credit and Commitments for Unutilised Credit Facilities.

8.2.5 Amounts Arising from ECL – Bank

8.2.5.1 Loss Allowance

The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instrument. The basis for determining transfers due to changes in credit risk is set out in our accounting policy;
see Note 16.

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

	2023				2022
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Balance as at 1 January	4,495,287	5,677,290	23,731,223	33,903,800	2,202,668	1,989,584	14,865,798	19,058,050
Transfer to Stage 1	947,558	(764,963)	(182,595)	–	839,493	(665,794)	(173,699)	–
Transfer to Stage 2	(961,858)	1,163,680	(201,822)	–	(298,877)	418,169	(119,292)	–
Transfer to Stage 3	(170,592)	(1,450,850)	1,621,442	–	(73,938)	(259,735)	333,673	–
Net remeasurement of loss allowance	(2,319,768)	(720,807)	3,214,225	173,650	754,086	2,396,757	5,602,375	8,753,218
New financial assets originated or purchased	1,510,031	3,331,575	7,516,555	12,358,161	1,071,855	1,798,309	2,304,774	5,174,938
Write-off	–	–	(96,971)	(96,971)	–	–	(46,612)	(46,612)
Foreign exchange and other movement	–	–	(421,384)	(421,384)	–	–	964,206	964,206
Balance as at 31 December	3,500,658	7,235,925	35,180,673	45,917,256	4,495,287	5,677,290	23,731,223	33,903,800

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

	2023			2022
	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000
Balance at beginning	163	1,955,909	1,956,072	163	563,311	563,474
Transferred from FVOCI during the year	–	–	–	–	215,095	215,095
Transferred to other assets	–	(124,470)	(124,470)	–	(607,764)	(607,764)
Exchange rate impact	–	(29,007)	(29,007)	–	–	–
Net remeasurement of loss allowance	(144)	494,343	494,199	–	1,785,267	1,785,267
Balance on 31 December	19	2,296,775	2,296,794	163	1,955,909	1,956,072

Loan commitments and financial guarantee contracts

	2023			2022
	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000
Balance at beginning	519,425	97,300	616,725	576,290	31,962	608,252
Net remeasurement of loss allowance	105,764	(16,151)	89,613	(56,865)	65,338	8,473
Balance as at 31 December	625,189	81,149	706,338	519,425	97,300	616,725

8.2.5.2 Sensitivity of ECL to Future Economic Conditions

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

Sensitivity of factors used to determine impairment provisions

The uncertainty of the time to recover from the current economic turbulence introduces significant estimation uncertainty in relation to the measurement of the Bank’s allowance for expected credit losses. The consequences of the tax hike, inflation, high interest rate and high unemployment could result in significant adjustments to the allowance in future financial years.

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

The table below shows the sensitivity of the impairment provision of the Bank as at 31 December 2023 to a reasonably possible change in PDs, LGDs, and forward-looking information.

	Sensitivity effect on statement of financial position increase/(decrease) in impairment provision				Sensitivity effect on income statement
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	LKR ’000
PD 1% increase across all age buckets	1,249,542	505,343	–	1,754,885	1,754,885
PD 1% decrease across all age buckets*	(1,234,199)	(505,343)	–	(1,739,542)	(1,739,542)
LGD 5% increase	291,098	714,355	3,400,985	4,406,438	4,406,438
LGD 5% decrease	(291,098)	(714,355)	(3,400,985)	(4,406,438)	(4,406,438)
Worst case 5% decrease and best case 5% Increase	(83,285)	(121,005)	–	(204,290)	(204,290)
Worst case 5% Increase and best case 1% decrease	37,855	39,071	–	76,926	76,926

Probability weighted economic scenarios

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

Credit Impaired Financial Assets

The following table sets out a reconciliation of changes in the net carrying amount of credit impaired loans and advances to customer

	2023 LKR ’000	2022 LKR ’000
Credit Impaired loans and advances to customer at the beginning	45,874,465	30,242,598
Classified as credit impaired during the year	31,014,377	17,266,489
Transferred to not credit impaired during the year and settlements	(6,929,631)	(4,212,811)
Other movement	1,382,109	2,578,189
Credit impaired loans and advances to customer at 31 December	71,341,320	45,874,465

8.2.6 Concentration of Credit Risk – Bank

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

In LKR ’000	Loans and advances to customers		Investments*		Loan commitments and financial guarantees issued
As at 31 December	2023	2022	2023	2022	2023	2022
Gross carrying amount	394,684,722	402,975,830	224,697,564	134,314,418	–	–
Amount committed/guaranteed	–	–	–	–	129,168,687	119,355,420
Concentration by sector
Agriculture, forestry, and fishing	44,259,142	46,546,272	–	–	12,336,370	13,134,553
Manufacturing	83,484,996	78,732,730	–	–	34,410,074	22,662,992
Tourism	19,208,743	19,757,213	–	–	1,691,799	834,987
Transportation and storage	9,922,045	12,053,681	–	–	1,672,581	1,344,685
Construction	36,651,087	32,713,107	–	–	13,837,015	7,990,817
Infrastructure development	27,246,566	35,197,051	–	–	10,866,089	20,111,494
Wholesale and retail trade	59,263,794	50,128,157	–	–	30,902,387	23,038,508
Information technology and communication services	2,600,034	2,821,899	–	–	1,593,220	1,397,560
Financial services	18,212,994	15,565,468	33,022,158	23,160,732	4,115,798	5,406,814
Professional, scientific, and technical activities	3,642,277	3,300,176	–	–	493,727	550,583
Arts, entertainment, and recreation	644,475	1,004,770	–	–	198,173	114,684
Education	3,903,953	5,013,693	–	–	70,595	144,646
Health care, social services, and support services	6,967,779	7,296,365	–	–	3,817,034	608,148
Consumption	65,229,541	68,856,876	–	–	13,163,825	21,651,839
Lending to ministry of finance	–	–	–	–	–	–
Lending to overseas entities	13,447,296	23,988,372	–	–	–	363,110
Government	–	–	190,725,929	111,153,686	–	–
Other	–	–	949,477	–	–	–
Total	394,684,722	402,975,830	224,697,564	134,314,418	129,168,687	119,355,420

* Investments include Government of Sri Lanka Treasury Bills, Treasury Bonds, Sovereign Bonds, Debentures, Placements with Banks,
Balances held with Banks and Matured Government Security Receivables.

8.2.7 Offsetting Financial Assets and Financial Liabilities

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

8.3 Liquidity Risk

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

8.3.1 Management of Liquidity Risk

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

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

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

8.3.2 Exposure to Liquidity Risk – Regulatory Liquidity (Bank)

As at 31 December	2023	2022
Statutory liquid assets (LKR ’000)	189,469,687	122,283,753
Statutory liquid assets ratio (minimum requirement 20%)
Total Bank Operations (%)	36.63	26.36
Liquidity coverage ratio (minimum requirement 100% in 2023 and 90% in 2022)
All currencies (%)	597.47	202.34
Rupee only (%)	715.50	289.85

