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of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, the DFCC Bank Act No. 35 of 1955 was repealed and the Bank was incorporated under the Companies Act No. 07 of 2007 as a public limited company listed on the Colombo Stock Exchange with the name “DFCC Bank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 2024 was as follow:

1.2 Consolidated financial statements

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

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

1.3 Parent Entity and Ultimate Parent Entity

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

1.4 Principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries, associates and joint venture/asset held for sale.

A summary of principal activities of DFCC Bank PLC, its subsidiary companies, associate company and joint venture company (assets held for sale) is as follows:

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 2024 were authorised for issue by the Directors on 19 February 2025.

1.6 Responsibility for Financial Statements

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

2.1 Statement of Compliance AND PRESENTATION

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).

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 on pages 239 to 245.

These financial statements include the following components:

• an Income Statement and Statement of Profit or Loss and Other Comprehensive Income providing information on the financial performance of the Group and the Bank for the year under review; (Refer pages 224 and 225).
• a Statement of Financial Position providing information on the financial position of the Group and Bank as at the year end;
  (Refer pages 226 and 227).
• a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and Bank; (Refer pages 228 and 231).
• a Statement of Cash Flows providing information to the users, on the ability of the Group and Bank to generate cash and cash equivalents and the needs of the entity to utilise those cash flows; (Refer pages 232 and 234).
• Notes to the financial statements comprising accounting policies and other explanatory information.
  (Refer pages 235 to 374)

The format used in the preparation and presentation of the financial statements and the disclosures made therein also comply with the specified formats prescribed by the Central Bank of Sri Lanka in the Circular No. 5 of 2024 on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks”.

2.2 Basis of Measurement

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

Financial Instruments

Non-Financial Assets/Liabilities

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.

The banking sector saw improvements in non-performing loans, reflecting gradual stabilisation. Although overall levels remained higher than pre crisis benchmarks, Bank focused on mitigating risks, optimising capital adequacy, and adapting to evolving regulatory requirements. Based on these, 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 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.

Revival from Economic crisis

Sri Lanka’s economic revival is progressing steadily, underpinned by key reforms facilitated by the IMF Extended Fund Facility (EFF). The country has made significant strides in implementing the EFF’s structural benchmarks, which have enhanced fiscal consolidation and bolstered financial stability. A key milestone in this recovery process has been the successful restructuring of the International Sovereign Bonds (ISBs), which has alleviated the debt burden and restored fiscal credibility. These efforts have laid the foundation for a gradual recovery, with the economy emerging from a period of negative GDP growth. Projections for 2025 now reflect an optimistic outlook, with expectations of a return to positive growth in the range of 3% to 4%, indicating a sustainable rebound as economic conditions stabilise.

Concurrently, macroeconomic indicators have shown significant improvement, contributing to a more favourable business environment. The tourism sector, a critical pillar of Sri Lanka’s economy, is experiencing a robust recovery, with increased international arrivals and higher revenue generation, signaling the return of foreign exchange inflows. In parallel, inflation has moderated due to effective monetary policies, while the Sri Lankan Rupee has stabilised, benefiting from stronger foreign exchange reserves. Interest rates have also been managed prudently, facilitating access to credit and investment opportunities. These positive trends in inflation, exchange rates, and interest rates, coupled with a revived tourism industry, signal a healthy macroeconomic environment and strong prospects for sustained economic growth.

The positive developments in Sri Lanka’s economic recovery have had a favorable impact on the Bank’s accounting estimates, particularly in relation to the computation of Expected Credit Loss (ECL) fair value measurement and assessment of recoverable amount of non-financial assets. As the macroeconomic environment stabilises, with key indicators such as inflation, exchange rates, and interest rates improving, the bank has revisited its ECL model to reflect these more favourable conditions. The successful restructuring of ISBs and the anticipated return to positive GDP growth have led to a more optimistic outlook for credit quality. This, in turn, has influenced the Bank’s credit risk assessments and allowed for a reduction in provisions for ECL. The revival of critical sectors, such as tourism, agriculture, and apparel, further supports the Bank’s expectations of improved borrower repayment capacity, reducing the risk of defaults. Estimates and underlying assumptions are reviewed on an ongoing basis. Revision 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:

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:

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:

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 the 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 the income statement.

