1. CORPORATE INFORMATION

1.1 General

SANASA Development Bank PLC (“the Bank”) is a Licensed Specialized Bank established under the Banking Act No. 30 of 1988 and its amendment there to. 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

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.

1.3 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.

1.4 Parent Entity and Ultimate Parent Entity

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

2. BASIS OF PREPARATION

2.1 Statement of Compliance

The Financial Statements of the Bank which comprise the Statement of Financial Position, Statement of Profit or Loss, Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and Notes to the Financial Statements have been prepared and presented in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) laid down by the Institute of Chartered Accountants of Sri Lanka and 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 and provide appropriate disclosures as required by the Listing Rules of the CSE.

The formats used in the preparation and presentation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL in the Circular No. 02 of 2019 on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks”. The Bank also publish annual and quarterly financial information and other disclosures in the Press and the Website in compliance with Section 4.2 of the aforementioned Circular.

2.2 Responsibility for Financial Statements

The Board of Directors is responsible for the Financial Statements of the Bank as per Sri Lanka Accounting Standards and the provisions of the Companies Act No. 7 of 2007.

The Board of Directors acknowledges their responsibility for financial statements as set out in the “Annual Report of the Board of Directors on the Affairs of the Company”, “Statement of Directors’ Responsibility for Financial Reporting” and the certification on the Statement of Financial Position.

2.3 Date of Authorization of Issue

The financial statements for the year ended 31 December 2022 were authorized for issue in accordance with a resolution of the Directors on 12 April 2023.

2.4 Basis of Measurement

The Financial Statements of the Bank have been prepared on the historical cost basis, except for the following material items in the Statement of Financial Position:

• Financial assets held at fair value through other comprehensive income (FVOCI) are measured at fair value (Note 23)
• Financial assets recognised through profit or loss (FVPL) are measured at fair value (Note 20)
• Liabilities for defined benefit obligations are recognised at the present value of the defined benefit obligation less the fair value of the plan assets (Note 33)

2.5 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 unless otherwise indicated. There was no change in the Bank’s presentation and functional currency during the year under review.

2.6 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. No adjustments have been made for inflationary factors affecting the Financial Statements.

An analysis on recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in the Note 46 to the Financial Statements.

2.7 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.

2.8 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. The details of such reclassifications are presented in Note 49 to the Financial Statements

2.9 Statement of Cash Flows

The Statement of Cash Flows 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, financing activities and investing activities have been recognised. Cash and cash equivalents comprise 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), money at call and short notice, net of unfavourable local bank balances.

2.10 Significant Accounting Judgments, Estimates and Assumptions

The preparation of Financial Statements of the Bank in conformity with Sri Lanka Accounting Standards requires the management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The most significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have most significant effect on the amounts recognised in the Financial Statements of the Bank are described in the respective notes.

2.11 Going Concern

The Directors have made an assessment of the Bank’s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. The Directors have considered the impact of the current adverse macroeconomic conditions on the business operations of the Bank. Furthermore, the Board is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern and they do not intend either to liquidate or to cease operations of the Bank. Therefore, the Financial Statements continue to be prepared on the going concern basis. The management has also conducted stress tests to evaluate the robustness of the financial resources of the Bank. This has been reviewed and approved by the Board.

2.12 Impairment Losses on Loans and Advances

The measurement of impairment losses under Sri Lanka Accounting Standards - SLFRS 9 (Financial Instruments) across all categories of financial assets requires judgement. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.

The Bank reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in the Statement of Profit or Loss. In particular, management's judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. Loans and advances that have been assessed individually and found to be not impaired and all individually insignificant loans and advances are then assessed collectively, by categorising them into groups of assets with similar risk characteristics, to determine the expected credit loss on such loans and advances.

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

• The Bank's criteria for assessing if there has been a significant increase in credit risk and so impairment for financial assets should be measured on a lifetime ECL basis
• Development of ECL models, including various formulas and the choice of inputs
• Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL model

It has been the Bank’s policy to regularly review its models in the context of actual loss experience and adjust when necessary. The above assumptions and judgments are discussed in detail under Note 3.2.6 to the Financial Statements.

In response to the adverse macroeconomic conditions and post- COVID-19 pandemic and the Bank’s expectations of economic impacts, key assumptions used in the Bank’s calculation of ECL have been revised with complete model validation done through an independent audit team. The economic scenarios and forwardlooking macroeconomic assumptions underpinning the collective provision calculation are outlined in Note 3.2.6.6, while the impact of changing the weights of different macroeconomic scenarios during the year is given in Note 48.2.1. (f). As of the reporting date, the expected impacts of adverse macro-economic conditions and post-COVID-19 have been captured via the model outcome as well as a separate management overlay reflecting the considerable uncertainty remaining in the modelled outcome given the unprecedented impacts of adverse macro-economic conditions and COVID-19. Although the credit model inputs and assumptions, including forward-looking macroeconomic assumptions, were revised in response to the adverse macroeconomic conditions and COVID-19 pandemic, the fundamental credit model mechanics and methodology underpinning the Bank’s calculation of ECL have remained consistent with prior periods.

The Bank continued to extend the moratorium for eligible borrowers as directed by the Central Bank of Sri Lanka during the year 2022. All individually significant customers who were under moratorium for a prolonged period of time have been classified at least under stage 2 on a prudent basis when calculating the impairment provisions. Furthermore, a case-by-case analysis has been conducted on the most significant exposures and has been classified as stage 3 when the circumstances demand so. The exposures which are not individually significant have been moved to stage 2 based on the industry risk of the underlying borrowers.

The additional provisions booked as an allowance for overlay for moratorium loans as of 31st December 2021 were further increased during the year covering both individually significant and other loans and advances. This is over and above the impairment provisions derived from the Bank’s impairment model after classifying these loans into stages as per the Bank’s classification criteria for moratorium loans.

A breakdown of the loans and advances of the Bank classified under stage 2 is given in Note 47.2.1. (g). The sensitivity of the individually significant loan impairment to recovery cash flows is given in Note 47.2.1. (c) while the sensitivity of collective impairment provision to the staging of the loans and advances is disclosed in Note 47.2.1. (d).

2.13 Impairment of Other Financial Assets

The Bank reviews its debt securities classified as FVOCI/ amortized cost at each reporting date. Objective evidence that debt security held at FVOCI/amortized cost is impaired/having an increased credit risk includes, among other things, the significant financial difficulty of the issuer, a breach of contract such as a default or delinquency in interest or principal payments, etc. Management judgment has been involved in determining whether there is a significant increase in the credit risk of these instruments or whether these instruments are impaired as of the reporting date.

Equity instruments classified as FVOCI are not subjective for impairment assessment.

2.14 Fair Value of Financial Instruments

The determination of fair values of financial assets and financial liabilities recorded on the Statement of Financial Position for which there is no observable market price are determined using a variety of valuation techniques that include the use of mathematical models. The valuation of financial instruments is described in more detail in Note 3.2.10.

The Bank measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. The fair value hierarchy is given in Note 44.

2.15 Financial Assets and Liabilities Classification

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 44, 'Analysis of Financial Instruments by Measurement Basis'.

2.16 Taxation

The Bank is subject to income tax and judgment is 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 applicable tax laws, at the time of preparation of these Financial Statements.

The details of deferred tax computation are given in Note 16 to the Financial Statements.

2.17 Defined Benefit Plans

The cost of the defined benefit plans and the present value of their obligations are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases, mortality rates, and possible future pension increases if any. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, management considers the interest rates of Sri Lanka government bonds with maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables. Future salary increases are based on the expected future inflation rate and expected future salary increase rates of the Bank.

2.18 Property, Plant and Equipment

The freehold land of the bank is reflected at fair value at each reporting date for Other assets 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.

The details of freehold land and buildings, including methods of valuation, are given in Notes 25.1 and 25.4 to the Financial Statements. The Bank revalued its freehold lands and buildings(remove) as of 31st December 2022 and necessary adjustments were included in the Financial Statements

2.19 Useful Lifetime of the Property, Plant, and Equipment

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

2.20 Commitments and Contingencies

All discernible risks are accounted for in determining the amount of all known liabilities. 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 recognized in the Statement of Financial Position but are disclosed unless they are remote. Details of commitments and contingencies are given in Note 39.

2.21 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 is 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 does not directly generate cash flows as a standalone asset is 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.

2.22 SLFRS 16 – Leases

The Bank uses its judgment to determine whether an operating lease contract qualifies for recognition of right of-use assets. It also uses judgement in the determination of the discount rate in the calculation of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease. As the Bank cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate to measure the lease liability. The incremental borrowing rate is the rate of interest that the Bank would have to pay, to borrow an amount similar to the value of the leased asset, over a similar term and with similar security in a similar economic environment. Further, the Bank applies judgment in evaluating whether it is reasonably certain to renew or terminate the lease at the end of the lease term. That is, it considers all relevant factors that create an economic benefit for it to exercise, either the renewal or termination option.

3. GENERAL ACCOUNTING POLICIES

3.1 Foreign Currency Transactions and Balances

All foreign currency transactions are translated into the functional currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates of the transactions were affected.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to Sri Lankan Rupees using the spot foreign exchange rate ruling at that date and all differences arising on non-trading activities are taken to 'Other operating income' in the Statement of Profit or Loss. The foreign currency gains or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the rate of exchange prevailing at the end of the reporting period.

Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items in foreign currency measured at fair value are translated using the exchange rates at the date when the fair value was determined.

Foreign exchange differences arising on the settlement or reporting of monetary items at rates different from those which were initially recorded are dealt with in the Statement of Profit or Loss. However, foreign currency differences arising on equity instruments classified as fair value through other comprehensive income, financial liabilities designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges are recognized in other comprehensive income.

3.2 Financial Instruments - Initial Recognition, Classification, and Subsequent Measurement

3.2.1 Date of Recognition

Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are initially recognized 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 marketplace. Loans and advances to customers are recognized when funds are transferred to the customers' accounts. The Bank recognizes balances due to depositors when funds are transferred to the Bank.

3.2.2 Initial Measurement of Financial Instruments

The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described in Notes 3.2.3.1(a) and 3.2.3.1 (b). Financial instruments are initially measured at their fair value.

Except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from this amount.

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.

3.2.2.1 ‘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 recognizes the difference between the transaction price and fair value ('Day 1' profit or loss) in the Statement of Profit or Loss over the tenor of the financial instrument using the effective interest rate method. In cases where fair value is determined using data that is not observable, the difference between the transaction price and model value is only recognized in the Statement of Profit or Loss when the inputs become observable, or when the instrument is derecognized.

The “Day 1 loss” arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortized using Effective Interest Rates (EIR) in “Interest income” and “Personnel expenses” over the remaining service period of the employees or tenure of the loan whichever is shorter.

3.2.3 Measurement Categories of Financial Assets and Liabilities

The Bank classifies all of its financial assets based on the business model for managing the assets and the asset's contractual terms, measured at either:

• Amortized cost, as explained in Note 3.2.3.1
• FVOCI as explained in Notes 3.2.3.5 and 3.2.3.6
• FVTPL

The Bank classifies and measures its derivative and trading portfolio at FVPL as explained in Notes 3.2.3.2 and 3.2.3.3. The Bank may designate financial instruments at FVPL if so doing eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 3.2.3.4.

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortized cost or at FVPL when they are held for trading, derivative instruments, or the fair value designation is applied, as explained in Notes 3.2.3.2,3.2.3.3,3.2.3.4 and 3.2.3.7.

3.2.3.1 Loans and Advances to Customers, Debt and Other Securities, Reverse Repurchase Agreements

The Bank only measures loans and advances to customers, debt and other securities and reverse repurchase agreements at amortized cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective of collecting contractual cash flows
• The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

The details of these conditions are outlined below.

3.2.3.1 (a) Business Model Assessment

The Bank determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.

The Bank's business model is not assessed on an instrument-byinstrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel
• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed
• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)

The expected frequency, value, and timing of sales are also important aspects of the Bank's assessment.

The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case' scenarios into account. If cash flows after initial recognition are realized in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

3.2.3.1 (b) The SPPI Test

As a second step of its classification process, the Bank assesses the contractual terms of financial instruments to identify whether they meet the SPPI test. 'Principal' for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium/discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgment and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

3.2.3.2 Derivatives Recorded at Fair Value Through Profit or Loss

A derivative is a financial instrument or other contracts with all two of the following characteristics:

Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variables, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e. the 'underlying').

• It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors.
• It is settled at a future date.

The Bank does not have any derivative instruments as of reporting date.

3.2.3.2 (a) Embedded Derivatives

An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way, similar to a stand-alone derivative.

An embedded derivative cause some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating, or credit index, or other variables, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.

Derivatives embedded in liabilities and non-financial host contacts are treated as separate derivatives and recorded at fair value if they meet the definition of a derivative (as defined above), their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at FVPL. The embedded derivatives separated from the host were carried at fair value in the trading portfolio with changes in fair value recognized in the income statement. Derivatives embedded in financial assets are no longer separated. Instead, they are classified based on the business model and SPPI assessments as outlined in Notes 3.2.3.1 (a) and 3.2.3.1. (b).

The bank does not have any embedded derivatives as of reporting date.

3.2.3.3 Financial Assets or Financial Liabilities Held for Trading

The Bank classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for shortterm profit-making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognized in net trading income. Interest income from financial assets held for trading is recorded under net interest income while dividend income is recorded in net trading income when the right to payment has been established. Included in this classification are debt securities and equity investments that have been acquired principally for the purpose of selling or repurchasing in the near term. The Bank does not have any financial liabilities classified as held for trading as of 31st December 2022.

3.2.3.4 Financial Assets and Financial Liabilities Designated at Fair Value Through Profit or Loss

Financial assets and financial liabilities in this category are those that are not held for trading and have been either designated by management upon initial recognition or are mandatorily required to be measured at fair value under SLFRS 9. Management only designates an instrument at FVPL upon initial recognition when one of the following criteria is met. Such designation is determined on an instrument-by-instrument basis:

• The designation eliminates or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis, Or
• The liabilities are part of a group of financial liabilities that are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, Or
• The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited

Financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in profit or loss with the exception of movements in fair value of liabilities designated at FVPL due to changes in the Bank's own credit risk. Such changes in fair value are recorded in the "Own credit reserve" through OCI and do not get recycled into the profit or loss. Interest earned or incurred on instruments designated at FVPL is accrued in interest income or interest expense, respectively, using the EIR, taking into account any discount/ premium and qualifying transaction costs being integral parts of the instrument.

3.2.3.5 Debt Instruments at FVOCI

The Bank applies this category for debt instruments when both of the following conditions are met:

• The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets
• The contractual terms of the financial asset meet the SPPI test

These instruments largely comprise government securities.

FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognized in OCI. Interest income and foreign exchange gains and losses are recognized in profit or loss in the same manner as for financial assets measured at amortized cost.

The ECL calculation for debt instruments at FVOCI is explained in Note 3.2.6.5. On de-recognition, cumulative gains or losses previously recognized in OCI are reclassified from OCI to profit or loss.

3.2.3.6 Equity instruments at FVOCI

Upon initial recognition, the Bank occasionally elects to classify irrevocably some of its equity investments at FVOCI when they meet the definition of equity under Sri Lanka Accounting Standard - LKAS 32 (Financial Instruments: Presentation) and are not held for trading. Such classification is determined on an instrument-byinstrument basis.

Gains and losses on these equity instruments are never recycled to profit. Dividends are recognized in profit or loss as other operating income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment.

3.2.3.7 Securities Sold Under Repurchase Agreements, due to Banks, due to Depositors, Other Borrowers, and Debt Securities Holders

After initial measurement, securities sold under repurchase agreements, due to banks, due to depositors, due to other borrowers, and due to debt securities holders are subsequently measured at amortized cost. Amortized cost is calculated by taking into account any discount or premium on the issue of funds and costs that are an integral part of the EIR. The Bank does not have compound financial instruments which contain both liability and equity components and require separation as of the date of the issue.

3.2.4 Reclassification of Financial Assets and Liabilities

The Bank does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Bank may acquire, dispose of, or terminates a business line (change in business model). When the Bank reclassifies its financial assets it applies the reclassification prospectively from the reclassification date without restating any previously recognized gains, losses (including impairment gains or losses), or interest. Financial liabilities are never reclassified.

When a financial asset is reclassified out of the amortized cost measurement category and into the fair value through the profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from the difference between the previous amortized cost of the financial asset and fair value is recognized in profit or loss.

When a financial asset is reclassified out of the fair value through the profit or loss measurement category and into the amortized cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount.

When a financial asset is reclassified out of the amortized cost measurement category and into the fair value through another comprehensive income measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from the difference between the previous amortized cost of the financial asset and fair value is recognized in other comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification.

When a financial asset is reclassified out of the fair value through another comprehensive income measurement category and into the amortized cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. However, the cumulative gain or loss previously recognized in other comprehensive income is removed from equity and adjusted against the fair value of the financial asset at the reclassification date. As a result, the financial asset is measured at the reclassification date as if it had always been measured at amortized cost. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification.

When a financial asset is reclassified out of the fair value through the profit or loss measurement category and into the fair value through other comprehensive income measurement categories, the financial asset continues to be measured at fair value.

When a financial asset is reclassified out of the fair value through other comprehensive income measurement categories and into fair value through the profit or loss measurement category, the financial asset continues to be measured at fair value. The cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment at the reclassification date.

The Bank did not reclassify any of its financial assets in 2022.

3.2.5 Derecognition of Financial Assets and Liabilities

3.2.5.1 Derecognition due to Substantial Modification of Terms and Conditions

The Bank derecognizes a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognized as a de-recognition gain or loss, to the extent that an impairment loss has not already been recorded. The newly recognized loans are classified as stage 1 for ECL measurement purposes unless the new loan is deemed to be credit-impaired at the date of inception.

When assessing whether or not to derecognize a loan to a customer, amongst others, the Bank considers the following factors:

• Change in the currency of the loan
• Introduction of an equity feature
• Change in counterparty
• If the modification is such that the instrument would no longer meet the SPPI criterion

If the modification does not result in cash flows that are substantially different, the modification does not result in de-recognition. Based on the change in cash flows discounted at the original EIR, the Bank records a modification gain or loss, to the extent that an impairment loss has not already been recorded.

