1. Reporting Entity
1.1.Corporate information
Commercial Bank of Ceylon PLC (the “Bank”) is a public limited liability company listed on the Colombo Stock Exchange (CSE), incorporated on June 25, 1969 under the Companies Ordinance No. 51 of 1938, and domiciled in Sri Lanka. It is a licensed commercial bank regulated under the Banking Act No. 30 of 1988 and amendments thereto. The Bank was re-registered under the Companies Act No. 07 of 2007 on January 23, 2008, under the Company Registration No. PQ 116. The registered office of the Bank is situated at “Commercial House”, No. 21, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka.
The ordinary shares of the Bank have a primary listing on the CSE.
The staff strength of the Bank as at December 31, 2017 was 4,982 (4,987 as at December 31, 2016).
Corporate information is presented in the inner back cover of this Annual Report.
1.2 Consolidated Financial Statements
The Consolidated Financial Statements as at and for the year ended December 31, 2017, comprise the Bank (Parent Company) and its Subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in its Associates.
The Bank does not have an identifiable parent of its own. The Bank is the Ultimate Parent of the Group.
1.3 principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries and associates
Commercial Bank of Ceylon PLC
The principal business activities of the Bank are providing a comprehensive range of financial services encompassing accepting deposits, personal banking, trade financing, offshore banking, resident and non-resident foreign currency operations, travel-related services, corporate and retail credit, syndicated financing, project financing, development banking, lease financing, hire purchase financing, rural credit, issuing of local and international debit and credit cards, tele-banking, internet banking, mobile banking, money remittance facilities, dealing in Government Securities and treasury-related products, salary remittance package, bullion trading, export and domestic factoring, pawning, margin trading, e-Banking services, bancassurance and Islamic banking products and services, etc.
Commercial Development
Company PLC (CDC)
Principal business activities of CDC are property development, related ancillary services and outsourcing of staff for non-critical functions of the Bank.
During 2015, the Board of Directors of the Bank resolved to reduce the shareholding of CDC, (in which the Bank had a stake of 94.55%) to comply with the requirements of the Listing Rule No. 7.13 of the CSE on Minimum Public Holding. Accordingly,
the Bank disposed a part of shares through the CSE and reduced the shareholding in CDC to 92.97% by December 31, 2017 (93.85% by December 31, 2016) and is in the process of taking steps to dispose the required number of shares to adhere to the requirements of the Listing Rules.
CDC, holds a 20% stake of Commercial Insurance Brokers (Pvt) Limited (CIB). The Bank has a significant influence over financial and operating activities of CIB though it effectively holds only 18.59% as at December 31, 2017 (18.77% as at December 31, 2016).
ONEzero Company Limited
The principal business activities being providing IT – related services.
Serendib Finance Limited
Principal business activities being providing financial services including leasing, hire purchase, loans, etc.
Commex Sri Lanka S.R.L.
Commex Sri Lanka S.R.L. inaugurated its money transfer operation during 2016 following the grant of a Money Transfer License from the Bank of Italy.
It operates as an agent to the Bank for opening of accounts, providing money transfer services, issuance and encashment of foreign currencies and travellers cheques, collecting applications for credit facilities and handling of ATM cards, etc.
Commercial Bank of Maldives Private Limited
Commercial Bank of Maldives Private Limited, a fully-fledged Tier 1 Bank, inaugurated its banking operations in the Maldives on September 26, 2016. This is a Subsidiary of the Bank partnering with Treetop Investments Maldives.
The principal activities include offering of an extensive range of banking and related financial services.
CBC Myanmar Microfinanace Company Limited
CBC Myanmar Microfinanace Company Limited was incorporated in Myanmar on April 4, 2017 as a fully owned subsidiary of the Bank.
The principle business activities include engaging in microfinance business.
A licence was issued by the Myanmar Microfinance Supervisory Enterprise for the Company to operate as a non-saving deposit organisation. The Company is yet to commence its commercial operations.
Equity Investments Lanka Limited
The principal activities include investment services, risk capital and venture capital management.
Commercial Insurance Brokers (Pvt) Limited (CIB)
CIB, a private limited liability company is an insurance broker registered with the Ministry of Finance in terms of legislation.
There were no significant changes in the nature of the principal business activities of the Bank and the Group during the financial year under review.
2. Basis of Accounting
2.1 Statement of compliance
The Consolidated Financial Statements of the Group and the separate Financial Statements of the Bank, have been prepared and presented in accordance with the Sri Lanka Accounting Standards (SLFRSs and LKASs), laid down by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in compliance with the requirements of the Companies Act and the Banking Act and provide appropriate disclosures as required by the Listing Rules of the CSE. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting.
