SANASA Development Bank PLC | Integrated Annual Report 2020

1.1 General

SANASA Development Bank PLC (“the Bank”) is a Licensed Specialised Bank established under the Banking Act No. 30 of 1988. It is a limited liability company, incorporated and domiciled in Sri Lanka. The registered office of the Bank is located at No. 12, Edmonton Road, Colombo 6. The Bank has a primary listing on the Colombo Stock Exchange.

1.2 Principal activities and nature of operations

1.2.1 Bank

SANASA Development Bank PLC provides a comprehensive range of financial services encompassing Development Banking, Corporate Banking, Personal Banking, Corporate and Trade Finance, Leasing and other Associated Activities.

1.2.2 Subsidiary

Payment Services (Private) Limited is a fully-owned subsidiary of the Bank, that was acquired on 26 May 2020. It was engaged in the business of providing online payment solutions on the web and mobile platforms under the brand name “Upay”. The subsidiary’s assets, liabilities, equity, income, expenses and cash flows does not have a material effect on the Consolidated Financial Statements of the Group. Therefore, the subsidiary has been deemed immaterial and has not been consolidated when preparing and presenting the Financial Statements of the Group.

1.3 Parent entity and ultimate parent entity

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

1.4 Date of authorisasion of issue

The Financial Statements for the year ended 31 December 2020 were authorised for issue in accordance with a resolution of the Directors on 19 March 2021.

2.1 BASIS OF PREPARATION

The Financial Statements have been prepared on a historical cost basis, except for the financial assets measured at fair value through profit or loss and financial assets recognised through other comprehensive income.

2.1.1 Statement of compliance

The Financial Statements of the Bank which comprise of the statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flow and significant accounting policies and notes have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) laid down by the Institute of Chartered Accountants of Sri Lanka and are in compliance with the requirements of the Companies Act No. 7 of 2007. The presentation of the Financial Statements is also in compliance with the requirements of the Banking Act No. 30 of 1988 and amendments thereto.

2.1.2 Presentation of financial statements

The assets and liabilities of the Bank presented in the Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non–current) is presented in Note 44.

2.1.3 Functional and Presentation Currency

The Financial Statements of the Bank are presented in Sri Lankan Rupees which is the currency of the primary economic environment in which the Bank operates. Financial information presented in Sri Lankan Rupees has been rounded to the nearest thousand unless indicated otherwise. There was no change in the Group’s presentation and functional currency during the year under review.

2.1.4 Materiality and Aggregation

In compliance with Sri Lanka Accounting Standard - LKAS 1 (Presentation of Financial Statements), each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or functions too are presented separately unless they are immaterial. 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 liability simultaneously. Income and expenses are not offset in the Statement of Profit or Loss unless required or permitted by an Accounting Standard.

2.1.5 Comparative Information

The comparative information is re-classified wherever necessary to conform to the current year’s classification in order to provide a better presentation.

2.1.6 Statement of Cash Flows

The Cash Flow Statement has been prepared by using the direct method in accordance with the Sri Lanka Accounting Standard - LKAS 7 (Statement of Cash flows), whereby gross cash receipts and gross cash payments of operating activities, finance activities and investing activities have been recognised. Cash and cash equivalents comprise of short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Cash and cash equivalents include cash in hand, balances with banks, placements with banks (less than 3 months) and reverse repurchased agreements.

2.2 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

In the process of applying the Bank’s accounting policies, management has exercised judgment and estimates in determining the amounts recognised in the Financial Statements. The most significant uses of judgment and estimates are as follows:

2.2.1 Going concern

The Bank’s Management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, Management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the Financial Statements continue to be prepared on the going concern basis. The Directors have considered the potential downsides that the COVID - 19 pandemic could bring to business operations of the Group, in making this assessment.

2.2.2 Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. The valuation of financial instruments is described in more detail in Note 41.

2.2.3 Classification of financial assets and liabilities

The Bank’s accounting policies provide scope for assets and liabilities to be classified, at inception into different accounting categories. The classification of financial instruments is given in Note 40, “Analysis of Financial Instruments by Measurement Basis”.

2.2.4 Impairment losses on loans and advances

The measurement of impairment losses under SLFRS 9 across all categories of financial assets requires judgment. These estimates are driven by a number of factors and the changes of these factors can result in different levels of adjustments.

The Bank reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the income statement. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

Loans and advances that have been assessed individually and found to be impaired have been provided for the impairment loss on loans and advances as disclosed in Note 8 and Note 17. All individually not insignificant loans and advances and unimpaired individual significant customers are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to Expected Credit Loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, remaining maturity, customer identification number, etc.)

The Bank’s expected credit loss (ECL) calculation under SLFRS 9 requires management to make judgments and estimates with regard to the following;

Criteria for assessing if there has been a significant increase in credit risk and therefore impairment for financial assets should be measured on a Lifetime Expected Credit Loss (LTECL) basis and the qualitative assessment
The segmentation of financial assets when their ECL is assessed on a collective basis
Development of ECL models, including the various formulas and the choice of inputs
Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs
Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models

It has been the Bank’s policy to regularly review its models in the context of actual loss experience and adjust when necessary. Furthermore, the procedure followed in the impairment calculations due to the COVID-19 outbreak have been described in Note 44.2.2 to the Financial Statement.

2.2.5 Impairment of other financial assets

The Bank reviews its debt securities classified as FVOCI/ amortised cost at each reporting date to access whether they are impaired. Objective evidence that a debt security held at FVOCI/amortised cost is impaired includes among other things significant financial difficulty of the issuer, a breach of contract such as a default or delinquency in interest or principal payment etc. Equity instruments classified as FVOCI are not subjective for impairment assessment.

2.2.6 Deferred tax assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised and impairment allowances which will be recovered in the foreseeable future. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. Details of the deferred tax assets are disclosed in Note 12.2 to the Financial Statement.

2.2.7 Taxation

The Bank is subject to income taxes and other taxes including VAT on financial services. Significant judgment was required to determine the total provision for current, deferred and other taxes due to the uncertainties that exist with respect to the interpretation of the applicability of tax laws, at the time of preparation of these Financial Statements.

The Bank recognised assets and liabilities for current deferred and other taxes based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income.

2.2.8 Defined benefit plan

The cost of the defined benefit plan is determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, salary increment rate, age of retirement, and mortality rates. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. The assumptions used for valuation is disclosed in more detail in Note 30.1.3.

2.2.9 Useful lifetime of the property, plant and equipment and intangible assets

The Bank reviews the residual values, useful lives and methods of depreciation of assets as at each reporting date. Judgment of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

2.2.10 Commitments and Contingencies

Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless they are remote. Details of commitments and contingencies are given in Note 36.

2.2.11 Classification of Investment Properties

Management requires using its judgment to determine whether a property qualifies as an investment property. The Bank has developed criteria so it can exercise its judgment consistently. A property that is held to earn rentals or for capital appreciation or both and which generates cash flows largely independently of the other assets held by the Bank are accounted for as investment properties. On the other hand, a property that is used for operations or in the process of providing services or for administrative purposes and which do not directly generate cash flows as a standalone asset are accounted for as property, plant and equipment. The Bank assesses on an annual basis, the accounting classification of its properties taking into consideration the current use of such properties. Details of investment properties are given in Note 23.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.3.1 Foreign currency transactions and balances

The Financial Statements are presented in Sri Lankan Rupees (LKR). Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to “Other operating income” in the income statement.

2.3.2 Financial instruments

2.3.2.1 Initial recognition, classification and subsequent measurement

(a) Date of recognition

All financial assets and liabilities with the exception of loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Bank recognises balances due to customers when funds are transferred to the Bank.

(b) Initial measurement of financial instruments

The classification of financial instruments at initial recognition depends on the cash flow characteristics and the business model for managing the instruments. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Bank accounts for the Day 1 profit or loss, as described below.

“Day 1” profit or loss

When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the bank immediately recognises the difference between the transaction price and fair value (“Day 1” profit or loss) in “Net operating income”. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the income statement when the inputs become observable, or when the instrument is derecognised.

(c) Classification and subsequent measurement of financial instruments

(i) Financial assets

The Bank classifies its financial assets into the following measurement categories:

Financial assets at amortised cost
Financial assets at fair value through profit or loss (FVTPL)
Financial assets measured at fair value through other comprehensive income (FVOCI)

The classification depends on the Bank’s business model for managing financial assets and the contractual terms of the financial assets’ cash flows. The Bank classifies its financial liabilities at amortised cost unless it has designated liabilities at fair value through profit.

a. Financial assets measured at amortised cost

Placements, loans and receivables to other customers and debt and other instruments are measured at amortised cost where they have:

Contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and profits on the principal amount outstanding; and
Are held within a business model whose objective is achieved by holding to collect contractual cash flows.

These instruments are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at amortised cost. The measurement of credit impairment is based on the three-stage expected credit loss model described below in Note 2.3.2.3 impairment of financial assets.

b. Financial assets at fair value through profit or loss

Financial assets fair value through profit or loss comprise:

Financial investments - for trading;
Instruments with contractual terms that do not represent solely payments of principal and profit.

Financial instruments held at fair value through profit or loss are initially recognised at fair value, with transaction costs recognised in the statement of profit or loss as incurred. Subsequently, they are measured at fair value and any gains or losses are recognised in the statement of profit or loss as they arise.

Where a financial asset is measured at fair value, a credit valuation adjustment is included to reflect the credit worthiness of the counterparty, representing the movement in fair value attributable to changes in credit risk.

Financial investments – for trading

A financial investment is classified as financial assets recognised through profit or loss if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship.

Government securities quoted equities and investment in unit trust securities are classified as financial assets recognised through profit or loss and recognised at fair value. Refer Note 16.

Financial instruments designated as measured at fair value through profit or loss

Upon initial recognition, financial instruments may be designated as measured at fair value through profit or loss. A financial asset may only be designated at fair value through profit or loss if doing so eliminates or significantly reduces measurement or recognition inconsistencies (i.e. eliminates an accounting mismatch) that would otherwise arise from measuring financial assets or liabilities on a different basis. The Bank does not designate any financial instruments under this category.

c. Financial assets measured at fair value through other comprehensive income

Investment in equity instruments that are neither trading financial assets recognised through profit or loss, nor contingent consideration recognised by the Bank in a business combination to which SLFRS 3 “Business Combination” applies, are measured at fair value through other comprehensive income, where an irrevocable election has been made by Management due to long-term nature of investment. For portfolios where Management does not consider an irrevocable election of adopting fair value through other comprehensive income, by default such investments shall be measured at fair value through profit and loss.

Amounts presented in other comprehensive income are not subsequently transferred to profit or loss. Dividends on such investments are recognised in profit or loss.

(ii) Financial liabilities

The initial and subsequent measurement of financial liabilities depends on their classification as described below:

At the inception the Bank determines the classification of its financial liabilities. Accordingly, financial liabilities are classified as;

Financial liabilities at amortised cost
Financial liabilities at Fair Value through Profit or Loss (FVTPL)
– Financial liabilities held for trading

– Financial liabilities designated at fair value through profit or loss

The subsequent measurement of financial liabilities depends on their classification.

a. Financial liabilities at amortised cost

Financial instruments issued by the Bank that are not designated at fair value through profit or loss, are classified as liabilities at amortised cost under “due to customers and other borrowings” as appropriate, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial assets for a fixed number of own equity shares at amortised cost using EIR method.

After initial recognition, such financial liabilities are substantially measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are integral part of the EIR. The EIR amortisation is included in “interest expenses” in the income statement. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the EIR amortisation process.

This category consists of due to other customers, other borrowings, debt securities issued and subordinated term debts.

b. Financial liabilities at Fair Value through Profit or Loss (FVTPL)

Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Subsequent to initial recognition, financial liabilities at FVTPL are fair value, and changes therein recognised in
profit or loss.

Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of the portfolio that is managed together for short-term profit or position taking. This category includes derivative financial instruments entered in to by the Bank which are not designated as hedging instruments in the hedge relationships as defined by the Sri Lanka Accounting Standards - LKAS 39 on “Financial Instruments: Recognition and Measurements”. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement.

The Bank does not have any financial liabilities under this category.

2.3.2.2 De-recognition of financial instruments

(a) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the asset have expired. The Bank also derecognises the financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition. The Bank has transferred the financial asset if, and only if, either:

The Bank has transferred its rights to receive cash flows from the asset or it retains the rights to the cash flows, but has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass – through” arrangement.
The Bank has transferred substantially all risks and rewards of the asset, or the Bank has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control
of the asset

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a “pass – through” arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset. In that case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

b. Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.

2.3.2.3 Impairment of financial assets

The Bank applies a three-stage approach to measuring Expected Credit Losses (ECLs) for the following categories of financial assets (debt instruments) that are not measured at fair value through profit or loss:

Instruments measured at amortised cost and fair value through other comprehensive income;
Loans and receivables to other customers; and
Financial guarantee contracts

ECL is not recognised on equity instruments.

Financial assets migrate through the following three stages based on the change in credit risk since initial recognition:

Stage 1: 12 months ECL

For exposures where there has not been a significant increase in credit risk since initial recognition and that are not credit impaired upon origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognised.

Bank determines 12 month ECL from customers who are not significantly credit deteriorated (i.e. less than 30 days past due).

Stage 2: Lifetime ECL – not Credit Impaired

Credit facilities, where contractual payments of a customer are more than 30 days past due, other than the credit facilities categorised under Stage 3 below, subject to the rebuttable presumption as stated in SLFRS 9. All restructured loans, which are restructured up to two times (other than upgraded restructured facilities, satisfactory performing period of a minimum 90 days considered subsequent to the due date of the first capital and/or interest instalment post-restructure). Under-performing credit facilities/exposures.

Stage 3: Lifetime ECL – Credit Impaired

Credit facilities where contractual payments of a customer are more than 90 days past due or three instalments in arrears, subject to the rebuttable presumption as stated in SLFRS 9. All restructured loans, which are restructured more than twice. All rescheduled loans, other than credit facilities/exposures (other than upgraded restructured facilities, satisfactory performing period of a minimum 90 days considered subsequent to the due date of the first capital and/or interest instalment post-restructure). All credit facilities/customers classified as non-performing as per CBSL directions. Non-performing credit facilities/customers.

Determining the stage for impairment

At each reporting date, the Bank assesses whether there has been a significant increase in credit risk for exposures since initial recognition by comparing the risk of default occurring over the expected life between the reporting date and the date of initial recognition.
The Bank considers reasonable and supportable information that is relevant and available without undue cost or effort for this purpose. This includes quantitative and qualitative information and also, forward-looking analysis.

An exposure will migrate through the ECL stages as asset quality deteriorates. If, in a subsequent period, asset quality improves and also reverses any previously assessed significant increase in credit risk since origination, then the provision for impairment loss reverts from lifetime ECL to 12-months ECL. Exposures that have not deteriorated significantly since origination, or where the deterioration remains within the Bank’s investment grade criteria, or which are less than 30 days past due, are considered to have a low credit risk. The provision for impairment loss for these financial assets is based on a 12-months ECL.