5.1.2 Subsidiaries

Details of the Bank’s subsidiaries, how they are accounted in the financial statements and their contingencies are set out in Note 35 and 58 on pages 331 to 362.

5.1.3 Non-controlling interests (NCI)

Details of non-controlling interests are given in Note 57 on page 362.

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 the 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 36 and 37 on pages 332 to 333.

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, Lanka Industrial Estates Limited and National Asset Management Limited included in the consolidation have financial years ending on 31 December.

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

5.2 Foreign currency

5.2.1 Foreign currency transactions

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

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

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

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

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

5.3 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.

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

5.3.2 Classification

5.3.2.1 Financial assets

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

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

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

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

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

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

All other financial assets are classified as measured at FVTPL.

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

5.3.2.1.1 Business model assessment

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

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

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

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

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

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

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 is not permitted by SLFRS 9.

Other than above, the Bank has applied options given under Statement of Alternative Treatment SoAT as explained in note 33.5.1 for reclassification of part of instrument during year 2022.

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;

• the consideration received (including any new asset obtained less any new liability assumed) and
• any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.

Any cumulative gain or 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.

The Group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. Examples of such transactions are securities lending and sale-and-repurchase transactions.

When assets are sold to a third party with a concurrent total return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to sale and repurchase transactions, because the Group retains all or substantially all of the risks and rewards of ownership of such assets.

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 the 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 significant accounting policies of the Bank/Group.

5.3.7 Fair value measurement

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

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

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

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

Subsequently, that difference is recognised in the 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 290.

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 the 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 the 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.

The Group does not have changes in material accounting policies in the current annual reporting period.

A number of new standards and amendments to standards are effective for annual periods beginning 1 January 2025 and earlier application of these standards is permitted. However, the Group has not early adopted the new and amended standards in preparing these consolidated financial statements.

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:

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, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

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

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;

• 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.
• 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.
• 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.
• Limiting concentration of exposure to counterparties, industries (for loans and advances, financial guarantees and similar exposures), credit ratings and countries.
• 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.
• 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.
• Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.
• 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

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.

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.

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 Bank 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 Bank and other parties. Any dispute of the transaction will be handled according to the terms of the agreement.

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.

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

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

Unrated exposure includes facilities granted for short term working capital requirements. Exposures not subject to rating under loans and advances to customers comprise of pawning advances against gold and credit cards. Pawning advances are of small ticket size and rely on underlying assets with minimal risk and by regulation does not require risk rating. Due to the large number of transactions the Bank monitors this at portfolio level. Card risk is analysed using a scorecard and is managed outside of the main rating system.

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

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

Unrated exposure includes facilities granted for short term working capital requirements. Exposures not subject to rating under loans and advances to customers comprise of pawning advances against gold and credit cards. Pawning advances are of small ticket size and rely on underlying assets with minimal risk and by regulation does not require risk rating. Due to the large number of transactions the Bank monitors this at portfolio level. Card risk is analysed using a scorecard and is managed outside of the main rating system.

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 FORWARD LOOKING INFORMATION

The bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and using an analysis of historical data has estimated the relationship between macroeconomic variables and credit risk and credit losses. The Bank has used quantitative macro economic indicators including the following forecasted indicators published by the Central Bank of Sri Lanka and International Monetary Fund (IMF).

Both exchange rates and interest rates are derived using an internally developed statistical methodology.