3.2.5.2 Derecognition Other than for Substantial Modification

3.2.5.2 (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 derecognized when the rights to receive cash flows from the financial asset have expired. The Bank also derecognizes 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 contractual rights to receive cash flows from the financial 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 Pass-through arrangements are transactions whereby the Bank retains the contractual rights to receive the cash flows of a financial asset (the 'original asset'), but assumes a contractual obligation to pay those cash flows to one or more entities (the 'eventual recipients') when all of the following three conditions are met:
• The Bank has no obligation to pay amounts to the eventual recipients unless it has collected equivalent amounts from the original asset, excluding short-term advances with the right to full recovery of the amount lent plus accrued interest at market rates
• The Bank cannot sell or pledge the original asset other than as security to the eventual recipients
• The Bank has to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the Bank is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents including interest earned, during the period between the collection date and the date of required remittance to the eventual recipients

A transfer only qualifies for de-recognition if either:

• The Bank has transferred substantially all the risks and rewards of the asset Or
• The Bank has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset

The Bank considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer.

When the Bank has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset continues to be recognized only to the extent of the Bank's continuing involvement, in which case, the Bank also recognizes 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 the Bank could be required to pay.

3.2.5.2 (b) Financial Liabilities

A financial liability is derecognized when the obligation under the liability is discharged, canceled, or expired. 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 de-recognition 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 recognized in profit or loss.

3.2.6 Impairment Allowance for Financial Assets

3.2.6.1 Overview of the ECL Principles

The Bank has been recording impairment (expected credit losses) for all loans, debt & other financial instruments not held at FVPL. Equity instruments are not subject to impairment under SLFRS 9.

The ECL impairment is based on the credit losses expected to arise over the life of the asset [the lifetime expected credit loss or (LTECL)], when there is a significant increase in credit risk since origination. In all other instances, the impairment is based on the 12 months' expected credit loss (12mECL). The Bank's policies for determining if there has been a significant increase in credit risk are set out in Note 3.2.6.1(b).

The 12m ECL is the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The policy for grouping financial assets measured on a collective basis is explained in Note 3.2.6.4. The details of individual assessments of ECLs are given in Note 3.2.6.3.

The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument's credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. This is further explained in Note 3.2.6.1 (b). Based on the above process, the Bank categorizes its loans into 'stage 1', 'stage 2', 'stage 3' and 'originated credit impaired', as described below:

• Stage 1: When loans are first recognized, the Bank recognizes an impairment based on 12m ECLs. Stage 1 loans also include facilities where the credit risk has improved and the loan has been reclassified from stage 2.
• Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank records an impairment for the LTECLs. Stage 2 loans also include facilities, where the credit risk has improved and the loan has been reclassified from stage 3.
• Stage 3: Loans considered credit-impaired [as outlined in Note 3.2.6.1 (a)]. The Bank records an impairment for the LTECLs.
• Originated credit impaired: Originated credit-impaired assets are financial assets that are credit impaired on initial recognition. They are recorded at fair value at original recognition and interest income is subsequently recognized based on a creditadjusted EIR. ECLs are only recognized or released to the extent that there is a subsequent change in the expected credit losses. The Bank did not have originated credit-impaired loans as of 31st December 2022 and 2021.

For financial assets for which the Bank has no reasonable expectations of recovering either the entire outstanding amount or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) de-recognition of the financial asset.

3.2.5.2 (a) Financial assets

The Bank considers a financial instrument as defaulted and therefore stage 3 (credit-impaired) for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether an individually significant 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 include:

• Reasonable and supportable forecasts of future economic conditions show a direct negative impact on the performance of a customer/group of customers.
• A significant change in the geographical locations or natural catastrophes that directly impact the performance of a customer/ group of customers.
• The value of the collateral is significantly reduced and/or the reliability of collateral is doubtful.
• The borrower is subject to litigation that significantly affects the performance of the credit facility.

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 material default criteria have been presented and the borrower is no longer considered as non-performing in accordance with the Directives of the Central Bank.

Once cured, the decision whether to classify an asset as stage 2 or stage 1 largely depends on the days past due, at the time of the cure. The corresponding reduction in ECL is recognized under "Impairment charge/reversal" in Note 12 to the financial statements.

The Bank's criterion for 'cure' for rescheduled/restructured loans is more stringent than ordinary loans and is explained in Note 3.2.6.10.

3.2.6.1 (b)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 12mECL or LTECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition. The Bank considers exposure to have a significantly increased credit risk when it is past due for more than 30 days.

The Bank also applies secondary qualitative methods for triggering a significant increase in credit risk, such as restructuring of an asset while the asset is less than 30 days past due. Further, rescheduled loans will remain in stage 2 for at least one year from the date of Reschedulment even if such loans become less than 30 days past due. In certain cases, the Bank may also consider that events explained in Note 3.2.6.1 (a) are a significant increase in credit risk as opposed to the default, for customers who are considered as individually significant.

Since March 2020, The Bank is focused on supporting customers who are experiencing financial difficulties because of the COVID-19 pandemic and has offered a range of industry-wide financial assistance measures including the debt moratorium initiated by the Central Bank of Sri Lanka. All individually significant customers who were under moratorium for a prolonged period of time have been classified at least under Stage 2 or moved to the next bucket on a prudent basis when calculating the impairment provisions. Furthermore, a case-by-case analysis has been conducted on the most significant exposures which have been classified as stage 2 or stage 3 when the circumstances demand so. The exposures which are not individually significant have been moved to stage 2 or the next bucket based on the industry risk of the underlying borrowers. The Bank has identified industries such as tourism, import businesses, construction (including condominiums), and agriculture including agrochemicals, transport, and store, personal other consumption needs, etc. as industries carrying an increased credit risk. Accordingly, exposures outstanding from the borrowers operating in these industries have been classified as stage 2. An analysis of the loans classified under stage 2 is given in Note 47.

3.2.6.1 Overview of the ECL Principles

The Bank calculates ECL based on three probability-weighted scenarios to measure the expected cash shortfall (the base case, best case, and the worst case), discounted at an approximation to the EIR. Each of these is associated with different loss rates. The assessment of multiple scenarios incorporate how defaulted loans are expected to be recovered, including the probability that the loans will cure and the value of collateral or the amount that might be received for selling the asset.

Key elements of the ECL calculations are outlined below:

• 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 derecognized and is still in the portfolio. The concept of PD is further explained in Note 3.2.6.4(a).
• 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 principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. The EAD is further explained in Note 3.2.6.4(b).
• LGD - The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including the realization of any collateral. It is usually expressed as a percentage of the EAD. The LGD is further explained in Note 3.2.6.4(c).

3.2.6.3 Calculation of ECLs for Individually Significant Loans

The Bank first assesses ECLs individually for financial assets that are individually significant to the Bank. In the event the Bank determines that such assets are not impaired, moves in to a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. However, assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The criteria used to determine whether individually significant customer is in default is discussed in Note 3.2.6.1 (a).

If the asset is impaired, the amount of the loss is measured by discounting the expected future cash flows of a financial asset at its original effective interest rate and comparing the resultant present value with the financial asset's current carrying amount. In determining the expected future cash flows, the Bank takes into account the base case, the best case, and the worst case scenarios considering various modes of settlement of the impaired credit facilities. The impairment on individually significant accounts are reviewed more regularly when circumstances require it. This normally encompasses a re-assessment of the enforceability of any collateral held and the timing and amount of actual and anticipated receipts. Individually assessed impairment is only released when there is reasonable and objective evidence of a reduction in the established loss estimate. Interest on impaired assets continues to be recognized through the unwinding of the discount. When ECLs are determined for individually significant financial assets, the following factors are considered:

• Aggregate exposure to the customer including any undrawn exposures;
• The viability of the customer's business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flows to service debt obligations;
• The amount and timing of expected receipts and recoveries;
• The realizable value of the security (or other credit mitigants) and the likelihood of successful repossession;

3.2.6.3 Calculation of ECLs for Individually Significant Loans

The Bank calculates ECLs either on a collective or an individual basis. Asset classes where the Bank calculates ECL on an individual basis include:

• All customers whose exposure is more than or equal to the internal threshold for classifying them as individually significant. However, if the customer is determined to be not impaired such customers are moved back to collective ECL calculation.
• The treasury, trading, and interbank relationships (such as Due from banks, debt, and other instruments at amortized cost/ FVOCI)

For all other asset classes, the Bank calculates ECL on a collective basis. The Bank categorizes these exposures into smaller homogeneous portfolios, based on a combination of internal and external characteristics of the loans, as described below:

• Product type
• Type of collateral

3.2.6.4 (a) PD estimation Process

PD estimation for loans and advances under SLFRS 9 is largely based on the Days Past Due (DPD) of the customers which is common for most banks in the country at present.

Accordingly, exposures are categorized among 5 groups based on the DPD as follows.

• Zero days past due
• 1 - 30 days past due
• 31 - 60 days past due
• 61 - 90 days past due
• Above 90 days past due

The movement of the customers into adverse DPD categories is tracked at each account level over the periods and it is used to estimate the amount of loans that will eventually be written off.

However, for loans granted to banks, debt and other financial instruments classified as amortized cost/FVOCI, the Bank relies on external credit ratings in determining their respective PDs. Due to limited stage movements in loan portfolios under moratorium schemes, the Bank has used additional assessments of SICR as explained in Note 3.2.6.1(b) to build an allowance for the overlay to better reflect the portfolio position.