8.3.3 Maturity Analysis for Financial Liabilities and Financial Assets

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

As at 31 December 2023 BANK	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liabilities by type
Non-derivative liabilities
Due to banks	52,793,464	52,793,852	49,843,778	2,950,074	–	–	–	52,793,852
Financial liabilities at amortised cost – Due to depositors	407,225,313	409,732,316	129,057,743	171,112,860	29,537,126	55,818,311	24,206,276	409,732,316
Financial liabilities at amortised cost – Due to other borrowers	72,022,734	71,905,913	12,998,555	11,560,106	22,284,106	21,277,149	3,785,997	71,905,913
Debt securities issued	16,311,577	16,311,577	4,832,618	290,688	6,777,101	–	4,411,170	16,311,577
Other liabilities	9,152,343	5,566,307	3,598,087	210,683	519,793	370,474	867,270	5,566,307
Subordinated term debt	9,072,265	9,072,265	396,257	69,537	8,401,546	204,925	–	9,072,265
	566,577,696	565,382,230	200,727,038	186,193,948	67,519,672	77,670,859	33,270,713	565,382,230
Derivative liabilities
Derivative financial liabilities	381,653	381,653	381,653	–	–	–	–	381,653
Financial assets by type
Non-derivative assets
Cash and cash equivalents	14,478,468	14,478,468	14,478,468	–	–	–	–	14,478,468
Balances with Central Bank	2,107,776	2,107,776	2,107,776	–	–	–	–	2,107,776
Placements with banks	29,138,098	29,138,098	29,138,098	–	–	–	–	29,138,098
Financial assets measured at fair value through profit or loss	1,740,928	1,740,928	532,135	798	–	–	1,207,995	1,740,928
Financial assets at amortised cost – Loans to and receivables from other customers	348,767,466	394,680,723	102,832,834	88,755,164	122,647,623	44,655,071	35,790,031	394,680,723
Financial assets at amortised cost – Debt and other instruments	68,031,313	67,631,595	1,580,212	52,045	23,853,009	25,680,592	16,465,737	67,631,595
Financial assets measured at fair value through other comprehensive income	134,902,765	134,886,199	45,801,944	44,140,364	11,945,976	16,442,286	16,555,629	134,886,199
Other assets	12,963,406	10,569,550	3,371,452	254,362	22,622	19,002	6,902,112	10,569,550
	612,130,220	655,233,337	199,842,919	133,202,733	158,469,230	86,796,951	76,921,504	655,233,337
Derivative assets
Derivative financial assets	16,499,171	16,499,171	908,974	2,448,189	7,010,475	6,131,533	–	16,499,171
The table below shows the contractual expiry by maturity of the Bank’s contingent liabilities and commitments.
Documentary credit	–	14,175,442	6,573,130	1,642,753	162,845	5,796,714	–	14,175,442
Guarantees	–	25,691,610	9,202,056	2,914,021	1,034,100	12,541,433	–	25,691,610
Commitments for unutilised credit facilities	–	89,301,635	89,301,635	–	–	–	–	89,301,635
	–	129,168,687	105,076,821	4,556,774	1,196,945	18,338,147	–	129,168,687

As at 31 December 2023 GROUP	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liabilities by type
Non-derivative liabilities
Due to banks	52,793,464	52,793,852	49,843,778	2,950,074	–	–	–	52,793,852
Financial liabilities at amortised cost – Due to depositors	406,584,864	409,614,803	129,033,944	171,085,083	29,471,189	55,818,311	24,206,276	409,614,803
Financial liabilities at amortised cost – Due to other borrowers	72,022,734	71,905,913	12,998,555	11,560,106	22,284,106	21,277,149	3,785,997	71,905,913
Debt securities issue	16,311,577	16,311,577	4,832,618	290,688	6,777,101	–	4,411,170	16,311,577
Other liabilities	9,485,315	5,789,243	3,685,037	346,669	519,793	370,474	867,270	5,789,243
Subordinated term debt	9,072,265	9,072,265	396,257	69,537	8,401,546	204,925	–	9,072,265
	566,270,219	565,487,653	200,790,189	186,302,157	67,453,735	77,670,859	33,270,713	565,487,653
Derivative liabilities
Derivative financial liabilities	381,653	381,653	381,653	–	–	–	–	381,653
Financial assets by type
Non-derivative assets
Cash and cash equivalents	14,483,062	14,483,062	14,483,062	–	–	–	–	14,483,062
Balances with Central Bank	2,107,776	2,107,776	2,107,776	–	–	–	–	2,107,776
Placements with banks	29,173,988	29,173,988	29,138,098	35,890	–	–	–	29,173,988
Financial assets measured at fair value through profit or loss	1,740,928	1,740,928	532,135	798	–	–	1,207,995	1,740,928
Financial assets at amortised cost – Loans to and receivables from other customers	348,767,466	394,680,710	102,832,821	88,755,164	122,647,623	44,655,071	35,790,031	394,680,710
Financial assets at amortised cost – Debt and other instruments	68,094,041	67,685,026	1,580,212	52,045	23,906,440	25,680,592	16,465,737	67,685,026
Financial assets measured at fair value through other comprehensive income	134,902,765	134,886,199	45,801,944	44,140,364	11,945,976	16,442,286	16,555,629	134,886,199
Other assets	13,170,641	10,738,637	3,371,453	338,905	107,165	19,002	6,902,112	10,738,637
	612,440,667	655,496,339	199,847,514	133,323,166	158,607,204	86,796,951	76,921,504	655,496,339
Derivative assets
Derivative financial assets	16,499,171	16,499,171	908,974	2,448,189	7,010,475	6,131,533	–	16,499,171

As at 31 December 2022 Bank	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liabilities by type
Non-derivative liabilities
Due to banks	15,857,994	16,002,590	12,099,097	3,903,493	–	–	–	16,002,590
Financial liabilities at amortised cost – Due to depositors	370,314,026	371,179,461	102,958,526	178,524,740	31,799,574	40,851,098	17,045,523	371,179,461
Financial liabilities at amortised cost – Due to other borrowers	81,145,692	81,158,528	4,576,098	10,089,507	27,331,823	25,833,178	13,327,922	81,158,528
Debt securities issued	16,304,115	16,327,016	1,051,031	290,804	8,790,470	1,783,541	4,411,170	16,327,016
Other liabilities	10,041,361	8,114,644	5,433,192	302,682	764,257	604,676	1,009,837	8,114,644
Subordinated term debt	18,399,991	18,420,972	3,604,056	6,215,834	8,396,255	204,827	–	18,420,972
	512,063,179	511,203,211	129,722,000	199,327,060	77,082,379	69,277,320	35,794,452	511,203,211
Derivative liabilities
Derivative financial liabilities	84,670	84,670	82,552	2,118	–	–	–	84,670
Financial assets by type
Non-derivative assets
Cash and cash equivalents	16,122,565	16,122,565	16,122,565	–	–	–	–	16,122,565
Balances with Central Bank	9,030,868	9,030,868	9,030,868	–	–	–	–	9,030,868
Placements with banks	15,224,692	15,256,706	15,256,706	–	–	–	–	15,256,706
Financial assets measured at fair value through profit or loss	1,429,149	1,429,149	–	795,434	–	633,715	–	1,429,149
Financial assets at amortised cost – Loans to and receivables from other customers	369,072,030	372,625,730	71,881,473	78,147,256	96,627,094	56,313,580	69,656,327	372,625,730
Financial assets at amortised cost – Debt and other instruments	50,947,926	51,061,990	11,619,357	4,022,483	18,844,407	11,992,192	4,583,551	51,061,990
Financial assets measured at fair value through other comprehensive income	63,319,060	63,319,060	15,208,301	31,774,249	5,798,500	2,079,021	8,458,989	63,319,060
Other assets	9,750,568	7,804,964	2,089,920	203,126	5,274,666	104,057	133,195	7,804,964
	534,896,858	536,651,032	141,209,190	114,942,548	126,544,667	71,122,565	82,832,062	536,651,032
Derivative assets
Derivative financial assets	20,473,544	20,473,544	206,741	1,224,873	9,610,969	7,357,529	2,073,432	20,473,544
The table below shows the contractual expiry by maturity of the Bank’s contingent liabilities and commitments.
Documentary credit		5,629,169	2,041,986	3,587,183	–	–	–	5,629,169
Guarantees		26,029,465	25,365,762	663,703	–	–	–	26,029,465
Commitments for unutilised credit facilities		87,696,786	87,696,786	–	–	–	–	87,696,786
		119,355,420	15,104,534	4,250,886	–	–	–	119,355,420