When an asset is uncollectible, it is written off against the related provision. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off reduce the amount of the expense in the statement of profit or loss.

The Bank assesses whether the credit risk on an exposure has increased significantly on an individual or collective basis. For the purposes of a collective evaluation of impairment, financial instruments are grouped on the basis of shared credit risk characteristics, taking into account instrument type, credit risk ratings, date of initial recognition, remaining term to maturity, industry, geographical location of the borrower and other relevant factors.

Measurement of ECLs

ECLs are derived from unbiased and probability-weighted estimates of expected loss, and are measured as follows:

Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls over the expected life of the financial asset discounted by the effective rate. The cash shortfall is the difference between the cash flows due to the Bank in accordance with the contract and the cash flows that the Bank expects to receive.
Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows discounted by the effective rate.
Undrawn commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive.
Financial guarantee contracts: as the expected payments to reimburse the holder less any amounts that the Bank expects to recover.

For further details on how the Bank calculates ECLs including the use of forward looking information, refer to the impairment assessment section in Note 44.

ECLs are recognised using a provision for impairment loss account in statement of profit and loss. The Bank recognises the provision charge in statement of profit or loss, with no reduction in the carrying amount of the asset in the statement of financial position.

The mechanics of the ECL calculations are outlined below and the key elements are, as follows.

PD : The probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio.

EAD : The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of capital and financing income, whether scheduled by contract or otherwise, expected draw downs on committed facilities, and accrued financing income from missed payments.

LGD : The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Bank would expect to receive, including the realisation of any collateral.

Procedure followed in the ECL calculations due to COVID-19 outbreak is detailed in Note 44 to the Financial Statements.

2.3.2.4 Critical accounting assumptions and estimates applicable for financial instruments

The application of the Bank’s accounting policies requires the use of judgments, estimates and assumptions. If different assumptions or estimates were applied, the resulting values would change, impacting the net assets and income of the Bank.

Assumptions made at each reporting date are based on best estimates at that date. Although the Bank has internal control systems in place to ensure that estimates are reliably measured, actual amounts may differ from those estimates. Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The accounting policies which are most sensitive to the use of judgment, estimates and assumptions are specified below.

(a) Fair value measurement

A significant portion of financial instruments are carried on the statement of financial position at fair value.

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.

Where the classification of a financial asset or liability results in it being measured at fair value, wherever possible, the fair value is determined by reference to the quoted bid or offer price in the most advantageous active market to which the Bank has immediate access. An adjustment for credit risk is also incorporated into the fair value as appropriate.

Fair value for a net open position that is a financial liability quoted in an active market is the current offer price, and for a financial asset the bid price, multiplied by the number of units of the instrument held or issued.

Where no active market exists for a particular asset or liability, the Bank uses a valuation technique to arrive at the fair value, including the use of transaction prices obtained in recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques, based on market conditions and risks existing at reporting date. In doing so, fair value is estimated using a valuation technique that makes maximum use of observable market inputs and places minimal reliance upon entity-specific inputs.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Bank recognises the difference between the transaction price and the fair value in profit or loss on initial recognition (i.e. on day one).

(b) Impairment charges on loans and receivables to other customers

Judgment is required by management in the estimation of the amount and timing of future cash flows when determining an impairment loss for loans and receivables to other customers. In estimating these cash flows, the Bank makes judgments about the customer’s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the impairment allowance.

A collective assessment of impairment takes into account data from the advance portfolio (such as credit quality, levels of arrears, credit utilisation, advances to collateral ratios etc.), and concentrations of risk and economic data (including levels of unemployment, inflation, GDP growth rate, country risk and the performance of different individual groups). The impairment loss on loans and receivables to other customers is disclosed in more detail in Note 17.

2.3.2.5 Determination of fair value

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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or
In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible by the Bank.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the Financial Statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 –	Quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 –	Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
Level 3 –	Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognised in the Financial Statements on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The disclosure of fair value of financial instruments is disclosed in
Note 41.

2.3.2.6 Collateral valuation

The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and based on the guidelines issued by the Central Bank of Sri Lanka. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent values and audited Financial Statements.

Collateral repossessed

The Bank’s policy is to determine whether a repossessed asset is best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset.

2.3.2.7 Offsetting financial instruments

Financial Assets and Liabilities are offset, and the net amount is presented in the Balance Sheet when the Bank has a legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously.

2.3.3 Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Bank retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within “repurchase agreements”, reflecting the transaction’s economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the EIR. When the counterparty has the right to sell or replace the securities, the Bank reclassifies those securities in its statement of financial position to “Financial assets held-for-trading pledged as collateral” or to “Financial investments available-for-sale pledged as collateral”, as appropriate. Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within “reverse repurchase agreements”, reflecting the transaction’s economic substance as a loan by the Bank.

The difference between the purchase and resale prices is recorded in “Net interest income” and is accrued over the life of the agreement using the EIR. If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within “Financial liabilities held-for-trading” and measured at fair value with any gains or losses included in “Net operating income”.

2.3.4 Securities lending and borrowing

Securities lending and borrowing transactions are usually collateralised by securities or cash. The transfer of the securities to counterparties is only reflected on the statement of financial position if the risks and rewards of ownership are also transferred. Cash advanced or received as collateral is recorded as an asset or liability. Securities borrowed are not recognised on the statement of financial position, unless they are then sold to third parties, in which case the obligation to return the securities is recorded as a trading liability and measured at fair value with any gains or losses included in “Net operating income”.

2.3.5 Leases

The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

2.3.5.1 Bank as the lessor

When the Bank acts as a lessor, it determines at least inception whether each lease is a finance lease or an operating lease. To classify each lease, the Bank makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset.

Operating leases

Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Finance leases

Assets leased to customers which transfer substantially all the risks and rewards associated with ownership other than legal title, are classified as “Finance Leases”. Amounts receivable under finance leases are included under “loans and receivables to customers” in the statement of financial position after deduction of initial rentals received, unearned lease income and the accumulated impairment losses. When assets are held subject to a finance lease, the present value of the lease payments, discounted at the rate of interest implicit in the lease, is recognised as a receivable. The difference between the total payments receivable under the lease and the present value of the receivable is recognised as unearned finance income, which is allocated to accounting periods reflect a constant periodic rate of return.

2.3.5.2 Bank as the lessee

The Bank applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Bank recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

Right-of-use assets

The Bank recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right of use assets are depreciated on a straight-line basis over the lease term over the range of 1 to 10 years. The right-of-use assets is presented in Note 22.

Lease liabilities

At the commencement date of the lease, the Bank recognises lease liabilities measured at the present value of lease payments to be made over the lease term. Lease liabilities are presented in Note 31.

2.3.6 Cash and cash equivalents

Cash and cash equivalents as referred to in the cash flow statement comprises cash on hand and balances with Banks on demand or with an original maturity of three months or less.

2.3.7 Property, plant and equipment

Property, plant and equipment are tangible items that are held for servicing, or for administrative purposes, and are expected to be used during more than one year.

Property and equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably in accordance with LKAS 16 on Property, plant and equipment. Initially property and equipment are measured at cost.

2.3.7.1 Basis of recognition and measurement

Cost model

An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its costs. Costs include expenditure that is directly attributable to the acquisition of the asset and cost is incurred subsequently to add to or replace a part of it. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to working condition for its intended use and the costs of dismantling and removing the items and restoring at the site on which they are located and capitalised borrowing costs. Purchase of software that is integral to the functionality of the related equipment is capitalised as a part of computer equipment.

When parts of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The Bank applies the cost model to property, plant and equipment and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.

Changes in the expected useful life are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates.

2.3.7.2 Subsequent cost

These are costs that are recognised in the carrying amount of an item, if it is probable that the future economic benefits embodied within that part will flow to the Bank and it can be reliably measured.

2.3.7.3 Repairs and maintenance

Repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the assets when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing assets will flow to the Bank and the renovation replaces an identifiable part of the asset. Major renovations are depreciated during the remaining useful life of the related asset.

2.3.7.4 Capital work in progress

Capital work in progress is stated at cost. It would be transferred to the relevant asset when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by Management. Capital work in progress is stated at cost less any accumulated impairment losses.

2.3.7.5 Borrowing costs

As per LKAS 23 on “Borrowing Costs”, the Bank capitalises the borrowing costs that are directly attributable to acquisition, construction or production of qualifying assets as part of the cost of the asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognised in the profit or loss in the period in which they occur.

2.3.7.6 De-recognition

Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “other operating income” in the income statement in the year the asset is derecognised.

2.3.7.7 Depreciation

Depreciation is calculated using the straight–line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

The class of assets	Useful life
Buildings	20 years
Computer hardware	3 years
Machinery and equipment	5 years
Motor vehicles	4 years
Furniture and fittings	5 years

2.3.8 Investment properties

Properties held to earn rental income have been classified as investment properties. Investment properties initially recognised at cost. After initial recognition the Bank uses the cost method to measure all of its investment property in according with requirements in LKAS 16 “Property, plant and equipment”.

Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner occupation, commencement of an operating lease to another party or completion of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner occupation or commencement of development with a view to sale.

Depreciation is calculated using the straight-line method to write down the cost of investment property to their residual values over their estimated useful lives. The estimated useful lives are as follows:

The class of assets	Useful life
Buildings	20 years

2.3.9 Asset classified as held for sale

Non-current assets are classified as investments - “held for sale” when their carrying amounts will be recovered principally through sale, they are available for sale in their present condition and their sale is highly probable. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of SLFRS 5 - “Non-current Assets Held for Sale and Discontinued Operations” such as deferred taxes, financial instruments, investment properties, insurance contracts and assets and liabilities arising from employee benefits.

2.3.10 Intangible assets

The Bank’s intangible assets include the value of computer software.

2.3.10.1 Basis of recognition

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank in accordance with LKAS 38 on “Intangible Assets”.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses if any.

2.3.10.2 Subsequent expenditure

Subsequent expenditure on intangible asset is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

2.3.10.3 Useful economic life, amortisation and impairment

The useful lives of intangible assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and they are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.

Amortisation

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual value over their estimated useful life as follows:

The class of intangible assets	Useful life
Computer software	7 years

The unamortised balances of intangible assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised in profit or loss to the extent that they are no longer probable of being recovered from the expected future benefits.

2.3.10.4 Derecognition

Intangible assets are derecognised on disposal or when no future economic benefits are expected from their use. Any gain or loss arising on derecognition of the asset, (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in the profit or loss in the year the asset is derecognised.

2.3.11 Impairment of non-financial assets

The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash–generating unit’s (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are 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. In determining fair value less costs to sell, an appropriate valuation model is used.

For assets, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Bank estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.

2.3.12 Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of Bank guarantees. Bank guarantees are initially recognised in the Financial Statements (within “other liabilities”) at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortisation recognised in the income statement, and the best estimate of expenditure required settling any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the income statement in “Credit loss expense”. The premium received is recognised in the income statement in “Net fees and commission income” on a straight-line basis over the life of the guarantee.

2.3.13 Provisions

Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement.

2.3.14 Retirement benefit obligations

2.3.14.1 Defined benefit plan- gratuity

Based on LKAS 19 on “Employee Benefits”, the Bank has adopted the actuarial valuation method for employee benefit liability an actuarial valuation is carried out every year to ascertain the liability. A separate fund is not maintained for this purpose.

The principal assumptions, which have the most significant effects on the valuation, are the rate of discount, rate of increase in salary, rate of turnover at the selected ages, rate of disability, death benefits and expenses.

The liability is measured on an actuarial basis using the projected unit credit method, adjusted for unrecognised actuarial gains and losses. The defined benefit plan liability is discounted using rates equivalent to the market yields at the date of statement of financial position that are denominated in the currency in which benefits will be paid, and that have a maturity approximating to the terms of the related pension liability.

The Bank recognises all actuarial gains and losses arising from the defined benefit plan in other comprehensive income (OCI) and all other expenses related to defined benefit plans are recognised as personnel expenses in income statement.

2.3.14.2 Defined contribution plan – Employees’ Provident Fund and Employees’ Trust Fund

Employees are eligible for Employees’ Provident Fund Contributions and Employees’ Trust Fund Contributions in line with the respective Statutes and Regulations. The Bank contributes a minimum 12% and 3%.

2.3.15 Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

2.3.15.1 Interest and similar income and expense

For all financial instruments measured at amortised cost, interest bearing financial assets classified as available for sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability.

The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as “Other operating income”. However, for a reclassified financial asset for which the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

2.3.15.2 Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight-line basis.

Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

2.3.15.3 Dividend income

Dividend income is recognised when the Bank’s right to receive the payment is established.

2.3.15.4 Net gain/(loss) from financial instruments

Net gain/(loss) from financial investments include capital gain/(loss) from trading and fair value gain/loss of financial investments at fair value through profit or loss.

2.3.15.5 Other operating income

Income earned on other sources, which are not directly related to the normal operations of the Bank are recognised as other operating income on accrual basis, such as gains on disposal of property, plant and equipment and foreign exchange gain/(loss).

2.3.16 Taxes

2.3.16.1 Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date.

2.3.16.2 Deferred tax

Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

2.3.16.3 Value Added Tax (VAT) on financial services

VAT on financial services is calculated in accordance with the Value Added Tax Act No.14 of 2002 and subsequent amendments thereto. The base for the computation of Value Added Tax on financial services is the accounting profit before income tax adjusted for the economic depreciation and emoluments of employees’ computed on prescribed rate. The VAT on financial services rate applied in 2020 is 15%
(2019 - 15%).

2.3.16.4 Withholding tax on dividends

Liability of withholding tax on dividend distributed by the Bank arises based on the declaration produced by the receiver of such dividend. If not no withholding liability exists.

2.3.16.5 Economic Service Charge (ESC)

As per the provisions of Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, the ESC is calculated on liable turnover. Currently, the ESC is payable at 0.5% and is deductible from the income tax payable. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the two subsequent years. This tax was abolished by the government with effect from 1 January 2020.

2.3.16.6 Crop Insurance Levy (CIL)

As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from 1 April 2013 and is payable to the National Insurance Trust Fund. Currently, CIL is payable at 1% of the profit after tax.

2.3.16.7 Nation Building Tax (NBT) on financial services

According to the Nation Building Tax Act, No. 09 of 2009 and subsequent amendments thereto, Nation Building Tax should be paid on the liable turnover with effect from 1 January 2014. NBT on financial services is calculated based on the value addition used for the purpose of VAT on financial services. The NBT rate applied up to 30 November 2019 is 2% and it was abolished with effect from 1 December 2019 by the Government.

2.3.16.8 Debts Repayments Levy (DRL)

DRL on financial services is calculated based on the total value addition used for the purpose of VAT on financial services in accordance with the Finance Act No. 35 of 2018 from 1 October 2018. The DRL rate applied in 2019 is 7%. This tax was abolished by the Government with effect from 1 January 2020.