3.2.6.4( b) Exposure at Default

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

To calculate the EAD for a stage 1 loan, the Bank assesses the possible default events within 12 months. However, if a stage 1 loan that is expected to default within 12 months from the balance sheet date is also expected to cure and subsequently default again, then all linked default events are considered. For stage 2 and stage 3 financial assets and credit-impaired financial assets at origination, events over the lifetime of the instruments are considered. The Bank determines EADs by modeling the range of possible exposure outcomes at various points in time, corresponding to the multiple scenarios. The SLFRS 9 PDs are then assigned to each economic scenario based on the outcome of the Bank's models.

3.2.6.4 (c) Loss Given Default

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 realized 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, a 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 that 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.

For financial investments other than loans and advances, the Bank uses the LGD rates specified by the regulator in the Basel III guidelines when calculating the ECL as per SLFRS 9.

3.2.6.5 Debt Instruments Measured at FVOCI

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the impairment that would arise if the assets were measured at amortized cost is recognized in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to the profit and loss upon de-recognition of the assets.

3.2.6.6 Forward-looking Information

The economic environment remains uncertain and future impairment charges may be impacted depending on the longevity of the pandemic and related containment measures. The COVID-19 pandemic no longer significantly impacted the local and global economies.

In its ECL models, the Bank relies on a broad range of forwardlooking information as economic inputs. The inputs and models used for calculating ECLs may not always capture all characteristics of the market as at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material.

In 2022, the Bank assessed the values of the key macro-economic variables in the impairment calculation model including the GDP growth rate, unemployment rate, interest rate, exchange rate, etc. These values have been determined based on the most recent forecasts available as at the date of the calculation.

To reflect these uncertainties in the calculation of expected credit losses, weightages are assigned for multiple economic scenarios during the year. Weights assigned for each scenario is given below along with the weightages used in 2021.

To ensure completeness and accuracy, the Bank obtains the above data primarily from the Central Bank of Sri Lanka (CBSL). Other third-party sources such as World Bank and International Monetary Fund etc are also used when CBSL data is not available.

3.2.6.7 Collateral Valuation

To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible.

The collateral comes in various forms, such as cash, securities, guarantees, real estate, receivables, inventories, other non-financial assets, and credit enhancements such as netting agreements. The fair value of collateral affects the calculation of ECLs. It is generally assessed, at a minimum, at inception and to fall in line with the CBSL directives.

To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent valuation specialists.

3.2.6.8 Collateral Repossessed

The Bank's policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for internal operations are transferred to the relevant asset category at the lower of the repossessed value or the carrying value of the original secured asset. The Bank did not transfer any repossessed assets to its property, plant, and equipment during the years ended 31st December 2022 and 2021.

3.2.6.9 Write-offs

Financial assets are written off either partially or in their entirety only when the Bank has stopped pursuing the recovery. For individual customers, the Bank has a policy of writing off the gross carrying amount when the financial asset is past due for many years, based on historical experience of recoveries of similar assets.

If the amount to be written off is greater than the accumulated impairment, the difference is first treated as an addition to the impairment that is then applied against the gross carrying amount. Any subsequent recoveries are credited to the statement of profit or loss.

3.2.6.10 Rescheduled and Restructured Loans

The Bank sometimes makes concessions or modifications to the original terms of loans in response to the borrower's financial difficulties, rather than taking possession of the collateral. The Bank considers a loan as rescheduled/restructured, when such concessions or modifications are provided as a result of the borrower's present or expected financial difficulties and the Bank would not have agreed to them if the borrower had been financially healthy. Indicators of financial difficulties include defaults on covenants or significant concerns raised by the Credit and Risk Departments. Re-schedulement/restructuring may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms. It is the Bank's policy to monitor rescheduled/ restructured loans to ensure that future payments are likely to occur.

When the Bank reschedules/restructures a loan facility of a customer, the entire portfolio of the customer is classified as minimum stage 2 at the modification date. The Bank also considers whether such assets should be classified as stage 3. Rescheduled customers will remain in stage 3/stage 2 for at least one year even if the rescheduled loan facility becomes a performing loan in terms of CBSL Directives. Restructured loans are upgraded to stage 1 by the Bank’s Risk Department based on their independent evaluation of the customers. If the upgraded rescheduled/restructured loans become past due (for more than 30 days) on a later date, the loss allowance reverts to being measured at an amount equal to lifetime expected credit losses. Details of restructured/rescheduled loans are disclosed in Note 47.2.1 (i). If modifications are substantial, the loan is derecognized, as explained in Note 3.2.5.1.

3.2.6.11 Relief Measures to Assist COVID-19 Affected Businesses and Individuals by CBSL

Central Bank of Sri Lanka provided financial assistance to disrupted industry sectors and the affected businesses/individuals in the form of a debt moratorium through licensed banks/financial institutions, since the inception of the pandemic. The Bank is actively involved in providing assistance to affected customers under these moratorium schemes. As per the 4th wave of the CBSL moratorium, capital and interest repayments were deferred until 30th June 2022. The Bank concluded that these modifications were not substantial to derecognize the original loans and therefore it continued to recognize the original loans in its financial statements. The Bank continued to recognize interest at the rate of a one-year treasury bill rate + 1% on the deferred capital during the period of deferment. Accordingly, the Bank did not require to recognize any modification losses during the year.

However, when calculating the expected credit losses, the Bank classified all individually significant customers who were under moratorium for a prolonged period of time under stage 2 or move to the next bucket on a prudent basis. Furthermore, a case-by-case analysis has been conducted on the most significant exposures which have been classified as stage 2 or stage 3 when the circumstances demand so. Further, an additional provision has been recognized in the Financial Statements as at 31st December 2022 as an allowance for overlay on account of all customers eligible for the 4th phase of the CBSL moratorium, assuming some of these customers would subsequently move to next bucket and stage 2 upon completion of the moratorium. This is over and above the impairment provisions derived from the Bank’s impairment model after classifying these loans into stages as per the Bank’s classification criteria for moratorium loans.

3.2.7 Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position only when the Bank has a legal right to set-off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under LKASs/SLFRSs or for gains and losses arising from a group of similar transactions such as in the Bank's trading activity.

3.2.8 Hedge Accounting

The Bank designates certain derivatives as either:

• Hedges of fair value of recognised assets, liabilities or firm commitments (fair value hedge);
• Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedge); or
• Hedges of net investments in foreign operations (net investment hedges)

Hedge accounting is used for derivatives designated in this way provided certain criteria are met. The Bank documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Bank also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The Bank did not designate any derivative as a hedging instrument during the years ended 31st December 2022 and 2021.

3.2.9 Amortised Cost Measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

3.2.10 Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its nonperformance risk. When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument (Level 01 valuation). A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

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

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price - i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability (Level 01 valuation) nor based on a valuation technique that uses only data from observable markets (Level 02 valuation), then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is wholly supported by observable market data or the transaction is closed out.

Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes a thirdparty market participant would take them into account in pricing a transaction.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

A fair value measurement of a nonfinancial asset considers 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 recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

3.3 Leases

At inception of a contract, the Bank assesses whether the contract is, or contains a lease. A contract is, or contains a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Bank considers whether:

• The contract involves the use of an identified asset. This may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified;
• The Bank has right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and
• The Bank has right to direct the use of the asset. The Bank has this right when it has the decision making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Bank has the right to direct the use of the asset if either;
• The Bank has the right to operate the asset; or
• The Bank designed the asset in a way that predetermines how and for what purpose it will be used.

3.3.1 Bank as the Lessee

The Bank recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made on or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying assets or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right of use asset is subsequently depreciated using straight line method from the commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of right of use assets are determined based on the tenor of rent agreements.

In addition, the right of use asset is periodically reduced by impairment losses, if any, and adjusted for certain re- measurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Banks’ incremental borrowing rate. Generally, the Bank uses its incremental borrowing rate as the discount rate.

The lease liability is subsequently measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments such as Bank changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in profit or loss if the carrying amount of the right of use asset has been reduced to zero.

The Bank presents right of use assets under Note 26 to the financial statements while the corresponding lease liability is presented in Note 34, ‘Other Liabilities’.

3.3.2 Short term Leases And Leases of Low Value Assets

The Bank has elected not to recognise right-of-use assets and lease liabilities for short term leases (that have a lease term of 12 months or less) and leases of low value assets. The Bank recognises lease payments associated with these leases as an expense on a straight line basis over the lease term.

3.3.3 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. If this is the case, then the lease is a finance lease. If not it is an operating lease. As part of this assessment, the Bank considers certain indicators such as whether the lease is for the major part of the economic life of the assets.

When the Bank is the lessor under a finance lease contract, the amounts due under the leases, after deduction of unearned interest income, are included in Note 21, 'Loans and advances’. Interest income receivable is recognised in 'Net interest income' over the periods of the leases so as to give a constant rate of return on the net investment in the leases.

The Bank recognises lease payments received under operating leases as income on a straight line basis over the lease term as part of other income.

3.4 Fiduciary Assets

The Bank provides fiduciary services that result in the holding of assets on behalf of its customers. Assets held in fiduciary capacity are not reported in the Financial Statements, as they are not assets of the Bank.

3.5 Provisions

A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking in to account the risks and uncertainties surrounding the obligation at that date. Where a provision is measured using cash flows estimated to settle the present obligation, its carrying amount is determined based on the present value of those cash flows.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured as the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. The expense relating to any provision is presented in the Statement of Profit or Loss net of any reimbursement.