8.2.5.2 LOSS ALLOWANCE

The following tables show reconciliation 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 and advances to customers – ECL

Financial assets at amortised cost – debt and other instruments – ecL

Loan commitments and financial guarantee contracts

8.2.5.2 Sensitivity of ECL to Future Economic Conditions

The ECL is 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 2024 to a reasonably possible change in PDs, LGDs, and forward-looking information.

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.

8.2.6 Concentration of Credit Risk – Bank

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

* 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 Asset 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 not available as potential collateral for obtaining funding.
• Monitoring the Bank’s liquidity through the Liquid Assets Ratio (statutory minimum was 20%) and Liquidity Coverage Ratios using a stock approach. (With the introduction of CBSL Direction No. 1 of 2024, the Central Bank of Sri Lanka discontinued the requirement for licensed banks to maintain the Statutory Liquid Assets Ratio (SLAR) and emphasised compliance with the Liquidity Coverage Ratio and Net Stable Funding Ratio within prescribed limits. Accordingly, the Bank continued preparing the monthly SLAR return until May 2024, after which it was discontinued in line with regulatory changes.)
• 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)

8.3.3 Maturity Analysis for Financial Liabilities and Financial Assets

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

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

Maturity Analysis of Total Assets and Total Liabilities

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

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

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

8.3.3.1 Carrying Value of Securities Allocated for Repurchase Transactions

As at 31 December	2024		2023
	Amortised Cost LKR ’000	Fair Value LKR ’000	Amortised Cost LKR ’000	Fair Value LKR ’000
Financial asset at amortised cost-debt and other instrument	50,096,357	55,046,838	49,097,778	53,544,118
Total	50,096,357	55,046,838	49,097,778	53,544,118

8.3.3.2 Market Value of Securities Received for Reverse Repurchase Transactions

As at 31 December	2024	2023
	Fair Value of Securities Received LKR ’000	Fair Value of Securities Received LKR ’000
Reverse repurchase agreements	6,303,215	–
Total	6,303,215	–

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	6.00	10.00
More than 1 year and up to 3 years	8.00	10.00
More than 3 years and up to 5 years	10.00	10.00
More than 5 years and up to 8 years	12.00	12.00
More than 8 years	14.00	14.00

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	2024		2023
	Carrying amount LKR ’000	Fair Value LKR ’000	Carrying amount LKR ’000	Fair Value LKR ’000
Cash and cash equivalents	13,504,806	13,504,806	14,478,468	14,478,468
Balances with Central Bank of Sri Lanka	2,328,346	2,328,346	2,107,776	2,107,776
Placements with banks	11,229,492	11,229,492	29,138,098	29,138,098
Unencumbered debt securities issued by sovereigns	169,555,753	177,743,962	145,571,442	140,242,686
Total liquidity reserves	196,618,397	204,806,806	191,295,784	185,967,028

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 2024
Cash and cash equivalents	26	–	–	13,504,806	–	13,504,806
Balances with Central Bank of Sri Lanka	27	–	2,328,346	–	–	2,328,346
Placements with banks	28	–	–	11,229,492	–	11,229,492
Derivative financial assets	29	–	–	9,643,442	–	9,643,442
Financial assets measured at fair value through profit or loss	30	–	–	7,416,018	–	7,416,018
Financial assets at amortised cost – loans and advances to banks	31	–	–	1,500,338	–	1,500,338
Financial assets at amortised cost – loans and advances to customers	32	–	–	394,361,480	–	394,361,480
Financial assets at amortised cost – debt and other instruments	33		–	60,860,067	–	105,641,690
Financial assets measured at fair value through other comprehensive income	34	6,232,257	–	132,025,969	–	138,258,226
Other assets	42	–	–	–	4,946,528	4,946,528
Non-financial assets		–	–	–	14,677,460	14,677,460
Total assets		51,013,880	2,328,346	630,541,612	19,623,988	703,507,826