2.3.17 Grants

Grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, it is recognised as deferred income and released to income in equal amounts over the expected useful life of the related asset.

2.3.18 Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.

Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the reporting date.

2.3.19 Equity reserves

The reserves recorded in equity on the Bank’s statement of financial position include:

“Available-for-sale/fair value through OCI” reserve which comprises changes in fair value of fair value through other comprehensive income investments.

2.3.20 Segment reporting

A segment is a distinguishable component of the Bank that is engaged in providing services (Business segments) or in providing services within a particular economic environment (Geographical segment) which is subject to risks and rewards that are different from those of other segments.

In accordance with the SLFRS 8 on “Segmental Reporting”, segmental information is presented in respect of the Bank based on Bank’s Management and internal reporting structure.

The Bank’s segmental reporting is based on the following operating segments.

Banking:	Individual customers’ deposits and consumer financing, equipment financing, home and property financing
Leasing:	Lease and hire purchase facility customers
Treasury:	Placements of funds with other banks and financial institutions, equity investments
Pawning:	Pawning advances to customers

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss of respective segment.

2.4 SRI LANKA ACCOUNTING STANDARDS NOT YET EFFECTIVE AS AT 31 DECEMBER 2020

The following new Sri Lanka Accounting Standards/amendments which have been issued by the Institute of Chartered Accountants of Sri Lanka is effective for annual periods beginning on or after 1 January 2021.

SLFRS 17 (Insurance Contracts)

SLFRS 17 “Insurance Contracts”, is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosures. Once effective, SLFRS 17 replaces existing SLFRS 4 “Insurance contracts”. The overall objective of SLFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers.

SLFRS 17 is effective for reporting periods beginning on or after 1 January 2021. Early application permitted, if the entity is applying SLFRS 16 and SLFRS 15 on or before the date in which it first applies SLFRS 17. This standard is not applicable to the Bank.

Amendments to SLFRS 9, LKAS 39, SLFRS 7, SLFRS 4 and SLFRS 16 – Interest Rate Benchmark Reform
(Phase 1 and 2)

The amendments to SLFRS 9 and LKAS 39 provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/ or amount of benchmark-based cash flows of the hedged item or the hedging instrument. IBOR reforms Phase 2 include number of reliefs and additional disclosures. Amendments supports companies in applying SLFRS when changes are made to contractual cash flows or hedging relationships because of the reform. These amendments are effective for the annual reporting periods beginning on or after 1 January 2021. The Bank is in the process of evaluating the impact of this amendment on Financial Statements.

For the year ended 31 December

	2020 LKR	2019 LKR
Interest income
Cash and cash equivalents	231,274,070	89,311,724
Placements with banks	307,023,206	760,109,685
Financial assets at amortised cost
– Loans and receivables to other customers	14,485,392,470	13,839,972,079
– Debt and other instruments*	410,448,333	382,677,549
Financial assets - fair value through profit or loss*	7,864,724	7,252,770
Total interest income	15,442,002,803	15,079,323,806

*Interest income earned from financial assets fair value through profit or loss classified under interest income on debt and other instruments in 31 December 2019 has been reclassified to interest income from financial assets -fair value through profit or loss and comparative figure in this Financial Statements is amended.

	2020 LKR	2019 LKR
Interest expenses
Financial liabilities at amortised cost
– Due to other customers	6,945,937,783	7,051,780,733
– Due to debt securities holders	98,141,850	98,141,850
– Other borrowers	1,730,533,552	1,891,915,771
– Subordinated term debt*	469,159,865	297,446,074
– Finance cost of lease liability	70,803,354	43,244,491
Total interest expenses	9,314,576,405	9,382,528,920
Net interest income	6,127,426,398	5,696,794,886

*Interest expense of subordinated term debt classified under interest expense of other borrowers in 31 December 2019 has been reclassified to interest expense of subordinated term debt and comparative figure in this Financial Statements is amended.

3.1 Net interest income from Sri Lanka Government Securities

	2020 LKR	2019 LKR
Net interest income from Sri Lanka Government Securities	381,193,368	325,074,604
Total	381,193,368	325,074,604

	2020 LKR	2019 LKR
Fee and commission income	390,619,231	237,656,461
Fee and commission expenses	(14,334,115)	(6,506,626)
Net fee and commission income	376,285,116	231,149,835

4.1 Net fee and commission earned from

	2020 LKR	2019 LKR
Loans	194,798,290	128,412,167
Deposits	1,897,389	1,591,602
Guarantees	1,284,435	1,885,322
Commission earned from insurance	86,849,822	21,692,391
Commission earned from ATM	30,724,671	17,724,505
Others	60,730,510	59,843,848
Net fee and commission income	376,285,116	231,149,835

	2020 LKR	2019 LKR
Quoted equities	(97,180)	–
Sri Lanka Government Securities – Treasury bills and treasury bonds	5,325,640	1,264,727
Total	5,228,460	1,264,727

	2020 LKR	2019 LKR
Sri Lanka Government Securities – Treasury bills and treasury bonds	12,304	(58,050)
Unit trust	268,514,699	114,947,499
Quoted equities	182,633	–
Total	268,709,636	114,889,449

	2020 LKR	2019 LKR
Gain on sale of property, plant and equipment	1,580,852	12,055,221
Dividend income	320,000	240,800
Account maintenance fees	50,179,417	75,675,472
Other income	3,146,834	2,997,292
Other operating income	55,227,102	90,968,785

8.1 Balances with Banks

	2020 LKR	2019 LKR
Stage 1	4,535,663	(267,938)
Total	4,535,663	(267,938)

8.2 Placements with banks

	2020 LKR	2019 LKR
Stage 1	(2,453,603)	(4,848,662)
Total	(2,453,603)	(4,848,662)

8.3 Financial assets at amortised cost – Loans and receivables to customers

	2020 LKR	2019 LKR
Stage 1	111,825,493	231,986,335
Stage 2	(9,875,249)	(105,851,634)
Stage 3	313,598,341	795,892,983
Total	415,548,585	922,027,684

8.4 Debt and other instruments

	2020 LKR	2019 LKR
Stage 1	(592,140)	522,422
Total	(592,140)	522,422

Total	417,038,505	917,433,506

	2020 LKR	2019 LKR
Salary and bonus	1,890,344,858	1,518,776,089
Contributions to defined contribution plans – EPF	230,132,935	202,665,907
– ETF	49,314,204	43,427,993
Contributions to defined benefit plans	99,882,738	92,127,811
Overtime	6,635,881	7,282,232
Staff welfare	33,477,284	29,112,351
Staff allowances	144,167,534	104,383,718
Others	122,817,867	118,571,829
Total	2,576,773,302	2,116,347,930

	2020 LKR	2019 LKR
Depreciation of property, plant and equipment	197,608,455	228,739,345
Amortisation of Right of use assets	188,930,704	182,256,972
Depreciation of investment property	1,056,030	1,056,030
Amortisation of intangible assets	66,973,809	19,140,249
Total	454,568,998	431,192,596

	2020 LKR	2019 LKR
Directors’ emoluments	31,230,800	22,346,444
Auditors’ remunerations	4,712,636	4,195,864
Professional and legal expenses	9,144,841	6,752,497
Office administration and establishment expenses	1,355,450,277	1,386,778,240
Total	1,400,538,554	1,420,073,045

11.1 Directors’ emoluments include fees paid to Non-executive Directors.

	2020 LKR	2019 LKR
Current tax expense
Income tax for the year	559,977,858	452,640,558
Adjustment in respect of current income tax of prior periods	15,336,343	31,203,942
Deferred taxation charge/(reversal)	1,328,535	(151,422,156)
Total	576,642,736	332,422,344

12.1 Reconciliation of tax expenses

	2020 LKR	2019 LKR
Profit before tax	1,412,930,083	585,827,440
Income tax for the period (Accounting profit @ 28%)	395,620,423	164,031,683
Income exempt from tax/or not taxable	(920,738)	(3,442,886)
Add: Tax effect of expenses that are not deductible for tax purposes	457,011,082	538,933,025
Less: Tax effect of expenses that are deductible for tax purposes	(451,869,016)	(288,309,630)
Add: Tax impact on leasing loss	160,136,108	41,428,366
Tax expense for the period	559,977,858	452,640,558
Adjustment in respect of current income tax of prior periods	15,336,343	31,203,942
Deferred taxation charge	1,328,535	(151,422,156)
At the effective income tax rate of 40.94% (2019 : 56.74%)	576,642,736	332,422,344

12.2 Deferred tax assets, liabilities and income tax relates to the followings:

	Statement of financial position		Statement of comprehensive income
	2020 LKR	2019 LKR	2020 LKR	2019 LKR
Deferred tax liability
Capital allowances for property, plant and equipment	45,319,503	50,479,669	(5,160,166)	34,841,965
Capital allowances for leased assets	111,998,871	100,495,732	11,503,139	(47,722,595)
	157,318,374	150,975,401	6,342,973	(12,880,630)
Deferred tax assets
Defined benefit plans	157,165,127	131,762,557	(25,402,570)	(32,403,311)
Impairment allowance	215,680,737	244,367,815	28,687,078	(110,456,104)
Right to use assets	16,145,034	7,326,690	(8,818,344)	(7,326,690)
	388,990,898	383,457,062	(5,533,836)	(150,186,105)
Deferred taxation charge/(reversal)			809,137	(163,066,735)
Net deferred tax liability/assets	(231,672,525)	(232,481,661)

12.2.1 Composition of deferred tax charge

	2020 LKR	2019 LKR
Impact on income tax expense	1,328,535	(151,422,156)
Impact on other comprehensive income	(519,397)	(11,644,579)
Total impact	809,137	(163,066,735)

12.3 New amendments to Income Tax Law

Based on the Circular No. SEC/2020/03 dated 19 May 2020 issued by Department of Inland Revenue, income tax rate applicable for the Banking sector has been reduced to 24% with effect from 1 January 2020. However, as the said amendment is yet to be enacted, both income tax and deferred tax provisions were calculated at the rate of 28% for the year ended 31 December 2020.

If the Bank considered the revised rate of 24% announced by the government in the computation of current and deferred tax, the income tax charge recognised in the profit and loss would have decreased by LKR 81 Mn. and the profitability of the year would be LKR 915 Mn.

Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary shareholders (after deducting preference share dividends, if any) by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year and the previous year are adjusted for events that have changed the number of ordinary shares outstanding, without a corresponding change in the resources such as a scrip dividend.

	2020 LKR	2019 LKR
Net profit for the period	836,287,347	253,405,096
Profit attributable to ordinary shareholders	836,287,347	253,405,096

	2020 Number	2019 Number
Weighted average number of ordinary shares in issue	75,700,321	56,308,252
	75,700,321	56,308,252
Basic/diluted earnings per ordinary share	11.05	4.50

The subordinated term debts detailed in Note 29 are resulted for anti-diluted earnings per share.

	2020 LKR	2019 LKR
Cash in hand	442,568,346	272,317,628
Balances with banks	9,203,236,671	2,157,826,360
Less : Impairment	(4,889,081)	(353,418)
Carrying value after impairment	9,640,915,936	2,429,790,570

14.1 Analysis of cash and cash equivalents based on exposure to credit risk

	Stage 1
	2020 LKR	2019 LKR
Cash and cash equivalents	9,645,805,017	2,430,143,988
Less: Impairment	(4,889,081)	(353,418)
Carrying value after impairment	9,640,915,936	2,429,790,570

14.2 Stage wise classification of impairment allowances of cash and cash equivalents

	Stage 1
	2020 LKR	2019 LKR
Opening balance as at 1 January	353,418	621,356
Charges/(write back) to income statement	4,535,663	(267,938)
Closing balance as at 31 December	4,889,081	353,418

14.3 Cash and cash equivalents for cash flow statement

	2020 LKR	2019 LKR
Cash and cash equivalents	9,640,915,936	2,429,790,570
Repurchase agreement	1,678,514,330	4,332,653,659
Fixed deposits less than 3 months	1,206,469,863	4,152,234,452
Total	12,525,900,129	10,914,678,681

	2020 LKR	2019 LKR
Placements with Banks	2,823,798,280	5,630,717,976
Less: Impairment	(169,828)	(2,623,431)
Carrying value after impairment	2,823,628,452	5,628,094,545

15.1 Analysis of placements with banks based on exposure to credit risk

	Stage 1
	2020 LKR	2019 LKR
Placements with banks	2,823,798,280	5,630,717,976
Less: Impairment allowance for placement	(169,828)	(2,623,431)
Carrying value after impairment	2,823,628,452	5,628,094,545

15.2 Stage wise classification of impairment allowances of placements with banks

	Stage 1
	2020 LKR	2019 LKR
Opening balance as at 1 January	2,623,431	7,472,093
Charges/(write back) to income statement	(2,453,603)	(4,848,662)
Closing balance as at 31 December	169,828	2,623,431

	2020 LKR	2019 LKR
Sri Lanka Government Securities – Treasury bills and Treasury bonds	7,628,946	46,519,350
Unit Trust	4,586,196,193	3,480,790,791
Quoted Equities (Note 16.1)	6,632,792	–
Total	4,600,457,930	3,527,310,141

16.1 Quoted Equities

	2020		2019
	Numberof shares	Market value LKR	Number of shares	Market value LKR
Commercial Bank of Ceylon PLC	7,500	606,750	–	–
Sampath Bank PLC	5,000	678,000	–	–
Hatton National Bank PLC	6,000	759,000	–	–
DFCC Bank PLC	20,000	1,306,000	–	–
John Keels Holdings PLC	5,200	777,920	–	–
Richard Pieris and Company PLC	33,431	498,122	–	–
Access Engineering PLC	40,000	984,000	–	–
Tokyo Cement Company (Lanka) PLC	15,000	1,023,000	–	–
		6,632,792		–

	2020 LKR	2019 LKR
Gross loans and receivables (Note 17.1)	105,975,283,350	88,720,800,911
Less: Individual impairment	(1,132,358,785)	(891,669,149)
Collective impairment	(2,180,655,849)	(2,005,796,900)
Net loans and receivables	102,662,268,716	85,823,334,862

17.1 Analysis of loans and receivables to other customers based on exposure to credit risk

	2020
	Stage 1 LKR	Stage 2 LKR	Stage 3 LKR	Total LKR
Individual impairment loans
Term loans	–	–	2,254,914,468	2,254,914,468
Leasing	–	–	495,117,862	495,117,862
Collective impairment loans
Pawning	2,332,753,070	57,538,316	1,547,355	2,391,838,740
Cash margin	4,355,333,082	440,956,245	7,352,414	4,803,641,741
Staff loans	1,367,230,779	–	3,831,428	1,371,062,206
Term loans
Business	1,444,229,174	68,695,224	292,777,428	1,805,701,826
Co-operative	2,921,781,840	40,810,944	167,580,282	3,130,173,066
Housing	2,607,489,772	446,356,367	226,462,312	3,280,308,450
Personal	11,429,091,118	59,912,131	404,769,767	11,893,773,016
Fixed and floating	25,359,626,981	714,812,380	1,594,202,626	27,668,641,988
SME	12,699,608,362	125,122,198	933,595,333	13,758,325,892
Upahara	24,326,579,966	25,453,790	32,755,833	24,384,789,589
Lease rentals receivables	6,806,798,551	1,557,455,093	372,740,860	8,736,994,504
Gross loans and receivables	95,650,522,696	3,537,112,688	6,787,647,966	105,975,283,350
Less: Impairment allowance	(662,089,944)	(154,078,607)	(2,496,846,083)	(3,313,014,634)
Net loans and receivables	94,988,432,752	3,383,034,080	4,290,801,883	102,662,268,716