3.6 Operational Risk Events

Provisions for operational risk events are recognised for losses incurred by the Bank which do not relate directly to the amounts of principal outstanding for loans and advances. The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation as at the reporting date, taking into account the risks and uncertainties that surround the events and circumstances that affect the provision.

3.7 Impairment of Non-Financial Assets

The carrying amounts of the Bank’s non- financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists or when annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. 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.

3.8 Other Taxes

3.8.1 Value Added Tax (VAT)

VAT on financial services is calculated in accordance with Value Added Tax (VAT) 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 VAT and income tax adjusted for the economic depreciation and emoluments payable to employees including cash benefits, non-cash benefits & provisions relating to terminal benefits.

3.8.2 Social Security Contribution Levy

As per the Social Security Contribution Levy (SSCL) Act No. 25 of 2022, effective from October 01, 2022, Bank is liable to pay SSCL on Financial Services at the rate of 2.5% on the value addition attributable to the supply of financial services. Further Non- Financial Services are made liable on the turnover at the rate of 2.5%.

3.8.3 Surcharge Tax

As per the Provisions of the Surcharge Tax Act No. 14 of 2022 if the aggregate of the taxable income of the holding company and all subsidiaries in a group of companies, for the Year of Assessment 2020/21, exceed LKR 2,000 Mn, each company in the group of companies is liable to pay Surcharge Tax calculated at 25% on the taxable income (after deducting profit from dividends received from subsidiaries included in the taxable income)

3.9 Regulatory Provisions

3.9.1 Deposit Insurance and Liquidity Support Scheme

All Licensed Commercial Banks and specialized Banks were required to insure their deposit liabilities in the "Sri Lanka Deposit Insurance and Liquidity Support Scheme" in terms of the Banking Act Direction No. 5 of 2010, issued on 27th September 2010. This was subsequently replaced by the Sri Lanka Deposit Insurance and Liquidity Support Scheme Regulations No. 2 of 2021, dated 06th August 2021. The Bank's total capital ratio as at 31st December 2022 exceed 14% and accordingly the Bank paid a premium of 0.1% of the eligible deposits as deposit insurance premium, during the year ended 31st December 2022.

3.9.2 Crop Insurance Levy

In terms of the Finance Act No. 12 of 2013, all institutions under the purview of Banking Act No. 30 of 1988, Finance Business Act No. 42 of 2011 and Regulation of Insurance Industry Act No. 43 of 2000 are required to pay 1% of the profit after tax as Crop Insurance Levy to the National Insurance Trust Fund effective from 1st April 2013.

4. NEW ACCOUNTING STANDARDS ISSUED DURING THE YEAR/CHANGES TO ALREADY EXISTING ACCOUNTING STANDARDS, BUT NOT EFFECTIVE AS OF 31ST DECEMBER 2022

The Bank has consistently applied the Accounting Policies as set out in Notes to all periods presented in these Financial Statements. Further, the Bank has not early adopted any other accounting standard, interpretation or amendment that has been issued but not effective.

5. ACCOUNTING STANDARDS/CBSL DIRECTIVES ISSUED BUT NOT YET EFFECTIVE AS AT 31ST DECEMBER 2022

5.1 Accounting Standards Issued by the Institute of Chartered Accountants of Sri Lanka

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 1st January 2023.

3.9.1 Deposit Insurance and Liquidity Support Scheme

The amendments clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement (having considered the applicable tax law) whether such deductions are attributable for tax purposes to the liability recognised in the financial statements (and interest expense) or to the related asset component (and interest expense). This judgement is important in determining whether any temporary differences exist on initial recognition of the asset and liability.

Also, under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal.

5.1.2 Amendments to “Accounting Policies, Changes in Accounting Estimates and Errors” (LKAS 8): Definition of Accounting Estimates

The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. Also, they clarify how entities use measurement techniques and inputs to develop accounting estimates. The amended standard clarifies that the effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates if they do not result from the correction of prior period errors.

The amendments are effective for annual reporting periods beginning on or after January 01, 2023. The bank does not expect this will result in a material impact on its Financial Statements

5.1.3 Amendments to “Presentation of Financial Statements” (LKAS 1) and “Making Materiality Judgements” (IFRS Practice Statement 2): Disclosure of Accounting Policies

Amendments to LKAS 1 and IFRS Practice Statement 2, provides guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful by,

• Replacing the requirement for entities to disclose their “significant” accounting policies with a requirement to disclose their “material” accounting policies.
• Adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures.

The amendments are effective for annual reporting periods beginning on or after January 01, 2023. The Group is in the process of revisiting its accounting policy information disclosures to ensure consistency with the amended requirements.

5.1.4 SLFRS 17 - Insurance Contracts

SLFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. SLFRS 17 is effective for annual reporting periods beginning on or after 1 January 2025. The Bank expects that the implementation of this standard may not have a material impact on the financial statements of the Bank.

6. GROSS INCOME

7. NET INTEREST INCOME

7.1 Net Interest Income from Sri Lanka Government Securities

8. NET FEE AND COMMISSION INCOME

8.1 Net fee and Commission Earned from

9. NET GAIN/(LOSS) FROM TRADING

10. NET FAIR VALUE GAIN/(LOSS) FROM FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

11. NET OTHER OPERATING INCOME

12. IMPAIRMENT FOR LOANS AND OTHER LOSSES

12.1 Balances with Banks

12.2 Placements with Banks

12.3 Financial Assets at Amorised Cost - Loans and Receivables to Customers

12.4 Debt and other Instruments

13. PERSONNEL EXPENSES

14. DEPRECIATION AND AMORTISATION EXPENSES

Amortisation of Intangible Assets

Intangible assets, except for goodwill, are amortised on a straight-line basis in the Statement of Profit or Loss from the date when the asset is available for use, over the best estimate of its useful economic life, based on a pattern in which the asset’s economic benefits are consumed by the Bank. The Bank assumes that there is no residual value for its intangible assets.

Investment properties

Properties held to earn rental income have been classified as investment properties. Investment properties are initially recognized at cost. Up to December 2021, After initial recognition the Bank uses the cost method to measure all of its investment property in accodance with requirements in LKAS 40 “Investment Property”. However Bank has changed the Measurement subsequent to initial recognition from cost model to fair value model. Standard permitted to only if this results in a more appropriate presentation

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.

Bank has changed Measurement subsequent to initial recognition from cost model to fair value model. Standard permitted to only if this results in a more appropriate presentation.

Depreciation for the up to year 2022 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:

Amortisation of Right-of-Use Assets

The right of use assets are depreciated using a straight-line method from the commencement date to the earlier of the end of the useful life of the right of use assets or the end of the lease term. The estimated useful lives of right of use assets are determined on the same basis as renewal of rent agreements.

Changes in Estimates

Depreciation/amortisation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate. During the year ended 31st December 2022, the Bank conducted an operational efficiency review and estimates were not changed.

15. OTHER EXPENSES

15.1 Directors' emoluments include fees Paid to Non-executive Directors.

16. TAX EXPENSE

16.1 Reconciliation of Tax Expenses

16.2 Deferred Tax Assets, Liabilities and Income Tax Relates to the Followings:

16.2.1 Composition of Deferred Tax Charge

16.3 Change of the Income Tax Rate from 24% to 30% and Other Amendments

The Bank applied the revised rate of 24% and other amendments in line with the Inland Revenue Amendment Act No. 45 of 2022 to calculate the income tax and deferred tax assets/liabilities as at 31st December 2022.Increased tax rate was applicable for a six month of the year of assesment.

first six months of the year of assessment commencing on April 1,2022, the rate was 24% and for second six months of the same year of assessment at the rate was 30%

16.4 Bank applied the revised rate of 30% to compute the deferred tax as at 31st December 2022 which resulted in Rs. 39 Mn impact (reversal) on total comprehensive income.

16.5 Surcharge tax

The Government of Sri Lanka in its Budget for 2022 has proposed a one-time tax, referred to as a surcharge tax of 25% to be imposed on companies that have earned a taxable income in excess of LK Rs. 2,000 million for the year of assessment 2020/2021. Since the Bank’s taxable income is exceeded Rs. 2,000 Mn, the proposed tax should be deemed an expenditure in the financial statements relating to the year of assessment 2020/2021. The Bill introducing the proposed tax was published after the reporting period and it has not been placed on the Order Paper of the Parliament for its first reading before the date these financial statements were authorized for issue. The proposed tax has not been substantively enacted by the end of the reporting period. Therefore, the financial statements as of 31 December 2021 have not been adjusted to reflect the consequences of this proposal.

According to the Surcharge Tax Act No. 14 of 2022, the Surcharge tax shall be deemed to be an expenditure in the financial statements commenced on 1st January 2020. Based on the Surcharge Tax Act requirements and the SoAT on Accounting for Surcharge Tax issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), the Bank has recognised the total liability to the Surcharge Tax as an adjustment to the opening retained earnings as at 1st January 2022. The Bank paid the 1st installment out of two equal installments amounting to Rs. 260.8 Mn. on April 20, 2022, and second installment amounting Rs.260.8 Mn. paid on 20th July 2022.

17. EARNINGS PER SHARE

The subordinated term debts detailed in Note 33 are resulted for anti-diluted earnings per share.