		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	26	–	–	14,478,468	–	14,478,468
Balances with Central Bank of Sri Lanka	27	–	2,107,776	–	–	2,107,776
Placements with banks	28			29,138,098		29,138,098
Derivative financial assets	29			16,499,171		16,499,171
Financial assets measured at fair value through profit or loss	30	–	–	1,740,928	–	1,740,928
Financial assets at amortised cost – loans and advances to banks	31	–	–	–	–	–
Financial assets at amortised cost – loans and advances to customers	32	–	–	348,767,466	–	348,767,466
Financial assets at amortised cost – debt and other instruments	33	25,198,422	–	42,832,891	–	68,031,313
Financial assets measured at fair value through other comprehensive income	34	17,539,330	–	117,363,435	–	134,902,765
Other assets	42	–	–	–	11,021,709	11,021,709
Non-financial assets		–	–	–	14,262,589	14,262,589
Total assets		42,737,752	2,107,776	570,820,457	25,284,298	640,950,283

* 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 taken 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, and 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 2024	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
Assets subject to market risk
Cash and cash equivalents	26	13,504,806		13,504,806
Placements with banks	28	11,229,492	–	11,229,492
Derivatives financial assets	29	9,643,442	–	9,643,442
Financial assets measured at fair value through profit or loss	30	7,416,018	5,202,788	2,213,230
Financial assets at amortised cost – loans and advances to banks	31	1,500,338	–	1,500,338
Financial assets at amortised cost – loans and advances to customers	32	394,361,480	–	394,361,480
Financial assets at amortised cost – debt and other instruments	33	105,641,690	–	105,641,690
Financial assets measured at fair value through other comprehensive income	34	138,258,226	–	138,258,226
Liabilities subject to market risk
Due to banks	44	7,149,474	–	7,149,474
Derivatives financial liabilities	29	909,188	–	909,188
Financial liabilities at amortised cost – Due to depositors	45	465,153,180	–	465,153,180
Financial liabilities at amortised cost – Due to other borrowers	46	96,755,632	–	96,755,632
Debt securities issued	47	14,690,723	–	14,690,723
Subordinated term debt	51	18,234,054	–	18,234,054

			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	26	14,478,468	–	14,478,468
Placements with banks	28	29,138,098	–	29,138,098
Derivatives financial assets	29	16,499,171	–	16,499,171
Financial assets measured at fair value through profit or loss	30	1,740,928	1,705,966	34,962
Financial assets at amortised cost - Loans and advances to banks	31	–	–	–
Financial assets at amortised cost – Loans and advances to customers	32	348,767,466	–	348,767,466
Financial assets at amortised cost – Debt and other instruments	33	68,031,313	–	68,031,313
Financial assets measured at fair value through other comprehensive income	34	134,902,765	–	134,902,765
Liabilities subject to market risk
Due to banks	44	52,793,464	–	52,793,464
Derivatives financial liabilities	29	381,653	–	381,653
Financial liabilities at amortised cost – Due to depositors	45	407,225,313	–	407,225,313
Financial liabilities at amortised cost – Due to other borrowers	46	72,022,734	–	72,022,734
Debt securities issued	47	16,311,577	–	16,311,577
Subordinated term debt	51	9,072,265	–	9,072,265

8.4.2 Exposure to Market Risk – 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.

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 gives 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 severe market liquidity situations.
• A 99% confidence level does not reflect losses that may occur beyon d 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 price 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 price of the invested shares. The Bank is exposed to equity price risk through its investments in the equity market which has been shown in the FVPL portfolio and the FVOCI portfolio.

Financial assets measured at fair value through profit or loss portfolio

Parameter	Position as at 31 December 2024 LKR ’000	Position as at 31 December 2023 LKR ’000
Marked-to-market value of the total quoted equity portfolio	3,374,092	1,169,294
Value-at-risk (under 99% probability for a quarterly time horizon)	17.28%	37.92%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	582,902	443,415
Unrealised gains in the equity FVPL portfolio reported in the fair value reserve	736,724	(422,847)

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 FVPL portfolio considers a quarterly time horizon.