	2019
	Stage 1 LKR	Stage 2 LKR	Stage 3 LKR	Total LKR
Individual impairment loans
Term loans	–	–	2,429,448,220	2,429,448,220
Leasing	–	–	347,461,848	347,461,848
Collective impairment loans
Pawning	1,659,484,155	30,675,731	22,012,069	1,712,171,954
Cash margin	4,645,118,340	793,272,466	4,963,166	5,443,353,971
Staff loans	1,252,923,774	4,610,333	22,812,160	1,280,346,267
Term loans
Business	10,338,753,420	238,259,107	898,766,510	11,475,779,037
Co-operative	2,100,930,848	101,685,565	82,598,336	2,285,214,749
Housing	2,638,550,309	456,060,240	221,438,389	3,316,048,938
Personal	51,175,819,323	923,660,778	1,888,639,373	53,988,119,475
Lease rentals receivables	4,398,092,872	1,774,794,840	269,968,740	6,442,856,452
Gross loans and receivables	78,209,673,042	4,323,019,060	6,188,108,809	88,720,800,911
Less: Impairment allowance	(550,264,452)	(163,953,856)	(2,183,247,741)	(2,897,466,049)
Net loans and receivables	77,659,408,590	4,159,065,203	4,004,861,069	85,823,334,862

17.2 Gross loans and receivables analysis by product

	2020 LKR	2019 LKR
Loans and receivables
Pawning	2,391,838,740	1,712,171,954
Cash margin	4,803,641,741	5,443,353,971
Staff loans	1,371,062,206	1,280,346,267
Term loans
Business	2,370,290,386	13,255,022,223
Co-operative	3,456,889,798	2,775,250,944
Housing	3,459,462,932	3,416,424,007
Personal	11,978,621,714	54,047,913,244
Fixed and floating	27,716,929,759	–
SME	14,775,622,413	–
Upahara	24,418,811,294	–
Lease rentals receivable (Note 17.2.1)	9,232,112,366	6,790,318,300
Gross total	105,975,283,350	88,720,800,911

17.2.1 Lease rentals receivable

	2020 LKR	2019 LKR
Gross lease receivable within one year	5,219,365,506	3,779,379,642
Unearned income on rentals receivable	(1,439,705,604)	(1,162,403,578)
Gross lease receivable within one year	3,779,659,902	2,616,976,064
Gross lease receivable after one year	6,874,727,831	5,219,997,382
Unearned income on rentals receivable	(1,422,275,366)	(1,046,655,146)
Gross lease receivable after one year	5,452,452,465	4,173,342,236
Total gross lease receivable	9,232,112,366	6,790,318,300

17.3 Gross loans and receivables analysis by currency

	2020 LKR	2019 LKR
Sri Lankan Rupee	105,975,283,350	88,720,800,911
Gross total	105,975,283,350	88,720,800,911

17.4 Analysis of loans and receivables to other customers based on exposure to credit risk

	2020 LKR	2019 LKR
Stage 1
Opening balance as at 1 January	550,264,452	318,278,117
Charges/(write back) to income statement	111,825,493	231,986,335
Closing balance as at 31 December	662,089,944	550,264,452
Stage 2
Opening balance as at 1 January	163,953,856	269,805,490
Charges/(write back) to income statement	(9,875,249)	(105,851,634)
Closing balance as at 31 December	154,078,607	163,953,856
Stage 3
Opening balance as at 1 January	2,183,247,741	1,387,354,758
Charges/(write back) to income statement	313,598,341	795,892,983
Closing balance as at 31 December	2,496,846,083	2,183,247,741

17.5 Movement in individual and collective impairment

	Individual impairment LKR	Collective impairment LKR	Total Impairment LKR
Opening balance as at 1 January 2019	350,360,455	1,625,077,910	1,975,438,365
Charge/(write back) to income statement	541,308,694	380,718,990	922,027,684
Recovery/(write-off) during the year	–	–	–
Closing balance as at 31 December 2019	891,669,149	2,005,796,900	2,897,466,049
Opening balance as at 1 January 2020	891,669,149	2,005,796,900	2,897,466,049
Charge/(write back) to income statement	240,689,636	174,858,950	415,548,586
Recovery/(write-off) during the year	–	–	–
Closing balance as at 31 December 2020	1,132,358,785	2,180,655,849	3,313,014,634

17.6 Based on the impairment model revalidation, product segmentation has been re-organised after evaluating the credit risk characteristics of loan facilities. Analysis of loans and advances, commitments, contingencies and impairment mentioned in Note 17.1 and 17.2 has disclosed the product segmentation as at 31 December 2020, after validating the impairment model. The Bank estimated Expected Credit Loss (ECL) as at
31 December 2020, based on the Probability of Default (PD), Loss Given Default (LGD) and Economic Factor Adjustment (EFA) computed as at
31 December 2020, after revalidating the impairment model.

	2020 LKR	2019 LKR
Debentures	54,315,068	93,473,535
Repurchase agreement	1,678,514,330	4,332,653,659
Treasury bill	3,259,652,440	1,771,722,268
Commercial papers	251,635,274	801,779,452
Less: Impairment	(111,894)	(704,033)
Carrying value after impairment	5,244,005,218	6,998,924,881

18.1 Analysis of debt and other instruments based on exposure to credit risk

	Stage 1
	2020 LKR	2019 LKR
Debentures	54,315,068	93,473,535
Repurchase agreement	1,678,514,330	4,332,653,659
Treasury bill	3,259,652,440	1,771,722,268
Commercial papers	251,635,274	801,779,452
Less: Impairment allowance	(111,894)	(704,033)
Carrying value after impairment	5,244,005,218	6,998,924,881

18.2 Stage wise classification of impairment allowances of debt and other instruments

	Stage 1
	2020 LKR	2019 LKR
Opening balance as at 1 January	704,033	181,611
Charges/(write back) to income statement	(592,140)	522,422
Closing balance as at 31 December	111,894	704,033

	2020 LKR	2019 LKR
Unquoted equity securities ( Note 19.1)	56,938,514	56,938,514
Financial assets measured at fair value through other comprehensive income	56,938,514	56,938,514

19.1 Unquoted equity securities

	2020		2019
	Number of shares	Amount LKR	Number of shares	Amount LKR
SANASA Insurance Company Limited	7,590,494	75,904,944	7,590,494	75,904,944
Credit Information Bureau of Sri Lanka	100	10,000	100	10,000
Consorzio Etimos S.C.	2	75,194	2	75,194
Loss from mark to market valuation as at 31 December market value		(19,051,624)		(19,051,624)
		56,938,514		56,938,514

19.1.1 Movement in unquoted equity securities

	2020 LKR	2019 LKR
Opening Balance as at 1 January	56,938,514	60,148,048
Investments made during the year	–	–
Disposal during the year	–	–
Loss from mark to market valuation	–	(3,209,534)
Closing balance as at 31 December	56,938,514	56,938,514

19.1.2 Valuation of unquoted equity securities

Type	Level	Method of valuation	Significant unobservable inputs	Sensitivity of fair value to unobservable inputs
Unquoted share investment	Level 3	Market approach – Price to book value of comparable peer companies	Medium price to book value – liquidity discount	Positively correlated sensitivity
			Regulatory non-compliance adjustment	Positively correlated sensitivity

	2020 LKR	2019 LKR
Unquoted equity investments	6,163,100	–
	6,163,100	–

20.1 Valuation of unquoted equity securities

Investment in Subsidiary includes the investment made by the Bank in Payment Services (Private) Limited, amounting to LKR 6,163,100/-.
Payment Services (Private) Limited was the operator of Upay digital solution App prior to purchase of this App by Sanasa Development Bank PLC on 10 June 2019. With this acquisition, Payment Services (Private) Limited has become a fully owned subsidiary of Sanasa Development Bank PLC, with effect from 26 May 2020. Since this investment is immaterial, Bank does not prepare the consolidated Financial Statements.

2020	Land and buildings LKR	Leasehold properties LKR	Computer hardware LKR	Machinery and equipment LKR	Furniture and fittings LKR	Motor vehicles LKR	Total LKR
Cost
Opening balance as at 1 January 2020	251,979,214	–	833,329,077	527,663,533	399,672,470	162,806,153	2,175,450,447
Additions	–	–	156,320,640	28,307,773	29,478,399	624,900	214,731,711
Disposals	–	–	(6,396,595)	(5,694,452)	(14,955,074)	(3,937,519)	(30,983,640)
Closing balance as at 31 December 2020	251,979,214	–	983,253,122	550,276,854	414,195,794	159,493,534	2,359,198,519
Less: Accumulated depreciation
Opening balance as at 1 January 2020	35,470,471	–	679,183,494	432,520,517	258,215,416	124,829,105	1,530,219,002
Charge for the year	1,804,029	–	87,767,502	39,069,904	53,648,060	15,318,959	197,608,455
Disposals	–	–	(7,176,713)	(5,249,347)	(13,959,908)	(3,937,513)	(30,323,481)
Closing balance as at 31 December 2020	37,274,500	–	759,774,284	466,341,075	297,903,568	136,210,551	1,697,503,977

2019	Land and buildings LKR	Leasehold properties LKR	Computer hardware LKR	Machinery and equipment LKR	Furniture and fittings LKR	Motor vehicles LKR	Total LKR
Cost
Opening balance as at 1 January 2019	251,979,214	590,000	770,392,814	502,015,293	375,412,047	155,821,731	2,056,211,099
Additions	–	–	70,837,633	33,733,536	42,058,542	25,015,227	171,644,938
Disposals	–	(590,000)	(7,901,370)	(8,085,296)	(17,798,119)	(18,030,805)	(52,405,590)
Closing balance as at 31 December 2019	251,979,214	–	833,329,077	527,663,533	399,672,470	162,806,153	2,175,450,447
Less: Accumulated depreciation
Opening balance as at 1 January 2019	31,597,097	590,000	578,596,828	394,948,782	222,178,506	123,561,393	1,351,472,606
Charge for the year	3,873,373	–	108,488,036	44,865,376	53,138,582	18,373,979	228,739,345
Disposals	–	(590,000)	(7,901,370)	(7,293,641)	(17,101,672)	(17,106,267)	(49,992,949)
Closing balance as at 31 December 2019	35,470,471	–	679,183,494	432,520,517	258,215,416	124,829,105	1,530,219,002

	Land and buildings LKR	Leasehold properties LKR	Computer hardware LKR	Machinery and equipment LKR	Furniture and fittings LKR	Motor vehicles LKR	Total LKR
Net book value as at 31 December 2020	214,704,713	–	223,478,838	83,935,780	116,292,227	23,282,983	661,694,541
Net book value as at 31 December 2019	216,508,744	–	154,145,583	95,143,016	141,457,054	37,977,048	645,231,444

21.1 Freehold land and buildings

The details of the Land and Buildings owned by the Bank are as follows:

Location/Address			As at 31 December 2020		As at 31 December 2019
	Extent		Cost		Cost
	Land (Purchase)	Building (Square feet)	Land LKR	Building LKR	Land LKR	Building LKR
No. 14, Edmonton Road, Kirulapone	17.85	–	38,999,000	–	38,999,000	–
No. 12/01, Edmonton Road, Kirulapone	18.05	–	46,799,000	–	46,799,000	–
A1, SANASA Housing Project, Toppass, Nuwara Eliya	14	1,200	400,000	2,100,000	400,000	2,100,000
No. 145, Rathnapura Road, Horana	13	5,956	20,539,000	6,500,000	20,539,000	6,500,000
No. 63A, Matara Road, Akuressa	14	3,728	14,423,820	8,975,180	14,423,820	8,975,180
No. 255, Sunnysaid Garden, Karapitiya	18.50	5,992	9,250,000	20,833,360	9,250,000	20,833,360
No. 342, Main Street, Kegalle	13.25	5,580	34,760,400	14,118,600	34,760,400	14,118,600
No. 6/176, Walauwatta, Kegalle	20	–	16,639,000	–	16,639,000	–
No. 5/176, Walauwatta, Kegalle	12	1,334	8,400,000	1,250,000	8,400,000	1,250,000
SANASA Campus Ltd, Paragammana, Hettimulla, Kegalle	320	2,600	1,002,912	4,568,824	1,002,912	4,568,824
60/65, Sahasapura Scheme, Baseline Mawatha, Borella	–	1,006	–	2,420,118	–	2,420,118
			191,213,132	60,766,082	191,213,132	60,766,082

21.2 During the financial year, the Bank acquired property, plant and equipment to the aggregate value of LKR 214,731,711/- (2019 – LKR 171,644,938/-). Cash payments amounting to LKR 214,731,711/- (2019 – LKR 171,644,938/-) were made during the year for purchase of property, plant and equipment.

21.3 Property, plant and equipment includes fully depreciated assets having a gross carrying amounts of LKR 1,489,104,298.04/- (2019 – LKR 1,267,939,427/-)

21.4 There were no restrictions on the title of the property, plant and equipment as at 31 December 2020.

21.5 There were no idle property, plant and equipment as at 31 December 2020.

	2020 LKR	2019 LKR
Cost
Opening balance as at 1 January /Day 1 impact from the adoption of SLFRS 16	833,527,720	585,725,102
Additions and improvements during the year	227,306,162	247,802,618
Closing balance as at 31 December	1,060,833,882	833,527,720
Less: Accumulated amortisation
Opening balance as at 1 January	182,256,972	–
Amortisation expenses for the year	188,930,704	182,256,972
Closing balance as at 31 December	371,187,676	182,256,972
Net book value as at 31 December	689,646,206	651,270,748

	2020 LKR	2019 LKR
Cost
Opening balance as at 1 January	35,359,000	35,359,000
Additions	–	–
Closing balance as at 31 December	35,359,000	35,359,000
Less: Accumulated depreciation
Opening balance as at 1 January	14,080,400	13,024,370
Charge for the year	1,056,030	1,056,030
Closing balance as at 31 December	15,136,430	14,080,400
Net book value as at 31 December	20,222,570	21,278,600

23.1 The details of the investment properties owned by the Bank are as follows:

	Extent		31 December 2020 Cost		31 December 2019 Cost
Location/Address	Land (Purchase)	Building (Square feet)	Land LKR	Building LKR	Land LKR	Building LKR
No. 6 A/176, Walauwatta, Kegalle	28	8,233.5	14,238,400	21,120,600	14,238,400	21,120,600
			14,238,400	21,120,600	14,238,400	21,120,600

23.2 There were no direct operating expenses arising from investment property that generated retain income and that did not generate material rental income.