18. CASH AND CASH EQUIVALENTS

18.1 Analysis of Cash and Cash Equivalents Based on Exposure to Credit Risk

18.2 Stage Wise Classification of Impairment Allowances of Cash and Cash Equivalents

18.3 Cash and Cash Equivalents for Cash Flow Statement

19. PLACEMENTS WITH BANKS

19.1 Analysis of Placements with Banks Based on Exposure to Credit Risk

19.2 Stage Wise Classification of Impairment Allowances of Placements with Banks

20. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

20.1 Quoted Equities

21. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND RECEIVABLES TO OTHER CUSTOMERS

21.1 Analysis of Loans and Receivables to Other Customers Based on Exposure to Credit Risk

21.2 Gross Loans and Receivables Analysis by Product

21.2.1 Lease Rentals Receivable

21.3 Gross Loans and Receivables Analysis by Currency

21.4 Gross Loans and Receivables Analysis Industry

21.4.1 As per the requirement of Central Bank of Sri Lanka (CBSL), a minimum of 10% of the loans and advances shall be granted to the agriculture sector. The Bank has complied with the said requirement as at 31st December 2022 and 31st December 2021.

21.5 Movement in individual and collective impairment based on exposure to credit risk

21.6 Movement in individual and collective impairment

21.7 Based on the impairment model revalidation, product segmentation has been re-classified after evaluating the credit risk characteristics of loan facilities. Analysis of loans and advances, commitments, contingencies mentioned in Note 48 has disclosed the product segmentation as at 31st December 2022 and 2021, after validating the impairment model. The Bank estimated Expected Credit Loss (ECL) as at December 31, 2022, based on the Probability of Default (PD), Loss Given Default (LGD) and Economic Factor Adjustment (EFA) computed as at December 31, 2022, after validating the impairment model.

22. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS

22.1 Analysis of Debt and Other Instruments Based on Exposure to Credit Risk

22.2 Stage Wise Classification of Impairment Allowances of Debt and Other Instruments

23. FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

23.1 Unquoted Equity Securities

23.1.2 Valuation of Unquoted Equity Securities

24 INVESTMENT IN SUBSIDIARIES

24.1 Investment in Subsidiary includes the investment made by the Bank in Payment Services (Private) Limited, amounting to Rs.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 10th June 2019. With this acquisition, Payment Services (Private) Limited has become a fully owned subsidiary of Sanasa Development Bank PLC, with effect from 26th May 2020. Since this investment is immaterial, The Bank do not prepare consolidated Financial Statements.

25. PROPERTY, PLANT AND EQUIPMENT

Rates of depreciation for each category of property, plant and equipment are given in Note 14, 'Depreciation and Amortisation Expenses'.

25.1 Freehold land and Buildings

The details of the land and buildings owned by the Bank are as follows:

25.2 During the financial year, the Bank acquired property, plant and equipment to the aggregate value of LKR 137,227,904/- (2021 - LKR 495,986,096/-). Cash payments amounting to LKR 137,227,904/-(2021 - LKR 495,986,096/-) were made during the year for purchase of property, plant and equipment.

25.3 Property, plant and equipment includes fully depreciated assets having a gross carrying amounts of LKR 1,734,533,086/- 2021 - LKR 1,620,924,106/- )

25.4 There were no restrictions on the title of the property, plant and equipment as at 31 December 2022.

25.5 There were no idle property, plant and equipment as at 31 December 2022.

26. RIGHT OF USE ASSETS

27. INVESTMENT PROPERTIES

27.1 The details of the Investment Properties Owned by the Bank are as Follows:

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

27.2 Assets classified as investment properties include land and building located in Kegalle. Market value (Level 3) of the above asset is LKR 75,000,000 /-. Valuation was carried out by E M P A G N I B Ekanayake independence Professional Valuer on 31st December 2022. Market comparable method is used for value the property and rate per perch is Rs. 1,200,000/-.

27.3 Assets previously classified as investment property and Property plant and equipment have been transferred to non-current assets available for sale at the end of 2022 with the intention of selling the property in 2023.All the criteria given by SLRS 05 were satisfied in its transfer to non-current assets held for sale.

27.4 Non-Current Assets Held for Sale

As per the SLRS 05 entity shall measure the Non current asset held for sale at the lower of its carrying amount and fair value less cost of sale. Market value (Level 3) of the above asset is LKR 75,000,000 /-. Valuation was carried out by E M P A G N I B Ekanayake independence Professional Valuer on 31st December 2022. Market comparable method is used for value the property and rate per perch is Rs. 1,200,000/-. Subsequently said asset was sold at Rs. 75,000,000 in February 2023.

28. INTANGIBLE ASSETS

There were no restrictions on the title of the intangible assets as at the reporting date. Further, there were no items pledged as securities for liabilities.

Intangible assets of the Bank as at 31st December 2021 only include computer software and cost of licenses. Rates of amortisation for computer software and licenses are given in Note 14, 'Depreciation and Amortisation Expenses'.

28.1 There were no idle intangible assets as at 31 December 2021.

28.2 There were no restrictions on the title of the intangible assets as at 31 December 2021.

29. OTHER ASSETS

30. DUE TO OTHER CUSTOMERS

30.1 Analysis of Due to Other Customers

31. OTHER BORROWINGS

31.1 Money Market Borrowings

31.2 Details of Term Loans

31.2.1 Movement in Term Loans

The Bank complied with all borrowing covenants reported under Note 32.1 as at 31st December 2022, other than the following covenant breaches as at 12th April 2023,

- DFC - NPL Ratio since June 2022 and Open Credit Exposure Ratio (OCER) since September 2022. The Bank holds dollar denominated FDs to mitigate the foreign currency risk and those are matching the dollar repayment schedule of the lender. The bank has intimated these breaches to the relavant lenders and the consent for waivers were obtained during post balance sheet period.

31.3 Securitised borrowings

31.4 Refinance Borrowings

Movement in refinance loans

31.4.1 Maturity Analysis of Refinance Borrowings

31.5 Securities and Terms of Borrowings

Interest rate ranging for above borrowings 0% to 39.27% per annum.
Bank has pledged from the lease portfolio sum of LKR 308,013,984.43 (2021 - LKR 655,455,469/- ) for the securitised borrowings.
Bank has pledged from the loan portfolios sum of LKR 3,573,204,504.04 (2021 - LKR 2,768,619,114/- ) for other borrowings.

32. SUBORDINATED TERM DEBTS

32.1 Details of Subordinated Term Debts

The Bank complied with all borrowing covenants reported under Note 32.1 as at 31st December 2022, other than the following covenant breaches as at 12th April 2023

- BIO - Open Credit Exposure Ratio (OCER) since September 2022 and Interest Rate Risk Ratio (IRRR) since March 2022 - DGGF - Return on Assets (ROA) since May 2022 and PAR90+ Rescheduled to Loan Ratio since June 2022.

The Bank holds two-dollar denominated FDs to mitigate the foreign currency risk and those are matching the dollar repayment schedule of the lender. The bank has intimated these breaches to the relavant lenders and the consent for waivers were obtained during post balance sheet period. Further, BIO loan is a Tier II capital instrument and continue to qualify as such.

33. RETIREMENT BENEFIT OBLIGATION

33.1 Defined Benefit Liability

33.1.1 Movement in Defined Benefit Obligation

33.1.2 Net benefit expense

33.1.3 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 2021. Appropriate and compatible assumptions were used in determining the cost of retirement benefits. The principal assumptions used are as follows:

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 11.1 years

The Bank generally uses the 10-year treasury bond rate as the discount rate. The treasury bond rates increased significantly during the year and was around 30% range during the latter part of 2022. As per the “Frequently Asked Questions (FAQs) on Use of Discount rate under the uncertain Economic Conditions” issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) it can be considered an adjusted treasury bond rate as the discount rate for the purpose of the actuarial valuations as at 31st December 2022, on the basis that the current treasury bond rates do not reflect only the time value of money. Accordingly, an adjusted discount rate of 18% was derived by removing a credit spread from the current treasury bond rate.

33.2 Sensitivity analysis on discounting rate and salary increment rate to statement of financial position and comprehensive income.

33.3 The expected Benefit Payout in the Future Years of Retirement Gratuity

34. OTHER LIABILITY

34.1 Movement in Lease Liabilities

34.2 Maturity Analysis of Lease Liabilities

35. STATED CAPITAL

35.1 Details of Ordinary Shares Issued and Fully Paid

35.2 Information of Rights Issue and Secondary Public Offer of Ordinary Voting Shares

33.1.3 The Principal Financial Assumptions Used are as Follows:

35.2.1.1 Utilization of Funds Raised Through Rights Issue in December 2020

35.2.2 Secondary Public Offer (SPO) of Ordinary Shares in August 2021

35.2.2.1 Utilization of funds raised through Secondary Public Offer (SPO) of Ordinary Shares in August 2021

36. STATUTORY RESERVE FUND

37. RETAINED EARNINGS

38. OTHER RESERVES

39. CONTINGENT LIABILITIES AND COMMITMENTS

39.1 Bank Guarantees and Commitements

39.2 Maturity Analysis of Bank Guarantees and Commitements

39.2 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

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

40. EVENTS OCCURRING AFTER THE REPORTING DATE

41. RELATED PARTY DISCLOSURE

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”.

41.1 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:

41.2 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.

41.2.1 Key Management Personnel Compensation

41.2.2 Other Transactions (Loans and Receivables) with Key Management Personnel - Balance Outstanding

41.2.3 Deposits and Investment from Key Management Personnel - Balance Outstanding

41.2.4 Other Payment to Key Management Personnel

41.2.5 Shareholdings by Key Management Personnel

41.2.5 Shareholdings by Key Management Personnel

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.