8.4.3 Exposure to Market Risk – Non-Trading Portfolios

Financial assets measured at fair value through other comprehensive income

Parameter	Position as at 31 December 2024 LKR ’000	Position as at 31 December 2023 LKR ’000
Marked-to-market value of the total quoted equity portfolio	24,293,516	16,267,149
Value-at-risk (under 99% probability for a quarterly time horizon)	28.13%	31.18%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VaR over a quarterly period	6,834,414	5,071,626
Unrealised gains in the equity FVOCI portfolio reported in the fair value reserve	12,092,381	4,628,837

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 FVOCI 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 2024

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	1,783,161	1,828,696	2.8	Portfolio value will decline approximately by 2.8% as a result of 1% increase in the interest rates.
Government Securities measured at FVOCI/LKR Bills and Bonds	111,375,098	113,099,228	1.6	Portfolio value will decline approximately by 1.6% as a result of 1% increase in the interest rates.
US Government Securities measured at FVOCI/US Treasury Bonds	587,023	595,289	1.2	Portfolio value will decline approximately by 1.2% 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 2024 is indicated by a modified duration of 2.8. 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 51 Mn as of 31 December 2024.

The market risk exposure for interest rate risk in the FVOCI Rupee portfolio and FVOCI US Treasuries portfolio as of 31 December 2024 is reflected in modified durations of 1.6 and 1.2 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 1.78 Bn and LKR 7 Mn respectively, as of 31 December 2024.

Duration analysis as at 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 2024 is quantified based on the assumed change in the interest rates for each time period and is given in the table below:

31 December	2024
	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	204,107	–	–	–	–
Placements with banks	10,457,186	297,677	–	–	–
Financial assets measured at fair value through profit or loss	61,447	23,116	6,593	–	1,737,540
Financial assets at amortised cost – loans and advances to banks	1,500,338	–	–	–	–
Financial assets at amortised cost – loans and advances to customers	150,458,026	55,268,447	22,966,380	31,789,811	111,817,505
Financial assets at amortised cost – debt and other instruments	1,968,800	1,471,837	12,821,143	1,299,203	88,080,707
Financial assets measured at fair value through other comprehensive income	2,492,757	3,839,705	31,271,210	17,713,405	58,377,439
	167,142,661	60,900,782	67,065,326	50,802,419	260,013,191
Due to banks	7,135,609	–	–	–	–
Financial liabilities at amortised cost – due to depositors	134,139,528	87,771,237	77,848,272	80,629,995	67,048,344
Financial liabilities at amortised cost – due to other borrowers	25,902,185	15,681,687	6,651,748	11,713,849	36,806,463
Debt securities issued	–	–	5,645,447	–	9,045,276
Subordinated term debt	–	5,635,605	–	4,318,000	8,280,449
	167,177,322	109,088,529	90,145,467	96,661,844	121,180,532
Net rate sensitive assets (liabilities)	(34,661)	(48,187,747)	(23,080,141)	(45,859,425)	138,832,659
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00
Impact	(173)	(441,718)	(259,652)	(458,594)
Total net impact if interest rates increase				(1,160,137)
Total net impact if interest rates decline				1,160,137

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 and advances to 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 issued	–	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

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.

8.4.5 Foreign Exchange Risk

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

Foreign exchange risk in net open position (NOP)/unhedged position of Bank The following table indicates the DFCC Bank’s exchange rate risk exposure based on the size of its NOP/unhedged positions in foreign currency assets/liabilities. By 31 December 2024, DFCC carried a net open/unhedged “short” position of USD 7.94 Mn. The impact of exchange rate risk is given below:

	2024 Amount		2023 Amount
Net exposure – USD equivalent (CBSL Return)	(7,938,000)		(1,860,000)
Value of position in LKR 000	(2,329,009)		(602,603)
Exchange rate (USD/LKR) as at 31 December	293.40		323.98
Possible potential loss to Bank – LKR 000
– If exchange rate (USD/LKR) appreciates by 1%	(23,290)		(6,026)
– If exchange rate appreciates by 10%	(232,901)		(60,260)
– If exchange rate appreciates by 15%	(349,351)		(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 2024 are as follows:

	Risk-weighted assets LKR ’000	Quantified possible exposure LKR ’000
Interest rate risk	2,844,269	22,754,152
Equity price risk	418,201	3,345,608
Foreign exchange and gold risk	162,995	1,303,960
Total	3,425,465	27,403,720

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 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.