23.3 Assets classified as investment properties include land and building located in Kegalle. Market value (Level 3) of the above asset is
LKR 68,861,600/-. Valuation was carried out by H A V S Indrajith independendent Professional Valuer on 8 July 2020. Market comparable method is used for value the property and rate per perch is LKR 1,000,000/-.

	2020 LKR	2019 LKR
Cost
Opening balance as at 1 January	535,786,769	211,929,704
Additions	153,652,601	323,857,065
Closing balance as at 31 December	689,439,370	535,786,769
Less: Accumulated amortisation
Opening balance as at 1 January	227,342,228	208,201,979
Charge for the year	66,973,809	19,140,249
Closing balance as at 31 December	294,316,037	227,342,228
Net book value as at 31 December	395,123,333	308,444,541

24.1 There were no idle Intangible assets as at 31 December 2020.

24.2 There were no restrictions on the title of the intangible assets as at 31 December 2020.

	2020 LKR	2019 LKR
Postage legal and other charges receivable	83,460,055	74,976,255
Prepaid staff cost	821,576,375	718,181,850
Deposits, prepayments and other receivables	982,002,736	586,153,879
Inventory	139,947,910	81,211,838
Total	2,026,987,076	1,460,523,822

	2020 LKR	2019 LKR
Total amount due to other customers	93,271,727,185	72,431,923,465
Total	93,271,727,185	72,431,923,465

26.1 Analysis of due to other customers

	2020 LKR	2019 LKR
By product
Savings deposits	21,159,867,045	15,540,255,346
Fixed deposits	72,111,860,140	56,891,668,119
Total	93,271,727,185	72,431,923,465

	2020 LKR	2019 LKR
By currency
Sri Lanka Rupee	93,271,727,185	72,431,923,465
Total	93,271,727,185	72,431,923,465

	Note	2020 LKR	2019 LKR
Money market borrowings	27.1	751,685,519	–
Term loan	27.2	13,827,169,416	16,735,146,458
Securitised borrowings	27.3	752,415,249	1,322,982,880
Refinance borrowing	27.4	2,759,229,790	2,241,588,630
Total		18,090,499,974	20,299,717,968

27.1 Money market borrowings

	2020 LKR	2019 LKR
National Development Bank PLC	250,854,918	–
Sampath Bank PLC	500,830,601	–
	751,685,519	–

27.2 Details of term loans

Institution	Fixed/ Floating	Tenure (Months)	2020 LKR	2019 LKR
National Savings Bank	Floating	48	–	207,769,764
National Savings Bank	Floating	48	832,400,000	1,332,800,000
Sampath Bank PLC	Floating	60	–	58,409,645
Sampath Bank PLC	Floating	60	–	58,409,645
Sampath Bank PLC	Floating	60	100,096,320	200,375,404
Sampath Bank PLC	Floating	60	116,785,715	217,076,694
Sampath Bank PLC	Floating	60	1,468,489,180	1,870,318,174
Seylan Bank PLC	Floating	48	281,688,026	407,168,242
Seylan Bank PLC	Floating	60	411,289,537	617,216,681
Seylan Bank PLC	Floating	48	554,086,580	810,352,488
Seylan Bank PLC	Floating	60	800,617,196	1,003,945,205
Seylan Bank PLC	Floating	60	400,428,751	501,972,603
Seylan Bank PLC	Floating	36	751,170,126	–
Seylan Bank PLC	Fixed	31	1,004,207,650	–
Seylan Bank PLC	Fixed	34	500,075,137	–
DFCC Bank	Floating	48	198,094,025	323,578,596
DFCC Bank	Floating	48	239,637,002	364,832,444
Peoples Bank	Floating	60	–	357,154,938
Peoples Bank	Floating	3	–	504,238,356
Peoples Bank	Floating	3	–	500,160,137
Peoples Bank	Fixed	90	1,000,414,208	–
MCB Bank Ltd	Floating	60	41,258,397	91,379,307
HNB Bank PLC	Floating	48	62,739,268	313,329,431
HNB Bank PLC	Floating	48	719,032,787	1,094,441,610
NDB Bank PLC	Fixed	1	–	150,749,589
NDB Bank PLC	Fixed	1	–	301,499,178
NDB Bank PLC	Fixed	1	–	150,562,192
NDB Bank PLC	Fixed	1	–	100,374,795
NDB Bank PLC	Fixed	1	–	300,090,411
Bank of Ceylon	Floating	60	1,113,153,928	1,403,234,192
Nations Trust Bank PLC	Floating	48	688,880,007	940,066,488
Cargill’s Bank	Floating	90	801,040,437	–
The International Finance Corporation (IFC)	Fixed	60	1,343,174,011	1,889,186,294
The Netherlands Development Finance Company (FMO)	Floating	52	398,411,132	664,453,956
			13,827,169,416	16,735,146,458

27.2.1 Movement in term loans

	Opening balance as at 1 January 2020 LKR	Obtained during year LKR	Repayment LKR	Closing balanc e as at 31 December 2020 LKR
National Savings Bank	1,540,500,000	–	(708,100,000)	832,400,000
Sampath Bank PLC	2,399,882,667	–	(716,612,000)	1,683,270,667
Seylan Bank PLC	3,330,625,006	3,500,000,000	(2,135,972,992)	4,694,652,014
Peoples Bank	1,355,248,857	2,000,000,000	(2,355,248,858)	999,999,999
MCB Bank Ltd	91,350,000	–	(50,100,000)	41,250,000
HNB Bank PLC	1,406,360,000	–	(624,960,000)	781,400,000
NDB Bank PLC	1,000,000,000	6,600,000,000	(7,600,000,000)	–
DFCC Bank	687,499,990	–	(250,000,008)	437,499,982
Bank of Ceylon	1,400,000,000	–	(288,000,000)	1,112,000,000
Nations Trust Bank	937,498,000	–	(250,008,000)	687,490,000
Cargill’s Bank	–	800,000,000	–	800,000,000
FMO	661,093,398	–	(264,437,359)	396,656,039
IFC	1,813,000,005	–	(517,999,995)	1,295,000,010
Interest Payable	112,088,534	–	–	65,550,705
	16,735,146,458	12,900,000,000	(15,761,439,212)	13,827,169,416

27.3 Securitised borrowings

	2020 LKR	2019 LKR
Trust 2	–	373,969,439
Trust 3	752,415,249	949,013,441
Total	752,415,249	1,322,982,880

27.4 Refinance borrowings

	2020 LKR	2019 LKR
SANASA Federation (Refinance of Athwela Loans)	54,200,000	54,200,000
Central Bank of Sri Lanka (Susahana)	80,827	80,827
Asian Development Bank (Dasuna)	19,658	19,658
Borrowings under Refinance of Jayatha	296,114,047	475,435,470
Borrowing under Awakaning North	–	145,825
Borrowing under Saubagya	970,783,726	1,231,893,619
Borrowing under SPENDP	–	72,000
Borrowing – Refinance Smile III	422,652,400	439,890,700
Borrowing – Refinance Sepi	1,200,000	1,900,000
Borrowing – Suwashakthi Loan	10,913,251	2,616,328
Borrowing – Athwela (READ)	8,495,001	21,118,334
Borrowing – Kapruka Ayojana	15,349,335	14,215,870
Borrowing – SAPP 4P Youth Loan	22,739,170	–
Borrowing – Saubagya COVID-19	918,051,417	–
Borrowing – SAPP RF Income Loan	3,108,337	–
Borrowing – SAPP 4P Agri Loan	35,522,621	–
	2,759,229,790	2,241,588,630

27.4.1 Maturity analysis of refinance borrowings

	2020 LKR	2019 LKR
Due within one year	1,299,259,312	845,552,922
1-5 years	1,455,234,378	1,377,200,599
After 5 years	4,736,100	18,705,800
	2,759,229,790	2,241,459,321

27.5 Securities and terms of borrowings

Interest rate ranging for above borrowings 0% to 12.40% per annum.

Bank has pledged from the lease portfolio sum of LKR 974,849,643/- (2019 – LKR 1,222,145,124/-) for the securitised borrowings.

Bank has pledged from the loan portfolio sum of LKR 4,700,438,624/- (2019 – LKR 5,571,629,344/-) for other borrowings.

	2020 LKR	2019 LKR
Debentures	1,013,899,072	1,014,034,248
Total	1,013,899,072	1,014,034,248

28.1 Types of debentures (Fixed)

(i) Rated Guaranteed Redeemable Debentures of LKR 100 each – Guaranteed by Sampath Bank PLC. The debentures are quoted on the Colombo Stock Exchange. (Rated (SL)A+ (SO) with a Stable Outlook by ICRA Lanka Limited)

Type	Interest payable frequency	Issue date	Maturity date	Annual effective rate (AER) %	Face value LKR	Interest payable LKR	Balance LKR
B	Semi Annually	31 December 2015	31 December 2020	10.25	402,610,000	20,240,503	422,850,503

(ii) Rated Guaranteed Redeemable Debentures of LKR 100 each – Guaranteed by Seylan Bank PLC. The debentures are quoted on the Colombo Stock Exchange. (Rated (SL)A- (SO) with a Stable Outlook by ICRA Lanka Limited)

Type	Interest payable frequency	Issue date	Maturity date	Annual effective rate (AER) %	Face value LKR	Interest payable LKR	Balance LKR
D	Semi Annually	31 December 2015	31 December 2020	10.57	561,950,000	29,098,569	591,048,569
					964,560,000	49,339,072	1,013,899,072

*The debenture value presented in this financial statements was matured and fully paid off on 3 January 2021. The total payment amount was LKR 1,013,899,072/-

	2020 LKR	2019 LKR
Subordinated term debts	4,052,630,214	4,210,565,525
Total	4,052,630,214	4,210,565,525

29.1 Details of subordinated term debts

Investor	Tenor/Repayment	Interest Rate	2020 LKR	2019 LKR
FMO	Repayment or conversion after 66 months	6-month T-bill rate + 550 basis points Payable per annum	103,911,945	316,124,625
SBI-FMO	Repayment or conversion after 66 months	6-month T-bill rate + 450 basis points Payable per annum	700,083,977	705,239,278
DGGF	Repayment or conversion after 60 months	6-month T-bill rate+700 basis points Payable per annum	1,766,631,730	1,768,988,516
BIO	Repayment or conversion after 60 months	6-month LIBOR + 550 basis points Payable per annum	1,522,742,899	1,453,890,011
Less: Initial transaction cost			(40,740,336)	(33,676,905)
Total			4,052,630,214	4,210,565,525

30.1 Defined benefit liability

	2020 LKR	2019 LKR
Defined benefit liability (Note 30.1.1)	571,382,319	479,575,300
Total	571,382,319	479,575,300

30.1.1 Movement in defined benefit obligation

	2020 LKR	2019 LKR
Opening balance as at 1 January	479,575,300	354,854,450
Net benefit expense (Note 30.1.2)	101,737,729	133,715,592
Benefit paid	(9,930,710)	(8,994,741)
Closing balance as at 31 December	571,382,319	479,575,300

30.1.2 Net benefit expense

	2020 LKR	2019 LKR
Interest cost	49,156,468	43,647,097
Current service cost	50,726,270	48,480,714
	99,882,738	92,127,811
Amounts recognised in the other comprehensive income
Actuarial gain/(loss) on obligations	1,854,991	41,587,781
Total expense for the year	101,737,729	133,715,592

30.1.3 The principal financial assumptions used are as follows:

Messrs. Piyal S Goonetilleke Actuaries, carried out an actuarial valuation of the defined benefit plan gratuity on 31 December 2020. Appropriate and compatible assumptions were used in determining the cost of retirement benefits. The principal assumptions used are as follows:

	2020	2019
Long term interest rate (%)	7.90	10.25
Future salary increase rate (%)	5.90	7.75
Retirement age (years)	55	55

Mortality – GA 1983 Mortality Table issued by the Institute of Actuaries London. The weighted average duration of the defined benefit plan obligation at the end of the reporting period is 8.9 years.

30.2 Sensitivity analysis on discounting rate and salary increment rate to Statement of Financial Position and Comprehensive Income

		2020		2019
Assumption	Rate change	Impact to financial position- increment/(reduction) of liability	Impact to Comprehensive Income-Charged/ (reversal)	Impact to financial position increment/(reduction) of liability	Impact to comprehensive income-charged/ (reversal)
Discount rate	1+	(42,970,663)	(42,970,663)	(35,226,669)	(35,226,669)
Discount rate	1-	49,433,619	49,433,619	40,392,239	40,392,239
Salary increment rate	1+	48,274,568	48,274,568	39,697,560	39,697,560
Salary increment rate	1-	(42,740,293)	(42,740,293)	(35,236,014)	(35,236,014)

30.3 The expected benefit payout in the future years of retirement gratuity

	2020 LKR	2019 LKR
Within next 12 months	51,215,732	44,481,682
Between 2 and 5 years	280,212,360	342,084,695
Beyond 5 years	413,682,631	350,405,795

	2020 LKR	2019 LKR
Special purpose project funds	399,455,755	405,698,608
Lease liability (Note 31.1)	654,139,519	591,658,015
Accruals and other payables	815,599,326	494,402,117
Total	1,869,194,600	1,491,758,740

31.1 Movement in lease liabilities

	2020 LKR	2019 LKR
Opening balance as at 1 January/Effect of adoption of SLFRS 16 as at 1 January	591,658,015	472,702,962
Additions	199,964,762	239,253,218
Accretion of interest	70,803,354	43,244,491
Payments during the year	(208,286,613)	(163,542,656)
Closing balance as at 31 December	654,139,519	591,658,015

31.2 Maturity analysis of lease liabilities

	2020 LKR	2019 LKR
Less than 1 year	71,920,305	9,731,499
Between 1 and 5 years	322,912,470	345,051,391
More than 5 years	259,306,744	236,875,125
Total lease liabilities as at 31 December	654,139,519	591,658,015

	2020 LKR	2019 LKR
Ordinary shares – Issued and fully paid	7,727,941,021	5,921,538,126
Total	7,727,941,021	5,921,538,126

32.1 Details of ordinary shares issued and fully paid

	Value		Number of shares
	2020 LKR	2019 LKR	2020 LKR	2019 LKR
Balance as at 1 January	5,921,538,126	5,921,538,126	56,308,252	56,308,252
Rights issue	1,526,267,201	–	30,525,344	–
Scrip dividend	280,135,695	–	4,742,436	–
Balance as at 31 December	7,727,941,022	5,921,538,126	91,576,032	56,308,252

Rights issue

30,525,344 ordinary shares of the Bank had been listed/allotted w.e.f. 4 December 2020, pursuant to the Rights issue 2020 in the proportion of 1: 2 at the consideration of LKR 50/-.

Scrip dividend

4,742,436 ordinary shares of the Bank had been listed w.e.f. 27 July 2020, pursuant to a Scrip dividend 2019 in the proportion of 1: 11.8140022617.