As at 31 December 2022 GROUP	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liabilities by type
Non-derivative liabilities
Due to banks	15,857,994	16,002,590	12,099,097	3,903,493	–	–	–	16,002,590
Financial liabilities at amortised cost – Due to depositors	369,746,855	370,958,560	102,958,526	178,303,839	31,799,574	40,851,098	17,045,523	370,958,560
Financial liabilities at amortised cost – Due to other borrowers	81,145,692	81,158,528	4,576,098	10,089,507	27,331,823	25,833,178	13,327,922	81,158,528
Debt securities issue	16,304,115	16,327,016	1,051,031	290,804	8,790,470	1,783,541	4,411,170	16,327,016
Other liabilities	10,335,890	8,301,556	5,356,220	566,566	764,257	604,676	1,009,837	8,301,556
Subordinated term debt	18,399,991	18,420,972	3,604,056	6,215,834	8,396,255	204,827	–	18,420,972
	511,790,537	511,169,222	129,645,028	199,370,043	77,082,379	69,277,320	35,794,452	511,169,222
Derivative liabilities
Derivative financial liabilities	84,670	84,670	82,552	2,118	–	–	–	84,670
Financial assets by type
Non-derivative assets
Cash and cash equivalents	16,126,635	16,126,635	16,126,635	–	–	–	–	16,126,635
Balances with Central Bank	9,030,868	9,030,868	9,030,868	–	–	–	–	9,030,868
Placements with banks	15,242,493	15,256,706	15,256,706	–	–	–	–	15,256,706
Financial assets measured at fair value through profit or loss	1,429,149	1,429,149	–	795,434	–	633,715	–	1,429,149
Financial assets at amortised cost – loans to and receivables from other customers	369,072,030	372,625,730	71,881,473	78,147,256	96,627,094	56,313,580	69,656,327	372,625,730
Financial assets at amortised cost – debt	50,947,926	51,061,990	11,619,357	4,022,483	18,844,407	11,992,192	4,583,551	51,061,990
Financial assets measured at fair value through other comprehensive income	63,319,060	63,319,060	15,208,301	31,774,249	5,798,500	2,079,021	8,458,989	63,319,060
Other assets	9,933,670	7,971,424	2,089,919	369,587	5,274,666	104,057	133,195	7,971,424
	535,101,831	536,821,562	141,213,259	115,109,009	126,544,667	71,122,565	82,832,062	536,821,562
Derivative assets
Derivative financial assets	20,473,544	20,473,544	206,741	1,224,873	9,610,969	7,357,529	2,073,432	20,473,544

Maturity Analysis of Total Assets and Total Liabilities

	Bank			Group
As at 31st December 2023	Within 12 months LKR ’000	More than 12 months LKR ’000	Total LKR ’000	Within 12 months LKR ’000	More than 12 months LKR ’000	Total LKR ’000
Assets
Cash and cash equivalents	14,478,468	–	14,478,468	14,483,062	–	14,483,062
Balances with Central Bank	2,107,776	–	2,107,776	2,107,776	–	2,107,776
Placements with banks	29,138,098	–	29,138,098	29,173,988	–	29,173,988
Derivative financial assets	3,357,163	13,142,008	16,499,171	3,357,163	13,142,008	16,499,171
Financial assets measured at fair value through profit or loss	532,135	1,208,793	1,740,928	532,135	1,208,793	1,740,928
Financial assets at amortised cost – Loans to and receivables from other customers	164,749,315	184,018,151	348,767,466	164,749,315.00	184,018,151	348,767,466
Financial assets at amortised cost – Debt and other instruments	2,031,975	65,999,338	68,031,313	2,031,975.00	66,062,066	68,094,041
Financial assets measured at fair value through other comprehensive income	89,958,874	44,943,891	134,902,765	89,958,874	44,943,891	134,902,765
Investment in subsidiaries	–	237,035	237,035	–	–	–
Investment in associate	–	33,169	33,169	–	36,844	36,844
Investment in joint venture	–	755,000	755,000	–	4,402,238	4,402,238
Investment property	–	9,879	9,879	–	468,385	468,385
Property, plant and equipment	–	3,499,737	3,499,737	–	3,704,411	3,704,411
Intangible assets	–	1,926,287	1,926,287	–	2,101,256	2,101,256
Deferred tax assets	–	5,407,626	5,407,626	–	5,415,426	5,415,426
Other assets	3,625,814	9,337,592	12,963,406	3,710,358	9,460,283	13,170,641
Total assets	309,979,618	330,518,506	640,498,124	310,104,646	334,963,752	645,068,398
Liabilities
Due to banks	52,793,464	–	52,793,464	52,793,464	–	52,793,464
Derivative financial liabilities	381,653	–	381,653	381,653	–	381,653
Financial liabilities at amortised cost – Due to depositors	297,663,600	109,561,713	407,225,313	297,663,600	108,921,264	406,584,864
Financial liabilities at amortised cost – Due to other borrowers	24,558,661	47,464,073	72,022,734	24,558,661	47,464,073	72,022,734
Debt securities issued	5,123,306	11,188,271	16,311,577	5,123,306	11,188,271	16,311,577
Retirement benefit obligation	–	1,371,126	1,371,126	–	1,400,921	1,400,921
Current tax liabilities	4,426,683	–	4,426,683	4,535,557	–	4,535,557
Deferred tax liabilities	–	–	–	–	104,276	104,276
Other liabilities	3,808,770	5,343,573	9,152,343	4,031,706	5,453,609	9,485,315
Subordinated term debt	465,794	8,606,471	9,072,265	465,794	8,606,471	9,072,265
Total shareholders’ equity	–	67,740,966	67,740,966	–	71,983,613	71,983,613
Non-controlling interest	–	–	–	–	392,159	392,159
Total equity and liabilities	389,221,931	251,276,193	640,498,124	389,553,741	255,514,657	645,068,398
Maturity gap	(79,242,313)	79,242,313	–	(79,449,095)	79,449,095	–
Cumulative gap	(79,242,313)	–	–	(79,449,095)	–	–