• Monitoring of the Key Risk Indicators (KRIs) for 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. Key Risk Indicator (KRI) monitoring for branches focuses on identifying risks, tracking trends, and ensuring timely corrective actions to mitigate threats.
• Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognising necessary improvements in the systems, processes and procedures.
• Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. Key findings of the analysis are evaluated at the ORSC, ORMC and the BIRMC meetings from an operational risk perspective.

The primary responsibility for the recommendation of controls to address operational risk lies with IRMD whilst implementation of controls 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:

• Requirements for appropriate segregation of duties, including independent authorisation of transactions.
• Requirements for reconciliation and monitoring of transactions.
• Compliance with regulatory and other legal requirements.
• Documentation of controls and procedures.
• Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks.
• Requirements for reporting of operational losses and proposed remedial action.
• Development of contingency plans.
• Training and professional development to establish ethics and business standards.
• 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:

• Ensure regulatory minimum capital adequacy requirements are not compromised.
• 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.
• Ensure capital impact of business decisions including strategic business plans are properly assessed and taken into consideration.
• Ensure capital consumption by business actions are adequately priced.
• 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	2024			2023
  Item	Bank	Group		Bank	Group
  Regulatory capital (LKR ’000)
  Common equity Tier 1	52,485,838	57,804,406		43,632,490	47,491,186
  Tier 1 capital	52,485,838	57,804,406		43,632,490	47,491,186
  Total capital	66,693,851	72,021,286		51,304,883	55,171,249
  Regulatory capital ratios (%)
  Common equity Tier 1 capital ratio (minimum requirement – 7.0%)	12.40%	13.61%		11.49	12.46
  Tier 1 capital ratio (minimum requirement – 8.5%)	12.40%	13.61%		11.49	12.46
  Total capital ratio (minimum requirement – 12.5%)	15.76%	16.96%		13.51	14.48

  Basel III computation of capital ratios

  31 December	2024		2023
  Item	Bank LKR ’000	Group LKR ’000	Bank LKR ’000	Group LKR ’000
  Common equity Tier 1 (CET 1) capital after adjustments	52,485,838	57,804,406	43,632,490	47,491,186
  Common equity Tier 1 (CET 1) capital	71,009,611	77,842,985	61,524,384	66,919,617
  Equity capital (stated capital)/assigned capital	14,710,454	14,710,454	13,866,557	13,866,557
  Reserve fund	3,657,968	3,657,968	3,239,968	3,239,968
  Published retained earnings/(accumulated retained losses)	35,834,730	42,668,104	28,250,357	33,645,590
  Published accumulated other comprehensive income (OCI)	3,026,620	3,026,620	2,387,663	2,387,663
  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	18,523,773	20,038,579	17,891,894	19,428,431
  Goodwill (net)	–	156,226	–	156,226
  Intangible assets (net)	2,001,636	2,013,975	1,926,287	1,945,030
  Investment in capital of banks and financial institutions	11,180,665	12,507,386	10,114,730	11,468,498
  Others	5,341,472	5,360,992	5,850,877	5,858,677
  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)	–	–	–	–