These SLFRSs and LKASs are available at www.casrilanka.com
The Group did not adopt any inappropriate accounting treatments, which are not in compliance with the requirements of the SLFRSs and LKASs, regulations governing the preparation and presentation of the Financial Statements.
Details of the Group’s Significant Accounting Policies followed during the year are given in Notes 6 to 10.
The formats used in the preparation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL for the preparation, presentation and publication of Annual Audited Financial Statements of Licensed Commercial Banks.
2.2 Responsibility for Financial Statements
The Board of Directors of the Bank is responsible for the preparation and presentation of the Financial Statements of the Group and the Bank as per the provisions of the Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards.
The Board of Directors acknowledges their responsibility for Financial Statements as set out in the “Annual Report of the Board of Directors”, “Statement of Directors’ Responsibility” and the certification on the Statement of Financial Position.
These Financial Statements include the following components:
- an Income Statement and a Statement of Profit or Loss and Other Comprehensive Income providing the information on the financial performance of the Group and the Bank for the year under review.
- a Statement of Financial Position providing the information on the financial position of the Group and the Bank as at the year end.
- a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and the Bank.
- a Statement of Cash Flows providing the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation of those cash flows.
- Notes to the Financial Statements comprising Significant Accounting Policies and other explanatory information.
2.3 Approval of Financial Statements by the Board of Directors
The Financial Statements of the Group and the Bank for the year ended December 31, 2017 (including comparatives for 2016), were approved and authorised for issue by the Board of Directors in accordance with Resolution of the Directors on February 23, 2018.
2.4 Basis of measurement
The Financial Statements of the Group have been prepared on the historical cost basis except for the following material items stated in the Statement of Financial Position.
| Items |
Basis of measurement |
Note No./s |
| Held-for-trading financial instruments including financial derivatives |
Fair value |
30 & 31 |
| Financial investments – Available for sale |
Fair value |
34 |
| Land and buildings |
Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation |
39 |
| Defined benefit obligation |
Net liability for defined benefit obligations are recognised as the present value of the defined benefit obligation, less net total of the plan assets, plus unrecognised actuarial gains, less unrecognised past service cost, and unrecognised actuarial losses |
50 |
| Equity settled share-based payment arrangements |
Fair Value on grant date |
54 |
2.5 Going concern basis of accounting
The Management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future.
Furthermore, the Management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the Financial Statements of the Group continue to be prepared on a going concern basis.
2.6 Functional and presentation currency
Items included in these Financial Statements are measured using the currency of the primary economic environment in which the Bank operates (the Functional Currency).
Each entity in the Group determines its own functional currency and items included in the Financial Statements of these entities are measured using that Functional Currency. There was no change in the Group’s Presentation and Functional Currency during the year under review.
These Financial Statements are presented in Sri Lankan Rupees, the Group’s Functional and Presentation Currency.
The information presented in US Dollars in the Section on “Supplementary Information” does not form part of the Financial Statements and is made available solely for the information of stakeholders.
2.7 Presentation of Financial Statements
The assets and liabilities of the Group 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 and after more than 12 months from the Reporting date is presented in Note 62 on “Maturity Analysis".
2.8 Rounding
The amounts in the Financial Statements have been rounded-off to the nearest rupees thousands, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements”.
2.9 Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the International Financial Reporting Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank.
2.10 Materiality and aggregation
Each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately, unless they are immaterial as permitted by the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements” and amendments to the LKAS 1 on “Disclosure Initiative” which was effective from January 1, 2016.
Notes to the Financial Statements are presented in a systematic manner which ensures the understandability and comparability of Financial Statements of the Group and the Bank. Understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.
2.11 Comparative information
Comparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year.
2.12 Use of judgements and estimates
In preparing the Financial Statements of the Group in conformity with SLFRSs and LKASs, the Management has made judgements, estimates and assumptions which 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 prospectively.
Significant areas of critical judgements, assumptions and estimation uncertainty, in applying Accounting Policies that have most significant effects on the amounts recognised in the Financial Statements of the Group are as follows:
A. Judgement
Information about judgements made in applying Accounting Policies that have the most significant effects on the amounts recognised in these Financial Statements is included in the following notes.
2.12.1 Determination of control
over investees
Management applies its judgement to determine whether the control indicators set out in Note 37 indicates that the Group controls the investees.