41.2.7 Recurrent and Non-recurrent Related Party Transactions

The Bank dis not have any transactions where the aggregate value of the non-recurrent Related Party Transactions exceeds 10% of the Equity or 5% of the Total Assets, whichever is lower.

The Bank did not have any transactions where the aggregate value of the recurrent Related Party Transactions exceeds 10% of the gross income of the Bank.

42. ASSETS PLEDGED

Bank has pledged from the lease portfolio sum of LKR 308,013,984.43 (2021 - LKR 655,455,469/- ) for the securitised borrowings. Bank has pledged from the loan portfolios sum of LKR 3,573,204,504.04 (2021 - LKR 2,768,619,114/-) for other borrowings.

43. ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

44. FAIR VALUE OF FINANCIAL INSTRUMENTS

44.1 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.

44.2 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

44.2.1 Analysis of Financial Instruments Recorded at Fair Value by Level Of Fair Value Hierarchy

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

44.3 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.

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.

45. SEGMENT REPORTING

The following table presents income, profit, total assets, total liabilities & cash flows of the Bank’s operating segments.

* Inter segment interest income and interest expense have been adjusted to net interest income in Treasury and Banking segments and comparative figure in this Financial Statements is amended.

46. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

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

47. RISK MANAGEMENT

47.1 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 continuous profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is mainly exposed to Credit Risk, Liquidity Risk, Market Risk and Operational Risk which has been disclosed in this note as summarised below:

Risk Management Framework

The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has delegated its authority to Board Integrated Risk Management Committee (BIRMC) which is responsible for developing and monitoring Bank’s risk management policies. The Committee comprises of Non - Executive Directors. Meetings of BIRMC are held regularly, and the Board of Directors are duly updated of its activities.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls and to monitor adherence to established limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, continuously updates and maintains a disciplined and constructive control environment, in which all employees are assigned and made to understand their respective roles and responsibilities.

Integrated Risk Management Unit

The business units (i.e. Credit Departments, Branches, Regional Offices, Treasury etc.) have primary responsibility for Risk Management. The Integrated Risk Management Unit, which has no responsibility for profit or volume targets, acts as the 2nd line of defense and reports to the Chief Risk Officer (CRO) who in turn directly reports to the BIRMC.

Asset/Liability Management Committee (ALCO)

EIRMC consists of executive members of the management team, including the CEO, the CRO and business lines heads, with the main role of coordinating management efforts to implement the RMF. The EIRMC shall include representatives of both the 1st and 2nd line units responsible for material risks, including management of the lending divisions/lines, Treasury, Finance, Operations, as well as Risk Management representatives.

Risk Measurement and Reporting

The Bank’s risks are measured using appropriate techniques based on the type of risk and industry best practices. The Bank also carries out Stress Testing to identify the effect of extreme events/worst case scenarios in most of the major types of risks and the results are reported to Board Integrated Risk Management Committee (BIRMC) on a periodic basis. Monitoring and controlling risks are primarily performed based on policies, limits and thresholds 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 (Risk Appetite).

The Bank’s risk measurement and reporting functions were further strengthened during the year amidst the unprecedented economic crisis during the year under review. The credit risk of the Bank’s loan book increased as the borrowers required remedial actions through restructuring/ rescheduling which impacted the loan repayments. The regulatory restrictions on initiating legal actions for recovery of loans and advances further elevated the credit risk. Similarly, market risk too increased due to significant volatility in financial markets locally as well as globally. The operational risks too increased owing to potentially higher external frauds due to economic reasons, the work from home arrangements, conducting branch operations with limited staff, etc. during the lockdown periods.

In this back drop, the Bank took additional measures to ensure that the elevated risks caused by the macroeconomic environment are adequately managed. Continuous reviews of the limits, policies and performance were carried out during the period. Some of these include;

• Reviewed risk elevated industries in the context of Macro Economic conditions
• Set up a special Remediation and Rehbilitation Unit to closely work with the Branches in providing reasonable remediation for distressed accounts and borrowers.
• Used of a range of additional stress tests to assess the impact on Bank’s performance and capital.
• Strengthened the remedial activities by allocating specific staff from the Branches, Central Credit Dept. to work with borrowers in providing solutions.
• Ensured adequate liquidity resources were held to meet Bank’s obligations, given the uncertainties caused by the pandemic.

Risk Mitigation

As part of its overall risk management, the Bank obtains various types of collaterals to mitigate the risk. Details such as nature of the collateral that could be accepted, required security margin etc. are clearly defined in the Credit Policy of the Bank and any deviations require specific approval. However, respective approving authorities would take into account the availability of security only as the secondary source of repayment.

47.2 Credit Risk

Credit risk is the risk of financial loss to the Bank, if a borrower or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances and investments in debt securities. In addition to the credit risk from direct funding exposures, the Bank would also be exposed to indirect liabilities such as guarantees, which would carry credit risk.

The Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector concentration risks) to ensure stringent Credit Risk Management.

47.2.1 Assessment of Expected Credit Losses

47.2.1 (a) Analysis of the total amortised cost for expected credit losses

47.2.1 (b) Movement of the total allowance for expected credit losses during the period

The methodology used in the determination of expected credit losses is explained in Note 3.2.6 to financial statements. As explained in the said Note, the Bank has made allowances for overlays where required to address the uncertainties and potential implications of COVID-19.

47.2.1 (c) Sensitivity Analysis: Impact of extending the recovery cash flows by further one year for individually significant impaired loans

Had the Bank further extended the recovery cash flows by one year, only for instances where cash flow is forecasted based on collateral realisation, the cumulative impairment provision for individually significant impaired loans would have increased by Rs 166.7 Mn (2021: Rs 253.73 Mn).

47.2.1 (d) Sensitivity Analysis: Impact of Staging of Loans and Advances on Collective Impairment

If all loans and advances currently in stage 2, were moved to stage 1, the ECL provision of the Bank as at 31st December 2022 would have reduced by approximately 89% (2021 - 66%). The total loans and advances in stage 2 as at 31st December 2022 amounts to Rs 7.02 Bn of the Bank.

If all loans and advances currently in stage 1, were moved to stage 2, the ECL provision of the Bank as at 31st December 2022 would have further increased by approximately 663% (2021 - 944%). The total loans and advances in stage 1 as at 31st December 2022 amounts to Rs 96 Bn of the Bank. The management believes that a movement of the entire stage 1 loan portfolio to stage 2 is highly unlikely.

47.2.1 (e) Sensitivity Analysis: Impact on collective impairment (loans & advances, credit related commitment & contingencies) due to changes in Probability Default (PDs) and Loss Given Default (LGDs)

47.2.1 (f) Sensitivity Analysis: Impact on Collective Impairment (Loans & Advances, Credit Related Commitment & Contingencies) due to Changes in Forward Looking Information

The Bank calculates expected credit losses based on three probability-weighted scenarios. The weightages used by the Bank as at 31st December 2022 are disclosed in Note 3.2.6.6 along with the weightages used in 2022. During the year, due to the uncertainties arise current adverse macro-economic conditions on the business operations , the Bank increased the weightage assigned to the worst case scenario by 5%, decreasing the weightage of the base case scenario by the same amount. Accordingly, the Bank's impairment provision increased by approximately Rs 13.9 Mn during the year.

A further worst case scenario increase up to 100% with a ) weightage on other scenario,would have increased the collective impairment provision of the Bank by approximately Rs 52Mn as at 31st December 2022.

Following table also summarizes the key economic indicators (GDP, Unemployment) used in estimating economic factor adjustment and impact on their changes.

Since the beginning of the year, as the Bank has reassessed the key economic indicators used in its ECL models, the expected GDP growth rate over the next few years has been revised downwards, given the slowdown of economy. Unemployment also follow a similar trend. Central Bank base rates have also been revised downwards for the short term, as part of the governmental response. Long-term expectations remain unchanged.

47.2.1 (g) Breakdown of Loans Classified Under stage 2

Loans classified under the stage 2 includes contractually past due loans and loans which have been shifted to stage 2 based on the criteria specified in the Note 3.2.6.1(a).

47.2.1 (h) Overview of Rescheduled/Restructured Loans & Advances

47.2.1 (i) Overview of rescheduled/restructured loans & advances upgraded during the year

The Bank upgrades rescheduled/restructured loans from stage 3/stage 2 to stage 1 as per the upgrading policy described in Note 3.2.6.10 of the Financial Statements. During the year the Bank upgraded Rs 390 Mn worth of rescheduled/restructured loans to stage 1. Due to this upgrade, the impairment provision against these loans decreased from Rs 37 Mn as at 31st December 2021 to Rs 8Mn as at 31st December 2022.

47.2.1 (j) Management Overlays on ECL Allowance

The Bank’s models have been constructed and calibrated using historical trends and correlations as well as forward looking economic scenarios. The severity of the current macro-economic projections and the added complexity caused by the various support schemes and regulatory guidance across the main regions in which the Bank operates could not be reliably modelled for the time being. As a consequence, the existing models may generate results that are either overly conservative or overly optimistic depending on the specific portfolio / segment. Bank expects that post-model and other judgmental adjustments will be applied for the foreseeable future. Post-model adjustments and management overlays made in estimating the reported ECL as at 31 December are set out in the following tables:

The Bank is in the process of implementing internal scorecard system for analyzing credit risk of financial assets starting from next financial year.