  31 December	2024		2023
  Item	Bank LKR ’000	Group LKR ’000	Bank LKR ’000	Group LKR ’000
  Tier 2 capital after adjustments	14,208,013	14,216,880	7,672,393	7,680,063
  Tier 2 capital	14,208,013	14,216,880	7,672,393	7,680,063
  Qualifying Tier 2 capital instruments	9,803,906	9,803,906	3,525,812	3,525,812
  Revaluation gains	–	–	–	–
  Stage 1 & 50% of stage 2 impairment provision subject to 1.25% of credit RWA	4,404,107	4,412,974	4,146,581	4,154,251
  Total adjustments to Tier 2
  Investment in own shares	–	–	–	–
  Others (specify)	–	–	–	–
  CET1 capital	52,485,838	57,804,406	43,632,490	47,491,186
  Total Tier 1 capital	52,485,838	57,804,406	43,632,490	47,491,186
  Total capital	66,693,851	72,021,286	51,304,883	55,171,249
  Total risk-weighted assets (RWA)	423,201,054	424,683,050	379,738,330	381,017,800
  RWAs for credit risk	352,328,550	353,037,904	331,726,504	332,340,053
  RWAs for market risk	27,403,720	27,403,720	14,061,808	14,061,808
  RWAs for operational risk	43,468,734	44,241,426	33,950,018	34,615,939
  CET1 Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer, and Surcharge on D-SIBs) (%)	12.40	13.61	11.49	12.46
  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 (%)	12.40	13.61	11.49	12.46
  Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs) (%)	15.76	16.96	13.51	14.48
  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 judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, government securities and simple over the counter derivatives like forward exchange contracts and interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

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

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

9.2 Valuation Framework

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

Specific controls include:

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

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

This includes:

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

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

9.3 Financial Instruments Measured at Fair Value – Fair Value Hierarchy

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

A. Bank/Group

As 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 the Colombo Stock Exchange are also classified as a Level 1 asset by referring to the quoted prices. US Treasury Bills valued using Bloomberg published 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.

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 2024 and no transfers in either direction in 2024.

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:

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 2024.

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:

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 is used 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 they are compared to observed transaction prices where available.

When establishing the fair value of a financial instrument using a valuation technique, the Group considers valuation adjustments in determining the fair value. The Group may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation adjustments).

• refer Note 29 Derivative Financial Instruments to reflect the Group’s assessment of factors that market participants would consider in setting fair value.

9.4 Financial Instruments not Measured at Fair Value

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

A. Bank

31 December		2024
	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	13,504,806	–	13,504,806	13,504,806
Balances with Central Bank of Sri Lanka	27	–	2,328,346	–	2,328,346	2,328,346
Placements with banks	28	–	11,229,492	–	11,229,492	11,229,492
Financial assets at amortised cost – loans and advances to banks	31	1,664,755	–	–	1,664,755	1,500,338
Financial assets at amortised cost – loans and advances to customers	32	–	–	377,802,310	377,802,310	394,361,480
Financial assets at amortised cost – Debt and other instruments	33	105,839,660	–	–	105,839,660	105,641,690
Other financial assets	42	–	–	4,946,528	4,946,528	4,946,528
		107,504,415	27,062,644	382,748,838	517,315,897	533,512,680
Liabilities
Due to banks	44	–	7,149,474	–	7,149,474	7,149,474
Financial liabilities at amortised cost – due to depositors	45	–	–	459,260,928	459,260,928	465,153,180
Financial liabilities at amortised cost – due to other borrowers	46	–	–	96,755,632	96,755,632	96,755,632
Debt securities issued	47	–	14,852,236	–	14,852,236	14,690,723
Other financial liabilities	50	–	–	7,441,320	7,441,320	7,441,320
Subordinated term debt	51	–	13,480,708	–	13,480,708	18,234,054
		–	35,482,418	563,457,880	598,940,298	609,424,383