2.12.2 Classification of financial assets and liabilities
The Significant Accounting Policies of the Group provide scope for assets to be classified at inception into different accounting categories under certain circumstances.
- In classifying financial assets or liabilities at “Fair value through profit or loss” (FVTPL), the Group has determined that it has met the criteria for this designation set out in Notes 30 and 31.
- In classifying financial assets as “Held to maturity” (HTM), the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by Note 35.
- In classifying financial assets as “Available for sale” (AFS), the Group has determined that all non-derivative financial assets that are designated as AFS or those financial assets not classified as loans and receivables, FVTPL or HTM be classified as AFS as set out in Note 34.
B. Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments for the year ended December 31, 2017 are included in the following Notes.
2.12.3 Fair Value of financial instruments
The fair values of financial assets and financial liabilities recognised 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 Group measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. Methodologies used for valuation of financial instruments and fair value hierarchy are stated in Note 26.
2.12.4 Impairment losses on loans and receivables
The Group reviews its individually significant loans and advances at each Reporting date to assess whether an impairment loss should be provided in the Income Statement. In particular, the Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss.
These estimates are based on assumptions about a number of factors and hence actual results may differ, resulting in future changes to the provisions made.
The individual impairment provision applies to financial assets evaluated individually for impairment and is based on Management’s best estimate of the present value of the future cash flows that are expected to be received. In estimating these cash flows, Management makes judgements about a borrower’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable.
A collective impairment provision is established for:
- groups of homogeneous loans and advances that are not considered individually significant; and
- groups of assets that are individually significant but that were not found to be individually impaired.
The collective provision for groups of homogeneous loans is established using statistical methods (such as, net flow rate methodology, risk migration analysis) or, a formula approach based on historical loss rate experience, using the statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at, on the basis of historical information is appropriately adjusted to reflect the economic conditions and portfolio factors as at the Reporting date. The loss rates are regularly reviewed against actual loss experience.
In assessing the need for collective impairment, Management considers factors such as credit quality (for example, loan to collateral ratio, level of restructured performing loans), portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions (including policy rates, inflation, growth in Gross Domestic Product, sovereign rating, etc.).
The accuracy of the provision depends on the model assumptions and parameters used in determining the collective provision.
Refer Note 18 for details.
2.12.5 Impairment of financial investments – available for sale
The Group reviews the debt securities classified as AFS investments at each Reporting date to assess whether they are impaired. This requires similar judgements as applied on the individual assessment of loans and advances.
The Group also records impairment charges on AFS equity investments when there has been a significant or prolonged decline in the fair value below their cost along with the historical share price movements, duration and extent up to which the fair value of an investment is less than its cost.
Refer Note 7.1.11.2 for details.
2.12.6 Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for an asset or a Cash Generating Unit (CGU) at each Reporting date or more frequently, if events or changes in circumstances necessitate to do so. This requires the estimation of the “Value in use” of such individual assets or the CGUs. Estimating “Value in use” requires the Management to make an estimate of the expected future cash flows from the asset or the CGU and also to select a suitable discount rate in order to calculate the present value of the relevant cash flows. This valuation requires the Group to make estimates about expected future cash flows and discount rates and hence, they are subject to uncertainty.
Refer Note 7.5 for details.
2.12.7 Revaluation of property, plant and equipment
The Group measures land and buildings at revalued amounts with changes in fair value being recognised in Equity through Other Comprehensive Income (OCI). The Group engages independent professional valuers to assess fair value of land and buildings. The key assumptions used to determine the fair value of the land and building and sensitivity analyses are provided in Note 39.5 (b) and 39.5 (c).
2.12.8 Useful life-time of the property, plant and equipment
The Group reviews the residual values, useful lives and methods of depreciation of Property, Plant and Equipment at each Reporting date. Judgement of the Management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.
Refer Note 20 for details.
2.12.9 Deferred tax assets
Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available and can be utilised against such tax losses. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax-planning strategies.
Refer Note 48 for details.
2.12.10 Defined benefit obligation
The cost of the defined benefit plans determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, future pension increases, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.
Refer Note 50 for the assumptions used.
2.12.11 Provisions for liabilities, commitments and contingencies
The Group receives legal claims in the normal course of business. Management has made judgements as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due processes in respective legal jurisdictions.
Information about significant areas of estimation uncertainty and critical judgements in applying Accounting Policies other than those stated above that have significant effects on the amounts recognised in the Consolidated Financial Statements are described in Notes 7.9 to 7.15
2.13 Events after the reporting period
Events after the reporting period are those events, favourable and unfavourable, that occur between the Reporting date and the date when the Financial Statements are authorised for issue.