	Bank			Group
As at 31st December 2022	Within 12 months LKR ’000	More than 12 months LKR ’000	Total LKR ’000	Within 12 months LKR ’000	More than 12 months LKR ’000	Total LKR ’000
Assets
Cash and cash equivalents	16,122,565	–	16,122,565	16,126,635	–	16,126,635
Balances with Central Bank	9,030,868	–	9,030,868	9,030,868	–	9,030,868
Placements with banks	15,224,692	–	15,224,692	15,242,493	–	15,242,493
Derivative financial assets	20,473,544	–	20,473,544	20,473,544	–	20,473,544
Financial assets measured at fair value through profit or loss	795,434	633,715	1,429,149	795,434	633,715	1,429,149
Financial assets at amortised cost – Loans to and receivables from other customers	150,028,729	219,043,301	369,072,030	150,028,729	219,043,301	369,072,030
Financial assets at amortised cost – Debt and other instruments	1,564,840	49,383,086	50,947,926	1,564,840	49,383,086	50,947,926
Financial assets measured at fair value through other comprehensive income	46,982,550	16,336,510	63,319,060	46,982,550	16,336,510	63,319,060
Investment in subsidiaries	–	237,035	237,035	–	–	–
Investment in associate	–	33,169	33,169	–	35,394	35,394
Investment in joint venture	–	755,000	755,000	–	3,577,701	3,577,701
Investment property	–	9,879	9,879	–	439,973	439,973
Property, plant and equipment	–	3,198,553	3,198,553	–	3,389,441	3,389,441
Intangible assets	–	2,198,042	2,198,042	–	2,375,055	2,375,055
Deferred tax assets	–	4,137,828	4,137,828	–	4,143,535	4,143,535
Other assets	2,293,046	7,457,522	9,750,568	2,459,506	7,474,164	9,933,670
Total assets	262,516,268	303,423,640	565,939,908	262,704,599	306,831,875	569,536,474
Liabilities
Due to banks	15,857,994	–	15,857,994	15,857,994	–	15,857,994
Derivative financial liabilities	84,670		84,670	84,670	–	84,670
Financial liabilities at amortised cost – Due to depositors	281,483,266	88,830,760	370,314,026	281,483,266	88,263,589	369,746,855
Financial liabilities at amortised cost – Due to other borrowers	14,665,605	66,480,087	81,145,692	14,665,605	66,480,087	81,145,692
Debt securities issued	1,341,835	14,962,280	16,304,115	1,341,835	14,962,280	16,304,115
Retirement benefit obligation	–	591,550	591,550	–	615,849	615,849
Current tax liabilities	2,479,562	–	2,479,562	2,575,008	–	2,575,008
Deferred tax liabilities	–	–	–	–	149,608	149,608
Other liabilities	5,735,874	4,305,487	10,041,361	5,922,786	4,413,104	10,335,890
Subordinated term debt	9,819,890	8,580,101	18,399,991	9,819,890	8,580,101	18,399,991
Total shareholders’ equity	–	50,720,947	50,720,947	–	54,014,652	54,014,652
Non-controlling interest	–	–	–	–	306,150	306,150
Total equity and liabilities	231,468,696	234,475,212	565,939,908	331,751,054	237,785,420	569,536,474
Maturity gap	(68,952,428)	68,952,428	–	(69,046,445)	69,046,455	–
Cumulative gap	(68,952,428)	–	–	(69,046,445)	–	–

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

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

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

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

8.3.3.1 Carrying Value of Securities Allocated for Repurchase Transactions

As at 31 December	2023		2022
	Amortised Cost LKR ’000	Fair Value LKR ’000	Amortised Cost LKR ’000	Fair Value LKR ’000
Financial asset at amortised cost-debt & other instrument	49,097,778	53,544,118	7,831,579	7,256,452
Total	49,097,778	53,544,118	7,831,579	7,256,452

8.3.3.2 Market Value of Securities Received for Reverse Repurchase Transactions

As at 31 December 2023, no outstanding balance on Reverse Repurchase transactions.

8.3.3.3 Bank’s Policy on Haircuts for Repurchase and Reverse Repurchase Transactions

Remaining Term to Maturity of the Eligible Security	Minimum Haircut (%)
	Repurchase Transactions	Reverse Repurchase Transactions
Up to 1 year	4.00	4.00
More than 1 year and up to 3 years	6.00	6.00
More than 3 years and up to 5 years	8.00	8.00
More than 5 years and up to 8 years	10.00	10.00
More than 8 years	12.00	12.00

8.3.4 Liquidity Reserves

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

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

As at 31 December	2023 Carrying amount LKR ’000	2023 Fair value LKR ’000	2022 Carrying amount LKR ’000	2022 Fair value LKR ’000
Cash and cash equivalents	14,478,468	14,478,468	16,122,565	16,122,565
Balances with Central Bank of Sri Lanka	2,107,776	2,107,776	9,030,868	9,030,868
Placements with banks	29,138,098	29,138,098	15,224,692	15,224,692
Unencumbered debt securities issued by sovereigns	145,571,442	140,242,686	106,873,421	88,471,766
Total liquidity reserves	191,295,784	185,967,028	147,251,546	128,849,891

8.3.5 Financial Assets Available to Support Future Funding

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

		Encumbered		Unencumbered
	Note	Pledged as collateral LKR ’000	Other* LKR ’000	Available as collateral LKR ’000	Other** LKR ’000	Total LKR ’000
31 December 2023
Cash and cash equivalents	25	–	–	14,478,468	–	14,478,468
Balances with Central Bank of Sri Lanka	26	–	2,107,776	–	–	2,107,776
Placements with banks	27	–	–	29,138,098	–	29,138,098
Derivative financial assets	28	–	–	16,499,171	–	16,499,171
Financial assets measured at fair value through profit or loss	29	–	–	1,740,928	–	1,740,928
Financial assets at amortised cost – Loans to and receivables to customers	30	–	–	348,767,466	–	348,767,466
Financial assets at amortised cost – Debt and other instruments	31	–	–	68,031,313	–	68,031,313
Financial assets measured at fair value through other comprehensive income	32	17,539,330	–	117,363,435	–	134,902,765
Other assets	40	–	–	–	10,569,550	10,569,550
Non-financial assets		–	–	–	14,262,589	14,262,589
Total assets		17,539,330	2,107,776	596,018,879	24,832,139	640,498,124
31 December 2022
Cash and cash equivalents	25	–	–	16,122,565	–	16,122,565
Balances with Central Bank of Sri Lanka	26	–	9,030,868	–	–	9,030,868
Placements with banks	27	–	–	15,224,692	–	15,224,692
Derivative financial assets	28			20,473,544		20,473,544
Financial assets measured at fair value through profit or loss	29	–	–	1,429,149	–	1,429,149
Financial assets at amortised cost – Loans to and receivables to customers	30	–	–	369,072,030	–	369,072,030
Financial assets at amortised cost – Debt and other instruments	31	–	–	50,947,926	–	50,947,926
Financial assets measured at fair value through other comprehensive income	32	2,547,500	–	60,771,560	–	63,319,060
Other assets	40	–	–	–	7,804,964	7,804,964
Non-financial assets		–	–	–	12,515,110	12,515,110
Total assets		2,547,500	9,030,868	534,041,466	20,320,074	565,939,908

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

8.4 Market Risk

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

8.4.1 Management of Market Risk

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

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

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

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

			Market risk measure
31 December 2023	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
Assets subject to market risk
Cash and cash equivalents	25	14,478,468	–	14,478,468
Placements with banks	27	29,138,098	–	29,138,098
Derivatives financial assets	28	16,499,171	–	16,499,171
Financial assets measured at fair value through profit or loss	29	1,740,928	1,705,966	34,962
Financial assets at amortised cost – Loans to and receivables from banks		–	–	–
Financial assets at amortised cost – Loans to and receivables from other customers	30	348,767,466	–	348,767,466
Financial assets at amortised cost – Debt and other instruments	31	68,031,313	–	68,031,313
Financial assets measured at fair value through other comprehensive income	32	134,902,765	–	134,902,765
Liabilities subject to market risk
Due to banks	41	52,793,464	–	52,793,464
Derivatives financial liabilities	28	381,653	–	381,653
Financial liabilities at amortised cost – Due to depositors	42	407,225,313	–	407,225,313
Financial liabilities at amortised cost – Due to other borrowers	43	72,022,734	–	72,022,734
Debt securities in issue	44	16,311,577	–	16,311,577
Subordinated term debt	48	9,072,265	–	9,072,265