	2020 LKR	2019 LKR
Opening balance as at 1 January	228,281,724	215,611,469
Transfer during the period	41,727,392	12,670,255
Closing balance as at 31 December	270,009,115	228,281,724

	2020 LKR	2019 LKR
Opening balance as at 1 January	1,491,553,906	1,280,762,267
Profit for the year	834,951,754	223,461,894
Transfers to other reserves	(41,727,392)	(12,670,255)
Scrip dividend	(280,135,695)	–
Cash dividend	(114,022,069)	–
Closing balance as at 31 December	1,890,620,504	1,491,553,906
Dividend per share	–	7.00

2020	Opening balance as at 1 January 2020 LKR	Movement/ transfers LKR	Closing balance as at 31 December 2020 LKR
General reserve	46,656,973	–	46,656,973
Available for sale/fair value through OCI reserve	(19,051,624)	–	(19,051,624)
Total	27,605,349	–	27,605,349

2019	Opening balance as at 1 January 2019 LKR	Movement/ transfers LKR	Closing balance as at 31 December 2019 LKR
General reserve	46,656,973	–	46,656,973
Available-for-sale/fair value through OCI reserve	(15,842,090)	(3,209,534)	(19,051,624)
Total	30,814,883	(3,209,534)	27,605,349

36.1 Bank guarantees

	2020 LKR	2019 LKR
Bank guarantees	194,553,577	177,752,357
Total	194,553,577	177,752,357

36.2 Litigation Against the Bank

Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing. At the year end, the Bank had several unresolved legal claims.

Following cases are filed against the Bank:

Legal status	Case numbers
1. Cases filed against the Bank with respect to mortgaged property and title of property
– District courts	L 17/11, DMR 496/15,
	M/10238, MB/1935
	6940/P, 218/L , 7628/T
	DMB/0124/08, L/528, 371/L
2. Cases filed against the Bank to restraining the payment of Bank Guarantee Bonds
– District Court	2440/M
3. Appeals filed by the customers against the court orders delivered favour to Bank
– District Court	DMB/005/16
– High Court Civil Appeal	HCCA/82/2017 (F)
4. Cases filed by customers to obtain injunction orders to restraining the auction of property mortgaged
– Commercial High Court	CHC/629/19/MR
– Supreme Court	CHC/955/18
5. Cases filed against the Bank over the repossession of vehicles
– District Court	SPL/2321
6. Cases filed against the Bank over the loan facilities to claiming right for the ceased assets by the guarantors
– District Court	207/CL, 31/18 CL, 17615/M/17
	17613/M/17, 13/17/CL, 53/CL
	551/CL, 552/CL, 553/CL
7. Cases filed against the Bank by the employees and former Directors
– District Court	DMR/4015/17, 6495/SPL
– Labour Tribunal	LT/BT/344/2017
	LT/JF/163/2020, LT/13/61/2020
8. Cases filed against the Bank by other parties
– District Court	M/10933/20, M/10972/20

Other than those disclosed above there are no cases filed against the Bank which would have material impact on the financial position of the Bank.

There are no material events after the reporting date that require adjustments to or disclosure in the Financial Statements.

The Bank carries out transaction in the ordinary course of business with the parties who are defined as related parties in the Sri Lanka Accounting Standard – LKAS 24 on “Related Party Disclosures”, the details of which are reported below: The Bank carries out transactions in the ordinary course of business on an arm’s length basis at commercial rates with related parties who are defined as LKAS 24 “Related Party Disclosures”.

38.1 Transactions with other related parties

According to the LKAS 24, FMO consider as a related party (Significant investor) and all transaction with FMO are given below:

	2020 LKR	2019 LKR
Interest and capital repayment	649,117,778	526,112,499
Reimbursement of expenses	5,663,516	889,181

38.2 Transactions with key management personnel (KMP)

Key management personnel include: the Chairman, the Board of Directors, and Chief Executive Officer, Deputy Chief Executive Officer of the Bank. Transactions with close family members of key management personnel are also taken into account in the transactions with key management personnel. The Same term, including interest/commission rates and security, as for comparable transaction with person of a similar standing or,
where applicable, with the employees. The transaction did not involve more than the normal risk of repayment or present other unfavorable features.

38.2.1 Key management personnel compensation

	2020 LKR	2019 LKR
Short-term employee benefits	63,519,749	50,627,995
Post employment benefits	–	2,100,000

38.2.2 Other transactions (loans and receivables) with key management personnel – Balance outstanding

	2020 LKR	2019 LKR
Granting	749,000	–
Repayments	(105,955)	(427,240)
Closing balance as at 31 December*	–	1,601,943
Interest income	89,519	253,941

* Chairperson and Deputy Chief Executive Officer resigned on 22 May 2020 and 05 December 2020 respectively.

38.2.3 Deposits and investment from key management personnel – Balance outstanding

	2020 LKR	2019 LKR
Deposits accepted and renewed during the period	63,662,770	39,587,156
Balance as at 31 December	16,406,022	16,630,438
Interest expenses	492,435	349,401

38.2.4 Other payment to key management personnel

	2020 LKR	2019 LKR
Cash dividend	458,601	–

38.2.5 Shareholdings by key management personnel

	2020 Number	2019 Number
Number of shares held by KMP	377,111	199,450

38.2.6 Terms and conditions of transaction with related parties

All related party transaction are carried out in the normal course of business and transacted at normal business terms. Transaction from related parties are made on terms equivalent to those that prevail in arm’s length transaction and comparable with those that would have been charged from unrelated companies. All related party outstanding balances at the year – end are secured and are to be settled in cash.

Bank has pledged from the lease portfolio sum of LKR 974,849,643/- (2019 – LKR 1,222,145,124/-) for the securitised borrowings.

Bank has pledged from the loan portfolio sum of LKR 4,700,438,624/- (2019 – LKR 5,571,629,344/-) for other borrowings.

As at 31 December 2020	Amortised cost LKR	FVTPL LKR	FVTOCI LKR	Total LKR
Financial assets
Cash and cash equivalents	9,640,915,936	–	–	9,640,915,936
Placements with banks	2,823,628,452	–	–	2,823,628,452
Financial assets at fair value through profit or loss	–	4,600,457,930	–	4,600,457,930
Financial assets at amortised cost
– Loans and receivables to other customers	102,662,268,716	–	–	102,662,268,716
– Debt and other instruments	5,244,005,218	–	–	5,244,005,218
Financial assets measured at fair value through other comprehensive income	–	–	56,938,514	56,938,514
Total financial assets	120,370,818,323	4,600,457,930	56,938,514	125,028,214,767
Financial liabilities
Due to other customers	93,271,727,185	–	–	93,271,727,185
Other borrowings	18,090,499,974	–	–	18,090,499,974
Debt securities issued	1,013,899,072	–	–	1,013,899,072
Subordinated term debts	4,052,630,214	–	–	4,052,630,214
Total financial liabilities	116,428,756,446	–	–	116,428,756,446

As at 31 December 2019	Amortised cost LKR	FVTPL LKR	FVTOCI LKR	Total LKR
Financial assets
Cash and cash equivalents	2,429,790,570	–	–	2,429,790,570
Placements with banks	5,628,094,545	–	–	5,628,094,545
Financial assets at fair value through profit or loss	–	3,527,310,141	–	3,527,310,141
Financial assets at amortised cost
– Loans and receivables to other customers	85,823,334,862	–	–	85,823,334,862
– Debt and other instruments	6,998,924,881	–	–	6,998,924,881
Financial assets measured at fair value through other comprehensive income	–	–	56,938,514	56,938,514
Total financial assets	100,880,144,858	3,527,310,141	56,938,514	104,464,393,512
Financial liabilities
Due to other customers	72,431,923,465	–	–	72,431,923,465
Other borrowings	20,299,717,968	–	–	20,299,717,968
Debt securities issued	1,014,034,248	–	–	1,014,034,248
Subordinated term debts	4,210,565,525	–	–	4,210,565,525
Total financial liabilities	97,956,241,206	–	–	97,956,241,206

41.1 Financial instruments recorded at fair value

The following is a description of how fair values are determined for financial instrument that are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumption that a market participant would make when valuing the instrument.

Fair value through other comprehensive income (OCI)

Fair value through OCI valued using valuation techniques or pricing models primary consist of unquoted.

Fair value through profit and loss (FVTPL)

Quoted equities, Sri Lanka Government securities (Treasury bills and bonds) and unit trust are included in financial assets fair value through profit or loss. Government securities are measured using average yield published by Central Bank of Sri Lanka. Quoted equities are valued using market price in active markets as at the reporting date. Unit trusts are measured using market price in markets that are not active.

41.2 Determination of fair value and fair value hierarchy

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique.

Level 1 : Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 : Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3 : Techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

41.2.1 Analysis of financial instruments recorded at fair value by level of fair value hierarchy

	As at 31 December 2020
	Level 1 LKR	Level 2 LKR	Level 3 LKR	Total LKR
Financial assets fair value through profit or loss
Sri Lanka Government securities – Treasury bonds	–	7,628,946	–	7,628,946
Unit trusts	–	4,586,196,193	–	4,586,196,193
Quoted equities	6,632,792	–	–	6,632,792
Fair value through other comprehensive income
Unquoted equity securities	–	–	56,938,514	56,938,514
Total	6,632,792	4,593,825,138	56,938,514	4,657,396,444

	As at 31 December 2019
	Level 1 LKR	Level 2 LKR	Level 3 LKR	Total LKR
Financial assets fair value through profit or loss
Sri Lanka Government securities – Treasury bonds	–	46,519,350	–	46,519,350
Unit trusts	–	3,480,790,791	–	3,480,790,791
Fair value through other comprehensive income
Unquoted equity securities	–	–	56,938,514	56,938,514
Total	–	3,527,310,141	56,938,514	3,584,248,655

The following table shows the total gains/(losses) recognised in profit or loss during the year relating to assets and liabilities held
at the year end.

	2020 LKR	2019 LKR
Net gain/(loss) from trading	5,228,460	1,264,727
Net fair value gain/(loss) of financial assets at fair value through profit or loss
Sri Lanka Government securities – Treasury bonds	12,304	(58,050)
Unit trusts	268,514,699	114,947,499
Quoted equities	182,633	–
Total gain/(loss)	273,938,096	116,154,176

41.3 Fair value of financial assets and liabilities not carried at fair value

Set out below is a comparison, by class, of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the Financial Statements. This table does not include the fair values of non-financial assets and non-financial liabilities.

		As at 31 December 2020
	Level	Carrying Value LKR	Fair Value LKR
Financial assets
Cash and cash equivalents	Note*	9,640,915,936	9,640,915,936
Placements with banks	Note*	2,823,628,452	2,823,628,452
Financial assets at amortised cost
– Loans and receivables to other customers	2	102,662,268,716	105,094,237,121
– Debt and other instruments	Note*	5,244,005,218	5,244,005,218
Total financial assets		120,370,818,323	122,802,786,727
Financial liabilities
Due to other customers	2	93,271,727,185	87,925,863,557
Other borrowings	2	18,090,499,974	19,001,914,274
Debt securities issued	Note*	1,013,899,072	1,013,899,072
Subordinated term debts	Note*	4,052,630,214	4,052,630,214
Total financial liabilities		116,428,756,446	111,994,307,118

		As at 31 December 2019
	Level	Carrying value LKR	Fair value LKR
Financial assets
Cash and cash equivalents	Note*	2,429,790,570	2,429,790,570
Placements with banks	Note*	5,628,094,545	5,628,094,545
Financial assets at amortised cost
– Loans and receivables to other customers	2	85,823,334,862	92,356,556,375
– Debt and other instruments	Note*	6,998,924,881	6,998,924,881
Total financial assets		100,880,144,857	107,413,366,371
Financial liabilities
Due to other customers	2	72,431,923,465	66,969,704,982
Other borrowings	2	20,299,717,968	21,651,988,374
Debt securities issued	Note*	1,014,034,248	1,014,034,248
Subordinated term debts	Note*	4,210,565,525	4,210,565,525
Total financial liabilities		97,956,241,206	93,846,293,129

Note*

Fair value of financial assets and liabilities not carried at fair value

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the Financial Statements:

Assets for which fair value approximates carrying value

For financial assets and financial liabilities that have a short-term maturity (less than a year) it is assumed that the carrying amounts approximate their fair value.
This assumption is also applied to demand deposits and savings accounts without a specific maturity. Loans and advances to customers with a variable rate are also considered to be carried at fair value.

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing interest rates of the Bank.

	As at 31 December 2020
	Banking LKR	Leasing LKR	Treasury LKR	Pawning LKR	Total LKR
Interest income	12,942,523,491	1,252,832,925	956,610,333	290,036,054	15,442,002,803
Interest expenses	(7,447,209,106)	(710,337,562)	(962,713,617)	(194,316,120)	(9,314,576,405)
Net interest income	5,495,314,385	542,495,363	(6,103,283)	95,719,934	6,127,426,398
Fee and commission income	373,272,363	17,346,869	–	–	390,619,231
Fee and commission expenses	(13,085,938)	(1,248,177)	–	–	(14,334,115)
Net fee and commission income	360,186,424	16,098,692	–	–	376,285,116
Net gains/(losses) from trading	–	–	5,228,460	–	5,228,460
Net fair value gain/(loss) of financial assets at fair value through profit or loss	–	–	268,709,636	–	268,709,636
Net other operating income	54,907,102	–	320,000	–	55,227,102
Total operating income	5,910,407,911	558,594,054	268,154,812	95,719,933	6,832,876,712
Impairment for loans and other losses	(265,963,204)	(152,531,672)	(1,489,920)	2,946,291	(417,038,505)
Net operating income	5,644,444,707	406,062,382	266,664,891	98,666,224	6,415,838,207
Depreciation and amortisation expenses	(405,187,739)	(38,648,045)	(160,864)	(10,572,351)	(454,568,998)
Segment result	5,239,256,968	367,414,338	266,504,028	88,093,873	5,961,269,209
Un-allocated expenses					(3,977,311,856)
Value Added Tax (VAT) on financial services					(571,027,269)
Profit before tax					1,412,930,083
Tax expenses					(576,642,736)
Profit for the year					836,287,347
Other comprehensive income
Other comprehensive income for the year net of tax					(1,335,594)
Total comprehensive income for the year					834,951,754
Segment assets	91,542,138,779	8,731,568,940	22,365,946,051	2,388,560,997	125,028,214,767
Un-allocated assets					4,031,509,351
Total assets	91,542,138,779	8,731,568,940	22,365,946,051	2,388,560,997	129,059,724,118
Segment liabilities	87,233,551,545	8,320,602,723	21,313,254,570	2,276,139,291	119,143,548,129
Total equity	–	–	–	–	9,916,175,990
Total liabilities	87,233,551,545	8,320,602,723	21,313,254,570	2,276,139,291	129,059,724,118
Addition to non-current assets	328,481,810	31,331,599	–	8,570,904	368,384,313