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	26	–	14,478,468	–	14,478,468	14,478,468
Balances with Central Bank of Sri Lanka	27	–	2,107,776	–	2,107,776	2,107,776
Placements with banks	28	–	29,138,098	–	29,138,098	29,138,098
Financial assets at amortised cost – loans and advances to customers	32	–	–	322,590,049	322,590,049	348,767,466
Financial assets at amortised cost – debt and other instruments	33	71,415,548	2,296,775	–	73,712,323	68,031,313
Other financial assets	42	–		11,021,709	11,021,709	11,021,709
		71,415,548	48,021,117	333,611,758	453,048,423	473,544,830
Liabilities
Due to banks	44	–	52,793,464	–	52,793,464	52,793,464
Financial liabilities at amortised cost – due to depositors	45	–	–	427,279,084	427,279,084	407,225,313
Financial liabilities at amortised cost – due to other borrowers	46	–	–	72,022,734	72,022,734	72,022,734
Debt securities issued	47	–	15,579,739	–	15,579,739	16,311,577
Other financial liabilities	50	–	–	6,018,466	6,018,466	6,018,466
Subordinated term debt	51	–	8,340,427	–	8,340,427	9,072,265
		–	76,713,630	505,320,284	582,033,914	563,443,819

B. Group

As at 31 December		2024
	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	13,523,476	–	13,523,475	13,523,475
Balances with Central Bank of Sri Lanka	27	–	2,328,346	–	2,328,346	2,328,346
Placements with banks	28	–	11,229,492	–	11,229,492	11,229,492
Financial assets at amortised cost – Loans and advances to banks	31	1,664,755	–	–	1,664,755	1,500,338
Financial assets at amortised cost – Loans and advances to customers	32	–	–	377,802,310	377,802,310	394,361,480
Financial assets at amortised cost – Debt and other instruments	33	105,839,660	–	–	105,839,660	105,701,871
Other financial assets	42	–		5,135,115	5,135,115	5,135,115
Total		107,504,415	27,081,314	382,937,425	517,523,153	533,780,117
Liabilities
Due to banks	44	–	7,149,474	–	7,149,474	7,149,474
Financial liabilities at amortised cost – Due to depositors	45	–	–	458,467,312	458,467,312	464,359,564
Financial liabilities at amortised cost – Due to other borrowers	46	–	–	96,755,632	96,755,632	96,755,632
Debt securities issued	47	–	14,852,236	–	14,852,236	14,690,723
Other financial liabilities	50	–	–	7,719,982	7,719,982	7,719,982
Subordinated term debt	51	–	13,480,708	–	13,480,708	18,234,054
		–	35,482,418	562,942,926	598,425,344	608,909,429

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	26	–	14,483,062	–	14,483,062	14,483,062
Balances with Central Bank of Sri Lanka	27	–	2,107,776	–	2,107,776	2,107,776
Placements with banks	28	–	29,173,988	–	29,173,988	29,173,988
Financial assets at amortised cost – Loans and advances to customers	32	–	–	322,590,049	322,590,049	348,767,466
Financial assets at amortised cost – Debt and other instruments	33	71,415,548	2,296,775	–	73,712,323	68,094,041
Other financial assets	42			11,190,796	11,190,796	11,190,796
Total		71,415,548	48,061,601	333,780,845	453,257,994	473,817,129
Liabilities
Due to banks	44	–	52,793,464	–	52,793,464	52,793,464
Financial liabilities at amortised cost – Due to depositors	45	–	–	427,279,084	427,279,084	406,584,864
Financial liabilities at amortised cost – Due to other borrowers	46	–	–	72,022,734	72,022,734	72,022,734
Debt securities issued	47	–	15,579,739	–	15,579,739	16,311,577
Other financial liabilities	50	–	–	6,241,402	6,241,402	6,241,402
Subordinated term debt	51	–	8,340,427	–	8,340,427	9,072,265
		–	76,713,630	505,543,220	582,256,850	563,026,306

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 and advances to 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 leasing facilities calculated based on current interest rates for similar types of facilities.

9.4.3 Loans and advances to 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. The 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 a 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 Issued

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.