			Market risk measure
31 December 2022	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
Assets subject to market risk
Cash and cash equivalents	25	16,122,565	–	16,122,565
Placements with banks	27	15,224,692	–	15,224,692
Derivatives financial assets	28	20,473,544	–	20,473,544
Financial assets measured at fair value through profit or loss	29	1,429,149	1,398,145	31,004
Financial assets at amortised cost – Loans to and receivables from other customers	30	369,072,030	–	369,072,030
Financial assets at amortised cost – Debt and other instruments	31	50,947,926	–	50,947,926
Financial assets measured at fair value through other comprehensive income	32	63,319,060	–	63,319,060
Liabilities subject to market risk
Due to banks	41	15,857,994	–	15,857,994
Derivatives financial liabilities	28	84,670	–	84,670
Financial liabilities at amortised cost – Due to depositors	42	370,314,026	–	370,314,026
Financial liabilities at amortised cost – Due to other borrowers	43	81,145,692	–	81,145,692
Debt securities in issue	44	16,304,115	–	16,304,115
Subordinated term debt	48	18,399,991	–	18,399,991

8.4.2 Exposure to Market Risks – Trading Portfolios

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

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

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

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

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

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

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

8.4.2.1 Equity Price Risk

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

Financial assets measured at fair value through profit or loss portfolio

Parameter	Position as at 31 December 2023 LKR ’000	Position as at 31 December 2022 LKR ’000
Marked-to-market value of the total quoted equity portfolio	1,169,294	598,972
Value-at-risk (under 99% probability for a quarterly time horizon)	37.92%	56.69%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	443,415	339,556
Unrealised gains in the trading equity portfolio reported in the fair value reserve	(422,847)	(200,202)

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

8.4.3 Exposure to Market Risks – Non-Trading Portfolios

Financial assets measured at fair value through other comprehensive income

Parameter	Position as at 31 December 2023 LKR ’000	Position as at 31 December 2022 LKR ’000
Marked-to-market value of the total quoted equity portfolio	16,267,149	8,171,584
Value-at-risk (under 99% probability for a quarterly time horizon)	31.18%	37.37%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	5,071,626	3,053,434
Unrealised gains in the equity portfolio reported in the fair value reserve	4,628,837	(2,271,901)

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

8.4.4 Interest Rate Risk

The principal risk to which Fair Value through Profit or Loss (FVPL) and Fair Value through Other Comprehensive Income (FVOCI) portfolios are exposed is the potential for loss arising from variations in the future cash flows or fair values of financial instruments due to fluctuations in market interest rates.

Duration analysis as at 31 December 2023

Portfolio	Face value LKR ’000	Marked-to market value LKR ’000	Modified Duration	Interpretation of duration
Government Securities measured at FVPL/LKR Bills and Bonds	500,665	532,932	0.32	Portfolio value will decline approximately by 0.32% as a result of 1% increase in the interest rates.
Government Securities measured at FVOCI/LKR Bills and Bonds	119,340,638	117,448,154	0.78	Portfolio value will decline approximately by 0.78% as a result of 1% increase in the interest rates.
US Government Securities measured at FVOCI/US Treasury Bills	971,919	949,477	0.46	Portfolio value will decline approximately by 0.46% as a result of 1% increase in the interest rates.

The market risk exposure for interest rate risk in the FVPL Rupee portfolio as of 31 December 2023 is indicated by a modified duration of 0.32. This level of interest rate risk exposure in the Rupee FVPL portfolio suggests a potential loss in the marked-to-market value amounting to LKR 1.7 Mn as of 31 December 2023.

The market risk exposure for interest rate risk in the FVOCI Rupee portfolio and FVOCI US Treasuries portfolio as of 31 December 2023 is reflected in modified durations of 0.78 and 0.46 respectively. This level of interest rate risk exposure in the Rupee FVOCI portfolio and FVOCI US Treasuries portfolio may lead to potential losses in marked-to-market value amounting to LKR 911 Mn and LKR 4.4 Mn respectively, as of 31 December 2023.

8.4.4.1 Potential Impact to NII due to Change in Market Interest Rates

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

The interest rate risk exposure as at 31 December 2023 is quantified based on the assumed change in the interest rates for each time period and is given in table below:

31 December 2023	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
Cash and cash equivalents	828,589	–	–	–	–
Placements with banks	28,583,114	74,161	–	–	–
Financial assets measured at fair value through profit or loss	–	–	532,186	748	–
Financial assets at amortised cost – Loans to and receivables from other customers	117,771,062	49,406,263	22,906,727	27,649,675	105,634,203
Financial assets at amortised cost – Debt and other instruments	–	4,276,077	244,290	–	65,807,740
Financial assets measured at fair value through other comprehensive income	16,776,751	28,142,777	37,518,437	7,571,405	28,388,261
	163,959,516	81,899,278	61,201,640	35,221,828	199,830,204
Due to banks	48,337,235	1,506,155	2,950,074	–	–
Financial liabilities at amortised cost – Due to depositors	124,662,425	72,215,659	75,780,831	78,566,344	43,242,951
Financial liabilities at amortised cost – Due to other borrowers	–	13,739,264	4,496,986	6,580,264	47,206,220
Debt securities in issue	–	4,819,254	297,082	–	11,195,241
Subordinated term debt	–	397,839	–	73,578	8,600,848
	172,999,660	92,678,171	83,524,973	85,220,186	110,245,260
Net rate sensitive assets (liabilities)	(9,040,144)	(10,778,893)	(22,323,333)	(49,998,358)	89,584,944
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00
Impact	(45,201)	(98,807)	(251,137)	(499,984)
Total net impact if interest rates increase				(895,128)
Total net impact if interest rates decline				895,128

31 December 2022	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
Cash and cash equivalents	1,566,636	–	–	–	–
Placements with banks	13,018,678	2,206,014	–	–	–
Financial assets measured at fair value through profit or loss	–	–	795,433	–	–
Financial assets at amortised cost – Loans to and receivables from customers	139,846,895	95,477,247	31,372,076	35,969,173	54,804,395
Financial assets at amortised cost – Debt and other instruments	1,745,942	9,889,773	2,339,275	1,650,345	37,278,663
Financial assets measured at fair value through other comprehensive income	3,797,959	11,490,644	13,510,430	18,263,819	7,863,205
	159,976,110	119,063,678	48,017,214	55,883,337	99,946,263
Due to banks	13,763,582	2,094,412	–	–	–
Financial liabilities at amortised cost – Due to depositors	88,920,831	62,265,263	77,026,884	89,260,266	42,999,820
Financial liabilities at amortised cost – Due to other borrowers	2,735,001	5,933,047	3,394,560	5,221,804	63,861,280
Debt securities in issue	–	1,007,125	296,990	–	15,000,000
Subordinated term debt	–	3,567,232	–	6,223,229	8,609,530
	105,419,414	74,867,079	80,718,434	100,705,299	130,470,630
Net rate sensitive assets (liabilities)	54,556,696	44,196,599	(32,701,220)	(44,821,962)	(30,524,367)
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00
Impact	272,783	405,135	(367,889)	(448,220)
Total net impact if interest rates increase				(138,189)
Total net impact if interest rates decline				138,189

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

8.4.4.2 Interest Rate Benchmark Reform

Overview

DFCC Bank PLC has proactively responded to the global initiative for Interest Rate Benchmark Reform, addressing operational risks, renegotiating loan contracts, and updating systems. Successfully navigating the LIBOR transition underscores the Bank’s commitment to effective planning and seamless operations, meticulously adhering to accepted guidelines.