	As at 31 December 2019
	Banking LKR	Leasing LKR	Treasury LKR	Pawning LKR	Total LKR
Interest income	12,509,868,962	1,090,964,365	1,239,351,727	239,138,751	15,079,323,806
Interest expenses	(6,977,189,168)	(573,254,531)	(1,674,257,285)	(157,827,936)	(9,382,528,920)
Net interest income	5,532,679,794	517,709,835	(434,905,559)	81,310,816	5,696,794,886
Fee and commission income	201,937,822	35,718,639	–	–	237,656,461
Fee and commission expenses	(6,012,622)	(494,004)	–	–	(6,506,626)
Net fee and commission income	195,925,201	35,224,634	–	–	231,149,835
Net gain/(loss) from trading			1,264,727		1,264,727
Net fair value gain/(loss) of financial assets at fair value through profit or loss	–	–	114,889,449	–	114,889,449
Net other operating income	90,727,985	–	240,800	–	90,968,785
Total operating income	5,819,332,979	552,934,468	(318,510,583)	81,310,815	6,135,067,682
Impairment for loans and other losses	(809,523,806)	(112,639,820)	4,594,178	135,942	(917,433,506)
Net operating income	5,009,809,173	440,294,648	(313,916,405)	81,446,757	5,217,634,176
Depreciation and amortisation expenses	(390,191,470)	(32,058,616)	(116,161)	(8,826,350)	(431,192,597)
Segment result	4,619,617,703	408,236,032	(314,032,566)	72,620,405	4,786,441,579
Un-allocated expenses					(3,536,420,975)
Value Added Tax (VAT) on financial services					(386,522,109)
Nation Building Tax (NBT) on financial services					(51,106,360)
Debt repayment levy					(226,564,695)
Profit before tax					585,827,440
Tax expenses					(332,422,344)
Profit for the year					253,405,096
Other comprehensive income
Other comprehensive income for the year net of tax					(33,152,736)
Total comprehensive income for the year					220,252,360
Segment assets	77,683,515,936	6,382,574,185	18,641,058,651	1,757,244,741	104,464,393,513
Un-allocated assets					3,319,230,816
Total assets	77,683,515,936	6,382,574,185	18,641,058,651	1,757,244,741	107,783,624,329
Segment liabilities	74,448,885,176	6,116,812,903	17,864,871,567	1,684,075,578	100,114,645,224
Total equity	–	–	–	–	7,668,979,105
Total liabilities	74,448,885,176	6,116,812,903	17,864,871,567	1,684,075,578	107,783,624,329
Addition to non-current assets	448,506,665	36,849,865	–	10,145,473	495,502,003

The following table shows an analysis of assets and liabilities according to when they are expected to be recovered or settled:

	As at 31 December 2020			As at 31 December 2019
	Within 12 months LKR	After 12 months LKR	Total LKR	Within 12 months LKR	After 12 months LKR	Total LKR
Assets
Cash and cash equivalents	9,640,915,936	–	9,640,915,936	2,429,790,570	–	2,429,790,570
Placements with banks	1,330,428,452	1,493,200,000	2,823,628,452	4,177,742,545	1,450,352,000	5,628,094,545
Financial assets fair value through profit or loss	4,600,457,931	–	4,600,457,931	3,527,310,141	–	3,527,310,141
Financial assets at amortised cost
– Loans and receivables to other customers	22,986,258,718	79,676,009,998	102,662,268,716	18,200,097,573	67,623,237,289	85,823,334,862
– Debt and other instruments	5,244,005,218	–	5,244,005,218	6,948,924,881	50,000,000	6,998,924,881
Financial assets measured at fair value through other comprehensive income	–	56,938,514	56,938,514	–	56,938,514	56,938,514
Investment in subsidiary	–	6,163,100	6,163,100
Property, plant and equipment	–	661,694,541	661,694,541	–	645,231,444	645,231,444
Right of use assets	75,496,546	614,149,660	689,646,206	11,907,855	639,362,893	651,270,748
Investment properties	–	20,222,570	20,222,570	–	21,278,600	21,278,600
Intangible assets	–	395,123,333	395,123,333	–	308,444,541	308,444,541
Deferred tax assets	231,672,525	–	231,672,525	–	232,481,661	232,481,661
Other assets	2,026,987,076	–	2,026,987,076	1,460,523,822	–	1,460,523,822
Total assets	46,136,222,402	82,923,501,716	129,059,724,118	36,756,297,388	71,027,326,942	107,783,624,329
Liabilities
Due to other customers	64,578,026,248	28,693,700,937	93,271,727,185	51,618,024,041	20,813,899,425	72,431,923,466
Other borrowings	10,025,936,138	8,064,563,836	18,090,499,974	8,444,199,647	11,855,518,321	20,299,717,968
Debt securities issued	1,013,899,072	–	1,013,899,072	1,014,034,248	–	1,014,034,248
Subordinated term debts	16,369,215	4,036,260,999	4,052,630,214	10,243,764	4,200,321,761	4,210,565,527
Retirement benefit obligation	–	571,382,319	571,382,319	–	479,575,300	479,575,300
Current tax liabilities	274,214,765	–	274,214,765	187,069,978	–	187,069,977
Other liabilities	1,286,975,386	582,219,214	1,869,194,600	909,832,224	581,926,516	1,491,758,740
Total liabilities	77,195,420,824	41,948,127,305	119,143,548,128	62,183,403,902	37,349,314,806	100,114,645,225
Net asset/(liability)	(31,059,198,421)	40,975,374,411	9,916,175,990	(25,427,106,514)	33,678,012,136	7,668,979,104

44.1 Introduction

Risk is inherent in the Bank’s activities but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk and operational risk.

The independent risk control process does include business risks such as changes in the environment, technology and industry. The Bank’s policy is to monitor those business risks through the Bank’s strategic planning process.

Risk management structure

The Board of Directors is responsible for the overall risk management approach and for approving the risk management strategies and principles.

The Board has appointed the Board subcommittee which has the responsibility to monitor the overall risk process within the Bank.

The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. The Risk Committee is responsible for managing risk decisions and monitoring risk levels and reports on a quarterly basis.

The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process is maintained. The unit works closely with the Risk Committee to ensure that procedures are compliant with the overall framework.

The Risk management Unit is responsible for monitoring compliance with risk principles, policies and limits across the Bank. This unit responsible for the independent control of risks, including monitoring the risk of exposures against limits and the assessment of risks of new products and structured transactions. This unit also ensures the complete capture of the risks in risk measurement and reporting systems. Exceptions are reported on periodically, where necessary, to the Risk Committee and the relevant actions are taken to address exceptions and any areas of weakness.

Bank’s treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank.

The Bank’s policy is that risk management processes throughout the Bank are audited annually by the Internal Audit function, which examines both adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with Management and reports its findings and recommendations to the Audit Committee.

Risk measurement and reporting systems

Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors, the Risk Committee and the head of each business division. The report includes aggregate credit exposure, liquidity ratios and risk profile changes. On a monthly basis, detailed reporting of industry, customer and geographic risks takes place. Senior Management assesses the appropriateness of the allowance for credit losses on a monthly basis. The Board subcommittee receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Bank.

For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, necessary and up-to-date information. A daily briefing is given to the CEO and all other relevant members of the Bank on the utilisation of market limits, proprietary investments, liquidity and any other risk developments.

Risk mitigation

As part of its overall risk management, the Bank uses several strategies and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks and exposures arising from forecast transactions. In accordance with the Bank’s policy, the risk profile of the Bank is assessed by the appropriate level of seniority within the Bank. The Bank actively uses collateral to reduce its credit risks.

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

The impact of COVID-19 on the business/operations and risk management of the Bank

The COVID-19 pandemic has had a direct impact on economic activities both locally and globally, while pandemic-related uncertainties have affected the overall business landscape of the country. Sri Lanka’s efforts to gradually revive its economic activities subsequent to the countrywide lock-down, have been once again impeded by the emergence of the second wave of the pandemic; which has forced lock-downs in selected areas and provinces with mobility restrictions being imposed to control a possible community spread.

Subsequent to the COVID-19 outbreak in Sri Lanka, the Bank had strictly adhered to the guidelines and directions issued by the Government and the Central Bank of Sri Lanka (CBSL) when conducting its business operations. The Bank provided relief for affected businesses and individuals, in line with the directions issued by CBSL. Such relief measures include, offering concessionary rates of interest to eligible loan products (debt moratorium), deferment of repayment terms of credit facilities, and waiving off selected fees and charges. Based on the Guidance Notes on Accounting Considerations of the COVID-19 Outbreak issued by the CA Sri Lanka, concessionary rates on the Equal Monthly Instalment loans given under Government’s debt moratorium relief packages have been considered under substantial modification methodology and new EIR has been computed after considering the modified tenor. This new EIR applied to calculate the interest income in these Financial Statements.

When assessing the expected credit losses, the Bank considered the potential impact of the COVID-19 outbreak based on the available information and has made provisions as management overlays to counter the future possible deteriorations in credit quality. However, due to the uncertainty of the pandemic-ridden business environment, actual losses may differ from the amount provided.

44.2 Credit risk

Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk evaluation system, which assigns each counterparty a risk. The credit quality review process aims to allow the Bank to assess the potential losses a result of the risks to which it is exposed and take corrective action.

Credit-related commitments risks

The Bank makes available to its customers guarantees which may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Such commitments expose the Bank to similar risks to loans and are mitigated by the same control processes and policies.

Risk concentrations: maximum exposure to credit risk without taking account of any collateral and other credit enhancements.

The Bank’s concentrations of risk are managed by client/counterparty, by geographical region and by industry sector. The maximum credit exposure to any client or counterparty as of 31 December 2020 was LKR 466.51 Mn.

The following table shows the maximum exposure to credit risk for the components of the statement of financial position, by geography of counterparty and by industry before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.

Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

Cash or securities
Real estate properties
Mortgages over residential properties
Movable assets – Motor vehicle
Gold

The Bank also obtains guarantees from parent companies for loans to their subsidiaries.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.

It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim.
In general, the Bank does not occupy repossessed properties for business use.

44.2.1 Maximum exposure credit risk by class of financial assets

	As at 31 December 2020		As at 31 December 2019
	Maximum exposure to credit risk LKR	Net exposure LKR	Maximum exposure to credit risk LKR	Net exposure LKR
Cash and cash equivalents	9,640,915,936	9,640,915,936	2,429,790,570	2,429,790,570
Placements with banks	2,823,628,452	2,823,628,452	5,628,094,545	5,628,094,545
Financial assets fair value through profit or loss	4,600,457,930	4,600,457,930	3,527,310,141	3,527,310,141
Financial assets at amortised cost
– Loans and receivables to other customers	105,975,283,350	78,249,415,928	88,720,800,911	74,451,537,819
– Debt and other instruments	5,244,005,218	3,565,490,888	6,998,924,881	2,666,271,222
Total	128,284,290,887	98,879,909,135	107,304,921,048	88,703,004,297

Credit quality by class of financial assets

	As at 31 December 2020
	Neither past due nor impaired LKR	Past due but not impaired LKR	Individually impaired LKR	Total LKR
Cash and cash equivalents	9,640,915,936	–	–	9,640,915,936
Placements with banks	2,823,628,452	–	–	2,823,628,452
Financial assets fair value through profit or loss	4,600,457,930	–	–	4,600,457,930
Financial assets at amortised cost
– Loans and receivables to other customers	88,430,044,611	14,795,206,409	2,750,032,330	105,975,283,350
– Debt and other instruments	5,244,005,218	–	–	5,244,005,218
Total	110,739,052,148	14,795,206,409	2,750,032,330	128,284,290,887

	As at 31 December 2019
	Neither past due nor impaired LKR	Past due but not impaired LKR	Individually impaired LKR	Total LKR
Cash and cash equivalents	2,429,790,570	–	–	2,429,790,570
Placements with banks	5,628,094,545	–	–	5,628,094,545
Financial assets fair value through profit or loss	3,527,310,141	–	–	3,527,310,141
Financial assets at amortised cost
– Loans and receivables to other customers	71,008,197,804	14,935,693,040	2,776,910,068	88,720,800,912
– Debt and other instruments	6,998,924,881	–	–	6,998,924,881
Total	89,592,317,942	14,935,693,040	2,776,910,068	107,304,921,049

	As at 31 December 2020 Past due but not impaired
	Less than 30 days LKR	31 to 60 days LKR	61 to 90 days LKR	More than 90 days LKR	Total LKR
Loans and receivables to other customers (without impairment)	7,220,478,085	3,206,339,561	330,773,126	4,037,615,637	14,795,206,409

	As at 31 December 2019 Past due but not impaired
	Less than 30 days LKR	31 to 60 days LKR	61 to 90 days LKR	More than 90 days LKR	Total LKR
Loans and receivables to other customers (without impairment)	7,201,475,238	3,784,482,626	538,536,434	3,411,198,742	14,935,693,040

44.2.2 Impairment assessment

definition of default and cure

The Bank considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL calculations in all cases when the borrower becomes 90 days past or three instalments in arrears due on its contractual payments. The Bank considers treasury and interbank balances defaulted and takes immediate action when the required intraday payments are not settled by the close of business as outlined in the individual agreements.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. When such events occur, the Bank carefully considers whether the event should result in treating the customer as defaulted and therefore assessed as Stage 3 for ECL calculations or whether Stage 2 is appropriate. Such events (among others) include;

When contractual payments of a customer are more than 30 days past due;
When reasonable and supportable forecasts of future economic conditions directly affect the performance of a customer/group of customers, portfolios or instruments;
When the value of collateral is significantly reduced and/or realisability of collateral is doubtful. Limits shall be set and documented by licensed banks;
Modification of terms resulting in concessions, including extensions, deferment of payments, waiver of covenants etc.;
When the customer is deceased/insolvent;
When the Bank is unable to contact or find the customer;

It is the Bank’s policy to consider a financial instrument as “cured” and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least six consecutive months. The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition.

Probability of default (PD) estimation process

Probability of Default is the estimate of the likelihood of default over a given time horizon. A default may only happen at a time horizon if the facility has not been previously derecognised and is still in the portfolio.

An early exit (EE) may occur in case of default unless the facility reverts to performing without significant modification of the contractual terms.
The marginal probability of default for the period is then adjusted from the probability that an early exit occurred during the previous periods.

12 Months PD

This is the estimated probability of default occurring within the next 12 months.

The 12 month PD is applied for the “Current” and “1-30 days” buckets since there is no significant deterioration in credit risk.

Lifetime PD

This is the estimated probability of default occurring over the remaining life of the financial instrument.

The lifetime PD is applied for the “31-60 days” and “61-90 days” buckets since there is a significant deterioration in credit risk.

The PD for the “Above 90 days” category is 100% since there is objective evidence of impairment as the default has occurred.

Exposure at default (EAD)

The exposure at default represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both client’s ability to increase its exposure while approaching default and potential early repayments too.

These components will all need to be estimated based on past experience and future expectations, for sections of the portfolio that are segmented so that they have similar credit characteristics.