The Bank does not have significant amount of financial assets that are written off but are still subject to enforcement activity.

47.2.2 Risks on Credit–related Commitments

The Bank makes available to its customers, guarantees that may require the Bank to make payments on behalf of customers and enters into commitments to extend credit lines to secure their liquidity needs.

47.2.3 Collateral and Other Credit Enhancements

48.2.3 (a) Net exposure to credit risk

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral. The main types of collateral obtained are as follows:

For commercial lending: charges over real estate properties, cash, inventory and trade receivables, shares etc.
For retail lending: mortgages over residential properties, motor vehicles, gold etc.

Management monitors the market value of collateral and will request additional collateral if the market values are not sufficient in accordance with the underlying agreement. It is the Bank’s policy to dispose repossessed properties in an orderly manner. The proceeds are used to recover the outstanding claim.

There was no change in the Bank's collateral policy during the year. Further, the Bank did not observe any significant deterioration in the quality of the collaterals and other credit enhancements during the reporting period.

The Bank does not provide for any allowances for ECL against financial assets secured by cash/deposits held within the Bank. Further, no allowance for ECL has been recognised for government securities denominated in Sri Lankan rupees, other financial assets secured by government guarantees, treasury bills and treasury bonds. Except for the above, Bank has recognised ECL for all other financial assets classified at amortised cost and debt instruments at FVOCI.

The following table shows the maximum exposure and net exposure (net of fair value of any collaterals held) to credit risk by class of financial asset, before netting off impairment for expected credit losses.

The loans & advances of the Bank are secured against immovable property and cash/deposits held within the Bank approximately 10% each. (2021: 10% and 5%). Further 12% (2021: 11%) of the loans & advances are secured against other securities including movable property, gold, lease receivables, etc. Approximately 31% (2021: 51%) of stage 3 loans & advances of the Bank are secured against immovable property and cash/deposits held within the Bank.

Approximately 53% of the loan book consists of Upahara and Uththamachara, SME and Personal loans, out of its total lending portfolio. 65% of this portfolio is salary/pensioned based. 9% of loan accounts are covered through collateral like properties. And also Upahara and Uththamachara loan portfolio is 100% backed by insurance coverage.

47.2.3 (b) Offsetting Financial Assets & Liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the Statement of Financial Position when the Bank has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

47.2.3 (c) Financial Assets & Liabilities Not Subject To Offsetting

Amounts that do not qualify for offsetting include netting arrangements that only permit outstanding transactions with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such netting arrangements include repurchase arrangements and other similar secured lending and borrowing arrangements.

47.2.4 Stage-wise Movement of Loans & Advances and Commitments & Contingencies

48.2.4. (a) Stage-wise movement of gross carrying values of loans and advances

Changes in the gross carrying amount of loans and advances during the period that contributed to the changes in impairment provision is given below:

47.2.4. (b) Stage-wise Movement of Impairment for Loans and Advances

More information about the significant changes in the impairment for loans and advances during the period is provided in the tables below

47.2.4. (c) Stage-wise Movement of Gross Carrying Values of Other Financial Assets

The Bank did not obverse any significant stage movements in other financial assets, which includes cash and cash equivalents, placements with banks, debt and other instruments at amortised cost and debt instruments at fair value through other comprehensive income.

47.2.5 Analysis of Risk Concentration

The following tables show the exposure to credit risk for the Financial Assets, including geography of counterparty and industry.

47.2.5.1 Geographical Distribution

Gross advance portfolio - Geographical wise is as follows

47.2.5.2 Industry Analysis

Gross advance portfolio - Industry wise is as follows

47.2.6 Commitments and Contingencies

To meet the financial needs of customers, the Bank enters into various commitments and contingent liabilities. Even though these obligations may not be recognised in the Statement of Financial Position, they do contain credit risk and are, therefore, part of the overall risk of the Bank.

The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Bank should have to pay if the guarantee is called upon. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the Statement of Financial Position. The Bank's maximum credit risk exposure for commitments and contingencies are disclosed in the Note No. 39.

Bank does not recognize a loss allowance for financial guarantee contracts as these contracts are fully backed by a Bank deposit (Savings or fixed deposit)

47.3 Liquidity Risk and Funding Management

Liquidity risk is the risk that the Bank will encounter difficulties in meeting its financial commitments that are settled by delivering cash or another financial asset. Hence, the Bank may 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 continuously managing assets with liquidity in mind and 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 assumed to be easily liquidated in the event of an unforeseen interruption of expected cash flow. The Bank also has committed lines of credit that could be utilised 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 specific to the Bank. The most important of this is to maintain the required ratio of liquid assets to liabilities, to meet the regulatory requirement (20%). Liquid assets consist of cash, short–term bank deposits and liquid debt securities including government securities. Further the Statutory Liquid Assets Ratio of the Bank for the month of December 2022 is as follows.

47.3.1 Statutory Liquid Assets Ratio (SLAR)

47.3.2 Loans & Advances to Deposits (Due to Banks and Due to Depositors) Ratio

The Bank is aware of the importance of deposits as a source of funds for its lending operations. This is monitored using the following ratio, which compares loans & advances to deposits.

Loans & advances to deposits ratio as at 31st December 2022: 112% (2021: 125%)

47.3.3 Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities

The tables below summarise the maturity profile of the expected undiscounted cash flows of the Bank’s financial assets and financial liabilities as at 31st December 2022. However, the Bank expects that many customers will not request repayment on the earliest date it could be required to pay and the tables do not reflect the expected cash flows indicated by its deposit retention history based on the behavioural pattern.

Contractual Maturities of Undiscounted Cash Flows of Financial Assets and Financial Liabilities

Financial guarantees contracts issued by the Bank has short term maturity period (maximum period of one year) as at 31st December 2021 and 31st December 2020.

47.4 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 such as interest rates, foreign exchange rates, commodity prices and equity prices. The Bank classifies exposures to market risk into either trading or non–trading portfolios and manages each of those portfolios separately.

Market risk limits are set and continuously reviewed by the risk department and treasury department of the Bank. As a part of its established market risk management process, the risk department and treasury department also monitors early signs of possible changes in market conditions such as : anticipated and actual changes to interest rates; scio economic factors driving mortgage prepayment behaviors; and economic and geopolitical factors driving currency and equity price movement. Those two departments are take adequate actions to mange market risk when necessary.

47.4.1 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 Bank’s policy is to continuously monitor positions on a daily basis and use periodic interest re-pricing strategies to ensure positions are maintained within prudential levels.

The following tables demonstrate the sensitivity of the Bank's Statement of Profit or Loss for the year ended 31st December 2022 and 31st December 2021 to a reasonable possible change in interest rates, with all other variables held constant.

The below computation is based on the rate sensitive assets and liabilities which are to be matured or re-priced within one year.

Rate Sensitive Assets (RSA) & Rate Sensitive Liabilities (RSL)

Impact on Statement of Profit or Loss due to Interest Rate Shocks

Impact on Statement of Profit or Loss due to interest rate shocks

Net Advance to Customers

Interest Rate Sensitivity Analysis

The tables below analyse 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.

47.4.2 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.

The Bank has two dollar denominated borrowings, granted by Belgian Investment Company for Developing Countries (BIO), USD 8Mn and The United States International Development Finance Corporation (DFC) , USD 40Mn as at 31st December 2022. These two borrowings are placed as two dollar denominated deposits with the Bank of Ceylon matching the capital repayment schedules of the loans.

Loan granted by BIO will be matured in December 2024. Therefore, the dollar fixed deposit was taken for the same maturity to cover the capital repayments i.e USD 8Mn to be made at the maturity. DFC loan will be matured in June 2028 and the dollar fixed deposits hedged against this loan will be matured at each installment repayment date.

47.5 Operational Risk

Operational risk is the risk of losses arising from failed internal processes, systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. Strategic and Reputational Risks are not covered in Operational Risk.

Operational Risks of the Bank are mitigated and managed through a Board approved Operational Risk Management Policy control framework which consists of monitoring and responding to potential risks such as segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, Business Continuity Planning etc. Operational Risk Management Unit reports to Chief Risk Officer and the Board Integrated Risk Management Committee which maintains a high level overall supervision of managing Operational Risks of the Bank.

47.6 Capital Management

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.

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 to enhance 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 monitor the credit growth carefully.

As mentioned in the Note 36.2, the Bank raised capital via a Rights Issues and Secondary Public Offer (SPO) to strengthen the capital ratios of the Bank

48. COMPARATIVE INFORMATION

The comparative information has been reclassified wherever necessary to conform to the current year’s presentation and details are given below.

48.1 Statement of Profit or Loss

Other income classified under account maintenance fee has been reclassified to other income and comparative figure in these financial statement is amended.

48.2 Statement of Financial Position

There were no reclassifications during the year.

48.3 Statement of Cash Flow

Changes in other assets which were previously reported under receipts from other operating activities have been reclassified to changes in other assets and comparative figure in this Financial Statements is amended.

Changes in other liabilities which were previously reported under payments on other operating activities have been reclassified to changes in other liabilities and comparative figure in this Financial Statements is amended.

VAT on FS paid presented under cash flows from operating activities in 31 December 2020 has been reclassified and presented under tax paid and comparative figure in these Financial Statements is amended.