To ensure a comprehensive approach, a robust governance structure was established, facilitating a well-coordinated process overseen by senior management. Thorough examination of risks associated with LIBOR-linked exposures informed crucial decisions to mitigate potential financial and operational impacts. Mechanisms were implemented to address financial and legal impacts resulting from transitioning via fallbacks.

Focus extended to preparing operating models and technology systems in alignment with outlined guidelines for operational and technological aspects. The determination of accounting and reporting treatment showcased the Bank’s commitment to transparency and compliance. A proactive stance in identifying, measuring, and monitoring risks, along with robust oversight, ensured ongoing risk management.

Throughout the transition, communication has been a cornerstone, with proactive engagement fostering open channels with stakeholders. This strategy ensured a smooth transition, demonstrating the Bank’s commitment to maintaining strong relationships.

In conclusion, the successful LIBOR transition is a testament to the Bank’s
diligent adherence to guidelines, strategic planning, and proactive stakeholder engagement.

As at 31 December 2023, LIBOR reform in respect of currencies to which the Bank has exposure has completed the process of reforming. The table below sets out the LIBOR rates that the Group had exposure to, the new benchmark rates to which these exposures have or are being transitioned.

Currency	Benchmark before reform	Benchmark after reform	Status
GBP	GBP LIBOR	SONIA	Completed
USD	USD LIBOR	SOFR	Completed
EURO	EURIBOR	€STR	Completed

8.4.5 Foreign Exchange Risk

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

The following table indicates the DFCC’s exchange rate risk exposure based on
its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31 December 2023, DFCC carried a USD equivalent net open/unhedged “short” position of LKR 603 Mn. The impact of exchange rate risk is given below:

	Amount
Net exposure – USD equivalent (CBSL Return)	(1,860,000)
Value of position in LKR ’000	(602,603)
Exchange rate (USD/LKR) as at 31 December 2023	323.98
Possible potential loss to Bank – LKR ’000
– If exchange rate (USD/LKR) appreciates by 1%	(6,026)
– If exchange rate appreciates by 10%	(60,260)
– If exchange rate appreciates by 15%	(90,390)

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

8.4.6 Market Risk Exposures for Regulatory Capital Assessment

Under the standardised approach of Basel III with effect from July 2017, market risk exposures are quantified for regulatory capital purposes. The computation results as at 31 December 2023 are as follows:

	Risk-weighted assets LKR ’000	Quantified possible exposure LKR ’000
Interest rate risk	11,984,456	1,498,057
Equity price risk	1,372,528	171,566
Foreign exchange and gold risk	704,824	88,103
Total	14,061,808	1,757,726

8.5 Operational Risk

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

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

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

a. Monitoring of the Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits using a traffic light system. Develop Risk and Control Self-Assessments to identify the risk exposure of all processes. b. Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognise necessary improvements in the systems, processes and procedures. c. Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. The key findings of the analysis are evaluated at the ORSC, ORMC and the BIRMC meetings in an operational risk perspective.

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

a. Requirements for appropriate segregation of duties, including independent authorisation of transactions. b. Requirements for reconciliation and monitoring of transactions. c. Compliance with regulatory and other legal requirements. d. Documentation of controls and procedures. e. Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks. f. Requirements for reporting of operational losses and propose remedial action. g. Development of contingency plans. h. Training and professional development to establish ethics
and business standards. i. Insurance covering risk due to threats arising from external and other events.

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

Group operational risk assessments are conducted at the Board level.

8.6 Capital Management

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

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

Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis. The Bank currently uses the standardised approach for credit risk and market risk and basic indicator approach for operational risk.

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

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

8.6.1 Key Regulatory Ratios – Capital Adequacy

31 December	2023		2022
Item	Bank	Group	Bank	Group
Regulatory capital (LKR ’000)
Common equity Tier 1	43,632,490	47,491,186	36,818,873	36,381,997
Tier 1 capital	43,632,490	47,491,186	36,818,873	36,381,997
Total capital	51,304,883	55,171,249	48,004,800	47,574,241
Regulatory capital ratios (%)
Common equity Tier 1 capital ratio (minimum requirement – 7.0%)	11.49	12.46	10.09	9.94
Tier 1 capital ratio (minimum requirement – 8.5%)	11.49	12.46	10.09	9.94
Total capital ratio (minimum requirement – 12.5%)	13.51	14.48	13.15	12.99

Basel III computation of capital ratios

31 December	2023		2022
Item	Bank LKR ’000	Group LKR ’000	Bank LKR ’000	Group LKR ’000
Common equity Tier 1 (CET 1) capital after adjustments	43,632,490	47,491,186	36,818,873	36,381,997
Common equity Tier 1 (CET 1) capital	61,524,384	66,919,617	52,778,734	56,909,693
Equity capital (stated capital)/assigned capital	13,866,557	13,866,557	13,182,025	13,182,025
Reserve fund	3,239,968	3,239,968	2,874,968	2,874,968
Published retained earnings/(accumulated retained losses)	28,250,357	33,645,590	22,600,898	26,731,857
Published accumulated other comprehensive income (OCI)	2,387,663	2,387,663	341,004	341,004
General and other disclosed reserves	13,779,839	13,779,839	13,779,839	13,779,839
Unpublished current year’s profit/loss and gains reflected in OCI	–	–	–	–
Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to CET1 capital	17,891,894	19,428,431	15,959,861	20,527,696
Goodwill (net)	–	156,226	–	156,226
Intangible assets (net)	1,926,287	1,945,030	2,198,042	2,218,827
Investment in capital of banks and financial institutions	10,114,730	11,468,498	9,204,363	13,589,480
Others	5,850,877	5,858,677	4,557,456	4,563,163
Additional Tier 1 (AT1) capital after adjustments
Additional Tier 1 (AT1) capital
Qualifying Additional Tier 1 capital instruments	–	–	–	–
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to AT1 capital	–	–	–	–
Investment in own shares	–	–	–	–
Others (specify)	–	–	–	–
Tier 2 capital after adjustments	7,672,393	7,680,063	11,185,927	11,192,244
Tier 2 capital	7,672,393	7,680,063	11,185,927	11,192,244
Qualifying Tier 2 capital instruments	3,525,812	3,525,812	7,039,040	7,039,040
Revaluation gains	–	–	–	–
Loan loss provisions	4,146,581	4,154,251	4,146,887	4,153,204
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to Tier 2	–	–	–	–
Investment in own shares	–	–	–	–
Others (specify)	–	–	–	–
CET1 capital	43,632,490	47,491,186	36,818,873	36,381,997
Total Tier 1 capital	43,632,490	47,491,186	36,818,873	36,381,997
Total capital	51,304,883	55,171,249	48,004,800	47,574,241
Total risk-weighted assets (RWA)
RWAs for credit risk	331,726,504	332,340,053	331,750,969	332,256,324
RWAs for market risk	14,061,808	14,061,808	8,391,648	8,391,648
RWAs for operational risk	33,950,018	34,615,939	24,960,191	25,491,894
CET1 Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer, and Surcharge on D-SIBs) (%)	11.49	12.46	10.09	9.94
of which: Capital Conservation Buffer (%)	2.50	2.50	2.50	2.50
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A
Total Tier 1 Capital Ratio (%)	11.49	12.46	10.09	9.94
Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs) (%)	13.51	14.48	13.15	12.99
of which: Capital Conservation Buffer (%)	2.50	2.50	2.50	2.50
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A

Accounting Policy

See accounting policy in Note 5.3.7.