Loss given default (LGD)

Loss given default is the magnitude of likely loss on exposure, and is expressed as a percentage of exposure. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realised from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios, based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types) as well as borrower characteristics.

For each year, closed contracts which have crossed the “Above 90 days” at-least once in their lifetime are considered. LGD will factor in all cash flows subsequent to the point of default until the full settlement of the loan.

Virtually closed contracts are also be added to this data set. Virtually closed contracts are active loans which have been long outstanding. A contract is determined to be virtually closed at the point the Bank determines that the cash flows have dried up.

Significant increase in credit risk

The Bank continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12 months ECL or lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list, or the account having been restructured. In certain cases, the Bank may also consider that events as a significant increase in credit risk as opposed to a default.

When estimating ECLs on a collective basis for a group of similar assets, the Bank applies the following in the categorisation of credit facilities/ exposures in to stages for computation of expected credit loss.

Stage 1

All credit facilities, which are not categorised under Stages 2 or 3 below

Stage 2

Credit facilities, where contractual payments of a customer are more than 30 days past due, other than the credit facilities categorised under Stage 3 below, subject to the rebuttable presumption as stated in SLFRS 9
All restructured loans, which are restructured up to two times (other than upgraded restructured facilities, satisfactory performing period of a minimum 90 days considered subsequent to the due date of the first capital and/or interest instalment post-restructure)
Under-performing credit facilities/exposures

Stage 3

Credit facilities where contractual payments of a customer are more than 90 days past due or 3 instalments in arrears, subject to the rebuttable presumption as stated in SLFRS 9
All restructured loans, which are restructured more than twice
All rescheduled loans (other than upgraded restructured facilities, satisfactory performing period of a minimum 90 days considered subsequent to the due date of the 1st capital and/or interest instalment post-restructure)
All credit facilities/customers classified as non-performing as per CBSL Directions
Non-performing credit facilities/customers

Grouping financial assets measured on a collective basis

As explained in Note 2.3.2.3 dependent on the factors below, the Bank calculates ECLs either on a collective or an individual basis.

An individual impairment assessment is performed for exposures over the individually significant threshold of LKR 5 Mn. for which there is objective evidence of expected loss based on the current status of the customer, i.e. based on whether customer is performing, non-performing, rescheduled or watch-listed.

Exposures that are assessed for individual impairment and for which an impairment provision has been recognised are not included in the collective assessment of impairment. If it is determined that no objective evidence of expected loss exists for an individually assessed exposure, or assessed for objective evidence and there is no requirement for individual impairment, whether significant or not, this is included in a group of exposures with similar credit risk characteristics that are collectively assessed for impairment under the relevant bucket.

A collective assessment is performed for exposures as follows:

Exposures that have not been individually assessed i.e. falling below the individually significant threshold
Exposures that have been assessed for objective evidence of incurred loss and were found to have no such evidence of expected loss
Exposures that have been individually assessed and were found not to be impaired on an individual basis based on the cash flow estimation

The Bank groups these exposure in to homogeneous portfolios to extent possible so as ensure that data point available for meaningful calculations.

For accounting purposes, the Bank used (prior to 2018) an incurred loss model for the recognition of losses on impaired financial assets. This means that losses can only be recognised when objective evidence of a specific loss event has been observed. Triggering events include the following:

Significant financial difficulty of the customer
A breach of contract such as a default of payment
Where the Bank grants the customer a concession due to the customer experiencing financial difficulty
It becomes probable that the customer will enter bankruptcy or other financial reorganisation
Observable data that suggests that there is a decrease in the estimated future cash flows from the loans

This approach differs from the expected loss model used for regulatory capital purposes in accordance with Basel III.

Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan or advance on an individual basis, include any overdue payments of interests or infringement of the original terms of the contract. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realisable value of collateral and the timing of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances and other debt investments that are not individually significant (including residential mortgages and unsecured consumer lending) and for individually significant loans and advances that have been assessed individually and found not to be impaired. The Bank generally bases its analyses on historical experience.

The Bank may use the aforementioned factors as appropriate to adjust the impairment allowances.

Allowances are evaluated separately at each reporting date with each portfolio.

The collective assessment is made for groups of assets with similar risk characteristics, in order to determine whether provision should be made due to incurred loss events for which there is objective evidence, but the effects of which are not yet evident in the individual loans assessments. The collective assessment takes account of data from the loan portfolio (such as historical losses on the portfolio, levels of arrears, credit utilisation, loan to collateral ratios and expected receipts and recoveries once impaired). The approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance is also taken into consideration. Local management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy. Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans.

The impact of COVID-19 on impairment assessment

CA Sri Lanka issued certain guidelines in the application of certain provisions in SLFRS 9 “Financial Instruments”, considering the insufficiency of information, uncertainty relating to borrowers repayment ability, resource constraints and various government relief measures as a result of the pandemic, though the circumstances require reassessment of all the factors for the preparation of Financial Statements for the reporting on 31 December 2020 Financial Statements and thereon. Accordingly, the Bank identified tourism sector and transportation sector as risk elevated industry. The Bank reviewed the customer exposures subject to the said industry and provide additional provisions by shifting buckets. Furthermore, on Economic Factor Adjustment, weightages are assigned to qualitative factors as at 31 December 2020.

Commitments and guarantees

To meet the financial needs of customers, the Bank enters into various commitments and contingent liabilities. Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank. Financial Statement has separately disclosed the Bank’s maximum credit risk exposure for commitments and guarantees.

44.3 Liquidity risk and funding management

Liquidity risk is defined as the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, Management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.

The Bank maintains a portfolio of highly marketable and diverse assets that assumed to be easily liquidated in the event of an unforeseen interruption of cash flow. The Bank also has committed lines of credit that it can access to meet liquidity needs. In accordance with the Bank’s policy the liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of net liquid assets to customer liabilities, to reflect market conditions. Liquid assets consist of cash, short-term Bank deposits and treasury bills available for immediate sale.

The Bank stresses the importance of term accounts and savings accounts as sources of funds to finance lending to customers. They are monitored using the advances to deposit ratio, which compares loans and advances to customers as a percentage of customer savings accounts, together with term funding with a remaining term to maturity.

Analysis of financial assets and liabilities by remaining contractual maturities

The table below summarises the maturity profile of the undiscounted cash flows of the Bank’s financial assets and liabilities as at 31 December.
The Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history.

	As at 31 December 2020
	Less than 7 Days LKR	7-30 Days LKR	1-3 Months LKR	3-12 Month LKR	1-3 Years LKR	3-5 Years LKR	Over 5 Years LKR	Total LKR
Financial assets
Cash and cash equivalents	9,640,915,936	–	–	–	–	–	–	9,640,915,936
Investments	357,803,497	3,199,836,573	7,524,200,755	26,970,267	–	2,035,084,138	–	13,143,895,230
Loans and receivables to other customers	2,664,314,944	3,723,664,975	3,857,452,612	20,280,143,387	32,635,677,665	21,707,804,459	31,781,916,292	116,650,974,334
Total financial assets	12,663,034,377	6,923,501,547	11,381,653,367	20,307,113,655	32,635,677,665	23,742,888,598	31,781,916,292	139,435,785,500
Financial liabilities
Due to other customers	3,582,958,337	6,215,514,264	14,758,474,547	41,851,590,839	18,940,913,000	6,497,675,055	5,660,668,351	97,507,794,394
Other borrowings	22,415,249	2,136,659,490	3,436,787,879	5,236,814,751	7,497,272,471	1,208,776,549	4,963,355	19,543,689,745
Debt securities issued	1,013,899,072	–	–	–	–	–	–	1,013,899,072
Subordinated term debts	–	–	43,004,273	320,965,299	1,446,567,116	3,439,470,915	–	5,250,007,602
Total financial liabilities	4,619,272,659	8,352,173,755	18,238,266,699	47,409,370,889	27,884,752,587	11,145,922,518	5,665,631,706	123,315,390,813
Net Financial assets/(liabilities)	8,043,761,718	(1,428,672,207)	(6,856,613,332)	(27,102,257,235)	4,750,925,078	12,596,966,079	26,116,284,585	16,120,394,687

	As at 31 December 2019
	Less than 7 Days LKR	7-30 Days LKR	1-3 Months LKR	3-12 Month LKR	1-3 Years LKR	3-5 Years LKR	Over 5 Years LKR	Total LKR
Financial assets
Cash and cash equivalents	2,429,790,570	–	–	–	–	–	–	2,429,790,570
Investments	1,361,134,010	6,758,727,196	6,545,608,637	70,869,472	55,625,000	1,977,374,902	–	16,769,339,217
Loans and receivables to other customers	1,497,786,878	2,335,054,001	3,452,678,744	17,283,911,199	26,605,051,230	18,194,066,707	29,417,331,304	98,785,880,063
Total financial assets	5,288,711,458	9,093,781,197	9,998,287,382	17,354,780,671	26,660,676,230	20,171,441,609	29,417,331,304	117,985,009,850
Financial liabilities
Due to other customers	2,712,403,307	4,888,405,210	12,755,524,393	32,944,756,647	13,385,221,583	5,329,197,253	4,197,664,703	76,213,173,096
Other borrowings	15,000,000	1,892,506,764	1,586,610,576	2,888,491,149	7,856,291,191	10,479,601,943	23,195,192	24,741,696,814
Debt securities issued	–	–	–	1,013,630,925	–	–	–	1,013,630,925
Subordinated term debts	–	–	27,073,979	2,371,080,750	5,541,681,836	–	–	7,939,836,565
Total financial liabilities	2,727,403,307	6,780,911,974	14,342,134,969	36,846,878,721	21,241,512,774	15,808,799,196	4,220,859,895	109,908,337,400
Net financial assets/(liabilities)	2,561,308,151	2,312,869,223	(4,343,847,587)	(19,492,098,050)	5,419,163,456	4,362,642,413	25,196,471,409	8,076,672,450

44.4 Market risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables. The Bank classifies exposures to market risk into either trading or non–trading portfolios and manages each of those portfolios separately. The market risk for the portfolio is managed and monitored using sensitivity analyses.

44.5 Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.

The table below analyses the Bank’s interest rate risk exposure on financial assets and liabilities.

The Bank’s assets and liabilities are included at carrying amount and categorised by the earlier of contractual re–pricing or maturity dates.

	Interest rate sensitivity assets and liabilities as at 31 December 2020
Asset or liability	Carrying amount LKR	On demand LKR	1-3 Months LKR	3-12 Months LKR	over 1 Year LKR	Non-interest LKR	Total LKR
Cash and cash equivalents	9,640,915,936	301,070,137	–	–	–	9,339,845,799	9,640,915,936
Placements with banks	2,823,628,452	–	1,200,000,000	130,428,452	1,493,200,000	–	2,823,628,452
Financial assets fair value through profit or loss	4,600,457,930	1,584,558,343	3,015,772,330	127,258	–	–	4,600,457,931
Loans and receivables to other customers	102,662,268,716	5,560,567,289	3,357,810,307	14,067,881,123	74,969,877,689	4,706,132,309	102,662,268,716
Debt and other instruments	5,244,005,218	2,342,260,002	2,880,525,900	21,219,316	–	–	5,244,005,218
Interest bearing assets	124,971,276,253	9,788,455,770	10,454,108,537	14,219,656,149	76,463,077,689	14,045,978,108	124,971,276,254
Due to other customers	93,271,727,185	9,040,551,929	13,616,893,260	41,920,581,059	28,693,700,937	–	93,271,727,185
Other borrowings	18,090,499,974	2,083,616,623	3,226,777,534	4,715,541,980	8,064,563,836	–	18,090,499,974
Debt securities issued	1,013,899,072	964,560,000	–	49,339,072	–	–	1,013,899,072
Subordinated term debts	4,052,630,214	–	–	16,369,215	4,036,260,999	–	4,052,630,214
Interest bearing liabilities	116,428,756,446	12,088,728,552	16,843,670,795	46,701,831,327	40,794,525,773	–	116,428,756,446
Interest rate sensitivity gap	8,542,519,807	(2,300,272,782)	(6,389,562,257)	(32,482,175,177)	35,668,551,916	14,045,978,108	8,542,519,808

	If market interest rate go up by 1% effect to interest Income	If market interest rate drop by 1% effect to interest Income
Effect on rate sensitive assets	1,249,712,763	(1,249,712,763)
Effect on rate sensitive liabilities	(1,164,287,564)	1,164,287,564
Sensitivity of profit or loss	85,425,198	(85,425,198)

	Interest rate sensitivity assets and liabilities as at 31 December 2019
Asset or liability	Carrying amount LKR	On demand LKR	1-3 Months LKR	3-12 Months LKR	over 1 Year LKR	Non-interest LKR	Total LKR
Cash and cash equivalents	2,429,790,570	301,666,356	–	–	–	2,128,124,214	2,429,790,570
Placements with banks	5,628,094,545	1,500,000,000	2,600,000,000	77,742,545	1,450,352,000	–	5,628,094,545
Financial assets fair value through profit or loss	3,527,310,141	1,201,481,867	2,325,448,774	379,500	–	–	3,527,310,141
Loans and receivables to other customers	85,823,334,862	3,291,228,229	2,964,786,201	11,944,083,143	63,729,040,814	3,894,196,475	85,823,334,862
Debt and other instruments	6,998,924,881	2,915,851,982	3,957,838,592	75,234,306	50,000,000	–	6,998,924,881
Interest bearing assets	104,407,454,999	9,210,228,434	11,848,073,567	12,097,439,494	65,229,392,814	6,022,320,689	104,407,454,999
Due to other customers	72,431,923,465	6,904,761,138	11,587,431,644	33,125,831,259	20,813,899,424	–	72,431,923,465
Other borrowings	20,299,717,968	1,903,296,614	1,564,984,548	4,975,918,485	11,855,518,321	–	20,299,717,968
Debt securities issued	1,014,034,248	–	–	1,014,034,248	–	–	1,014,034,248
Subordinated term debts	4,210,565,525	–	–	10,243,764	4,200,321,761	–	4,210,565,525
Interest bearing liabilities	97,956,241,206	8,808,057,752	13,152,416,192	39,126,027,756	36,869,739,506	–	97,956,241,206
Interest rate sensitivity gap	6,451,213,793	402,170,682	(1,304,342,625)	(27,028,588,261)	28,359,653,308	6,022,320,689	6,451,213,793

	If market interest rate go up by 1% effect to interest Income	If market interest rate drop by 1% effect to interest Income
Effect on rate sensitive assets	1,044,074,550	(1,044,074,550)
Effect on rate sensitive liabilities	(979,562,412)	979,562,412
Sensitivity of profit or loss	64,512,138	(64,512,138)

44.6 Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Bank doesn’t have material currency risk.

44.7 Equity price risk

Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indices and individual stocks.

The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Central Bank of Sri Lanka.

During the past year, the Bank had complied in full with all its externally imposed capital requirements.

Capital management

The primary objectives of the Bank’s capital management policy are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholder value.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities.

Financial Reports

Notes to the Financial Statements

1. Corporate information