9.1 Valuation Models

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

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

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

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

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

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

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

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

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

9.2 Valuation Framework

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

Specific controls include:

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

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

This includes:

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

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

9.3 Financial Instruments Measured at Fair Value – Fair Value Hierarchy

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

A. Bank/Group

As at 31 December 2023	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	28
Forward foreign exchange contracts		–	16,499,171	–	16,499,171
Financial assets measured at fair value through profit or loss	29
Government of Sri Lanka Treasury Bills and Bonds		532,932	–	–	532,932
Equity securities – quoted		1,169,294	–	–	1,169,294
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	34,962	–	34,962
Financial assets measured at fair value through other comprehensive income	32
Government of Sri Lanka Treasury Bills and Bonds		117,448,154	–	–	117,448,154
US Treasury Bill		949,477	–	–	949,477
Sri Lanka sovereign bonds		–	–	–	–
Equity shares – quoted		16,267,149	–	–	16,267,149
Equity shares – unquoted		–	–	237,985	237,985
Preference shares		–	–	–	–
		136,370,746	16,534,133	237,985	153,142,864
Financial liabilities
Derivative financial liabilities	28
Forward foreign exchange contracts		–	381,653	–	381,653
		–	381,653	–	381,653

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	28
Forward foreign exchange contracts		–	20,473,544	–	20,473,544
Financial assets measured at fair value through profit or loss	29
Government of Sri Lanka Treasury Bills and Bonds		795,433	–	–	795,433
Equity securities – quoted		598,972	–	–	598,972
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	31,004	–	31,004
Financial assets measured at fair value through other comprehensive income	32
Government of Sri Lanka Treasury Bills and Bonds		54,926,057	–	–	54,926,057
Sri Lanka sovereign bonds		–	–	–	–
Equity shares – quoted		8,171,584	–	–	8,171,584
Equity shares – unquoted		–	–	221,419	221,419
		64,495,786	20,504,548	221,419	85,221,753
Financial liabilities
Derivative financial liabilities	28
Forward foreign exchange contracts		–	84,670	–	84,670
		–	84,670	–	84,670

As Treasury Bills/Bonds are valued using Central Bank published rates, investments in Treasury Bills/Bonds are classified under Level 1. Other securities which are listed in Colombo Stock Exchange are also classified as Level 1 asset by referring
to the quoted prices. US Treasury Bill valued using Bloomberg publish rates.

9.3.1 Valuation Techniques and Significant Unobservable Inputs

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

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement
Unquoted equity shares	Net asset approach: The fair value is determining based on the net assets value of the unquoted equity share	Net asset value per share	The estimated fair value would increase/(decrease) if the adjusted net asset value per share were higher/(lower)

9.3.2 Transfers between Levels 1 and 2

There were no transfers from Level 1 to 2 or Level 2 to Level 1 in 2023 and no transfers in either direction in 2023.

9.3.3 Level 3 Recurring Fair Values

9.3.3.1 Reconciliation of Level 3 Fair Values

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

	Equity securities
	Bank/Group
	2023 LKR ’000	2022 LKR ’000
Balance at 1 January	221,419	216,602
Purchased during the year	–	–
Gains included in OCI	–	–
Net change in fair value (unrealised)	16,567	4,817
Balance at 31 December	237,985	221,419

9.3.3.2 Transfer Out of Level 3

There were no transfers out of Level 3 and no transfers out of Level 2 in 2023.

9.3.3.3 Sensitivity Analysis

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

	OCI, net of tax
As at 31 December 2023	Increase LKR ’000	Decrease LKR ’000
Equity securities	–	–
Adjusted net assets value (5% movement)	11,899	(11,899)

Accounting Judgements, Estimates and Assumptions

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

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

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

When establishing the fair value of a financial instrument using a valuation technique, the Group considers valuation adjustments in determining the fair value. The Group may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation adjustments – refer Note 28 Derivative Financial Instruments) to reflect the Group’s assessment of factors that market participants would consider in setting fair value.

9.4 Financial Instruments not Measured at Fair Value

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

A. Bank

As at 31 December 2023	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	25	–	14,478,468	–	14,478,468	14,478,468
Balances with Central Bank of Sri Lanka	26	–	2,107,776	–	2,107,776	2,107,776
Placements with banks	27	–	29,138,098	–	29,138,098	29,138,098
Financial assets at amortised cost – Loans to and receivables from other customers	30	–	–	322,590,049	322,590,049	348,767,466
Financial assets at amortised cost – Debt and other instruments	31	71,415,548	2,296,775	–	73,712,323	68,031,313
Other financial assets	40	–	–	10,569,550	10,569,550	10,569,550
		71,415,548	48,021,117	333,159,599	452,596,264	473,092,671
Liabilities
Due to banks	41	–	52,793,464	–	52,793,464	52,793,464
Financial liabilities at amortised cost – Due to depositors	42	–	–	427,279,084	427,279,084	407,225,313
Financial liabilities at amortised cost – Due to other borrowers	43	–	–	72,022,734	72,022,734	72,022,734
Debt securities in issue	44	–	15,579,739	–	15,579,739	16,311,577
Other financial liabilities	47	–	–	5,566,307	5,566,307	5,566,307
Subordinated term debt	48	–	8,340,427	–	8,340,427	9,072,265
		–	76,713,630	504,868,125	581,581,755	562,991,660

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	25	–	16,122,565	–	16,122,565	16,122,565
Balances with Central Bank of Sri Lanka	26	–	9,030,868	–	9,030,868	9,030,868
Placements with banks	27	–	15,224,692	–	15,224,692	15,224,692
Financial assets at amortised cost – Loans to and receivables from other customers	30	–	–	339,333,283	339,333,283	369,072,030
Financial assets at amortised cost – Debt and other instruments	31	37,049,928	2,607,280	240,533	39,897,741	50,947,926
Other financial assets	40	–	–	7,804,964	7,804,964	7,804,964
		37,049,928	42,985,405	347,378,780	427,414,113	468,203,045
Liabilities
Due to banks	41	–	15,857,994	–	15,857,994	15,857,994
Financial liabilities at amortised cost – Due to depositors	42	–	–	361,987,182	361,987,182	370,314,026
Financial liabilities at amortised cost – Due to other borrowers	43	–	–	81,145,692	81,145,692	81,145,692
Debt securities in issue	44	–	11,786,903	–	11,786,903	16,304,115
Other financial liabilities	47	–	–	8,114,644	8,114,644	8,114,644
Subordinated term debt	48	–	15,010,515	–	15,010,515	18,399,991
		–	42,655,412	451,247,518	493,902,930	510,136,462

B. Group

As at 31 December 2023	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	25	–	14,483,062	–	14,483,062	14,483,062
Balances with Central Bank of Sri Lanka	26	–	2,107,776	–	2,107,776	2,107,776
Placements with banks	27	–	29,173,988	–	29,173,988	29,173,988
Financial assets at amortised cost – Loans to and receivables from other customers	30	–	–	322,590,049	322,590,049	348,767,466
Financial assets at amortised cost – Debt and other instruments	31	71,415,548	2,296,775	–	73,712,323	68,094,041
Other financial assets	40	–	–	10,738,637	10,738,637	10,738,637
		71,415,548	48,061,601	333,328,686	452,805,835	473,364,970
Liabilities
Due to banks	41	–	52,793,464	–	52,793,464	52,793,464
Financial liabilities at amortised cost – Due to depositors	42	–	–	427,279,084	427,279,084	406,584,864
Financial liabilities at amortised cost – Due to other borrowers	43	–	–	72,022,734	72,022,734	72,022,734
Debt securities in issue	44	–	15,579,739	–	15,579,739	16,311,577
Other financial liabilities	47	–	–	5,789,243	5,789,243	5,789,243
Subordinated term debt	48	–	8,340,427	–	8,340,427	9,072,265
		–	76,713,630	505,091,061	581,804,691	562,574,147

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	25	–	16,126,635	–	16,126,635	16,126,635
Balances with Central Bank of Sri Lanka	26	–	9,030,868	–	9,030,868	9,030,868
Placements with banks	27	–	15,242,493	–	15,242,493	15,242,493
Financial assets at amortised cost – Loans to and receivables from other customers	30	–	–	339,333,283	339,333,283	369,072,030
Financial assets at amortised cost – Debt and other instruments	31	37,049,928	2,607,280	240,533	39,897,741	50,947,926
Other financial assets	40	–	–	7,971,424	7,971,424	7,971,424
		37,049,928	43,007,276	347,545,240	427,602,444	468,391,376
Liabilities
Due to banks	41	–	15,857,994	–	15,857,994	15,857,994
Financial liabilities at amortised cost – Due to depositors	42	–	–	369,746,855	369,746,855	369,746,855
Financial liabilities at amortised cost – Due to other borrowers	43	–	–	81,145,692	81,145,692	81,145,692
Debt securities in issue	44	–	16,304,115	–	16,304,115	16,304,115
Other financial liabilities	47	–	–	8,301,556	8,301,556	8,301,556
Subordinated term debt	48	–	–	18,399,991	18,399,991	18,399,991
		–	32,162,109	477,594,094	509,756,203	509,756,203

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

9.4.1 Cash and Cash Equivalents and Placements with Banks

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

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

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

9.4.3 Loans to and Receivables from Other Customers – Other Loans

	Composition %
Floating rate loan portfolio	63
Fixed rate loans	37
– With remaining maturity less than one year	7
– Others	30

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

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

9.4.4 Financial Assets at Amortised Cost – Debt and Other Instruments

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

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

9.4.5 Due to Banks

The carrying value of amounts due to banks approximates their fair value as these balances have a remaining maturity of less than one year approximate their fair value.

The others are repriced either monthly, quarterly, or semi annually and rates are revised in line with changes in market rates. Hence, the carrying value of these borrowings approximate the fair value.

9.4.6 Due to Other Customers

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

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

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

9.4.7 Due to Other Borrowers

This consists of borrowings sourced from multilateral and bilateral institutions.

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

9.4.8 Debt Securities in Issue

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

9.4.9 Subordinated term debts

The fair value of fixed rate subordinated debentures has been determined by discounting the future cash flows by the interest rates prevailing as at the reporting date for similar instruments.

The carrying values of balances with Central Bank of Sri Lanka, other financial assets and other financial liabilities are reasonable approximation of their fair values since, those are short term in nature or re-priced to current market rates frequently.

	BANK		GROUP
For the year ended 31 December	2023 LKR ’000	2022 LKR ’000	2023 LKR ’000	2022 LKR ’000
Interest income (Note 11.1.1)	96,921,523	69,863,356	96,924,661	69,867,327
Net fee and commission income (Note 12.1.1)	5,239,924	3,643,039	5,238,670	3,641,487
Net gains from trading (Note 13)	1,055,107	63,216	1,055,107	63,216
Net gains from derecognition of financial assets (Note 14)	2,838,626	99,112	2,838,626	99,112
Net other operating income (Note 15)	828,270	1,290,793	1,384,474	1,800,241
	106,883,450	74,959,516	107,441,538	75,471,383

Accounting Policy

Effective Interest Rate

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

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

– the gross carrying amount of the financial asset; or

– the amortised cost of the financial liability.

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

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

Amortised Cost and Gross Carrying Amount

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

Calculation of Interest Income and Expense

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

For the financial asset that has become credit impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis.

11.1 Composition

	BANK		GROUP
For the year ended 31 December	2023 LKR ’000	2022 LKR ’000	2023 LKR ’000	2022 LKR ’000
Interest income (Note 11.1.1)	96,921,523	69,863,356	96,924,661	69,867,327
Interest expenses (Note 11.1.2)	(65,697,026)	(43,342,290)	(65,584,019)	(43,268,327)
Net interest income	31,224,497	26,521,066	31,340,642	26,599,000

11.1.1 Interest Income

	BANK		GROUP
For the year ended 31 December	2023 LKR ’000	2022 LKR ’000	2023 LKR ’000	2022 LKR ’000
Placements with banks	745,983	559,190	749,121	563,162
Financial assets measured at fair value through profit or loss	61,044	25,694	61,044	25,694
Financial assets at amortised cost – Loans to and receivables from banks	260,650	111,038	260,650	111,037
Financial assets at amortised cost – Loans to and receivables from other customers (Note 11.1.1.1)	62,540,000	58,052,403	62,540,000	58,052,403
Financial assets at amortised cost – Debt and other instruments	11,423,353	4,397,052	11,423,353	4,397,052
Financial assets measured at fair value through other comprehensive income	21,876,959	4,314,980	21,876,959	4,314,980
Securities purchased under resale agreements	13,534	2,402,999	13,534	2,402,999
Total interest income	96,921,523	69,863,356	96,924,661	69,867,327

11.1.1.1 Interest Income from loans to and receivables from other customers includes modifications made to support the recovery of businesses/customers affected by economic crisis. There is no material modification loss or gain due to modification to the original terms and conditions of the loan during the year ended 31 December 2023.

11.1.2 Interest Expenses

	BANK		GROUP
For the year ended 31 December	2023 LKR ’000	2022 LKR ’000	2023 LKR ’000	2022 LKR ’000
Due to banks	1,105,866	521,361	1,105,866	521,361
Financial liabilities at amortised cost – Due to depositors	54,418,072	33,314,183	54,303,840	33,240,219
Financial liabilities at amortised cost – Due to other borrowers	3,227,370	3,389,930	3,227,370	3,389,930
Debt securities in issue	3,640,799	4,023,673	3,640,799	4,023,674
Interest expense on lease liabilities (Note 49.5)	153,345	141,899	154,570	141,899
Securities sold under repurchase agreements	3,151,574	1,951,244	3,151,574	1,951,244
Total interest expenses	65,697,026	43,342,290	65,584,019	43,268,327

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

	BANK		GROUP
As at 31 December	2023 LKR ’000	2022 LKR ’000	2023 LKR ’000	2022 LKR ’000
Financial assets measured at amortised cost (Note 24)	473,092,671	468,203,045	473,364,970	468,391,376
Financial assets measured at FVOCI (Note 32)	118,397,631	54,926,057	118,397,631	54,926,057
Financial assets measured at FVTPL (Note 29)	532,932	795,433	532,932	795,433
Total	592,023,234	523,924,535	592,295,533	524,112,866
Financial liabilities measured at amortised cost (Note 24)	562,991,660	510,136,462	562,574,147	509,756,203

11.1.3 Interest Income from Government Securities – Bank/Group

For the year ended 31 December	2023 LKR ’000	2022 LKR ’000
Financial assets measured at fair value through profit or loss	61,044	25,694
Financial assets at amortised cost – Debt and other instruments	11,384,648	4,327,593
Financial assets measured at fair value through other comprehensive income	21,859,770	4,314,980
	33,305,462	8,668,267