In this regard, all material and important events that occurred after the reporting period have been considered and appropriate disclosures are made in Note 70, where necessary.
3. Financial Risk Management
3.1 Introduction and overview
Risk is inherent in the Bank’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.
The Group has exposure mainly to the following risks from financial instruments:
- Credit risk;
- Market risk;
- Liquidity risk; and
- Operational risk.
3.2 Bank’s risk management framework
The Board of Directors of the Bank has the overall responsibility for the establishment and oversight of the Bank’s Risk Management Framework.
The Risk Management Policy of the Bank translates overall risk appetite on business activities in a holistic approach to provide the guidance required for convergence of strategic and risk perspectives of the Bank.
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Risk Management Policy Framework constitutes the Credit Policy, Lending Guidelines, ALM Policy including Liquidity Risk Policy, Foreign Exchange Policy, Operational Risk Policy, IT Risk Management Policy, Market Risk Management Policy, Stress Testing Policy, etc., which have been firmly established
to provide control and guidance for decision-making throughout the Bank in a uniform manner.
The Committee structure embedded to the system acts as a fact finding and decision-making authority through meaningful discussions of multiple points of view. The Risk Management Committees effectively deliberate on matters at hand
to provide guidance to the business lines with a view to managing risk in accordance with the strategic goals and risk appetite of the Bank.
The Board of Directors of the Bank has formed a mandatory Subcommittee namely, the Board Integrated Risk Management Committee (BIRMC) as per Banking Act Direction No. 11 of 2007 on Corporate Governance. The performance of the Committee and the duties and roles of members are reviewed by the Board annually.
The meetings of the Executive Integrated Risk Management Committee (EIRMC) are conducted on a monthly basis to discuss Credit and Operational risk matters of the Bank while priority is given for liquidity and market risks at the Assets and Liabilities Committee (ALCO) meetings that convene at least once a fortnight.
In addition, the Integrated Risk Management Department carries out semi-annual Bank-wide risk assessment function focusing on adherence to laws, regulations, and regulatory guidelines as well as internal controls and approved policies. A dedicated Compliance Department is entrusted with the responsibility of monitoring these requirements on an ongoing basis.
Further, the Internal Audit function of the Bank independently monitors and evaluates the risk management function of the Bank and provides their views on adequacy of the Risk Management Framework to the Board Audit Committee.
Credit risk
The risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations.
The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations and by monitoring exposures in relation to such limits.
Management of credit risk
Lending Guidelines of the Bank formulated in consultation with lending units provide expected granularity of credit assessment, risk grading, their acceptability of collateral, etc., as well as limits on exposures and concentration levels to various sectors, counterparties, geographies, and segments.
A robust risk grading system incorporating Basel requirements of facility rating and counterparty rating are adopted by the Bank for evaluation of credit proposals. This risk grading framework consists 10 grades of varying degrees of risk as indicators for the Lending Officers to evaluate and arrive at suitable risk-reward trade-offs in their propositions. These risk grades are reviewed by the Integrated Risk Management Department regularly.
Portfolio level credit risk analyses are taken up at monthly EIRMC as well as quarterly BIRMC meetings. Individual credit proposals evaluated by the Lending Officers are approved by the Authorising Officers within the hierarchy in Delegated Authority Levels whilst ensuring a minimum of four eyes principle when approving any lending proposals. Escalation of approving levels occurs based on exposure levels as well as final risk ratings of borrowers.
The Executive Credit Committee (ECC) and the Board Credit Committee (BCC) are entrusted with approval of high value facilities while the Board will be the ultimate authority for approving facilities beyond predetermined threshold levels. Deliberations take place at BCC level on facilities taken up for approval within the specified threshold and recommendation for approval of the Board based on quantum of exposures proposed is exercised.
The Integrated Risk Management Department provides risk approval for individual proposals above predetermined threshold levels, consequent to a rigorous independent risk evaluation guided by Credit Policy, Lending Guidelines, and circular instructions within a limit framework stemming from risk appetite of the Bank.
Market risk
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, and equity prices. The Bank classifies exposures to market risk into either trading or non-trading portfolios and manages each of those portfolios separately.
The market risk for the trading portfolio is monitored and managed closely.
Management of market risk
Market Risk Policy, ALCO Policy, and Foreign Exchange Risk Policy are the three main policies that constitute the framework governing the Market Risk Management function of the Bank.
Due to the business model adopted by the Bank, exposure to equity and commodity risk was kept at bay throughout the year.
However, Interest Rate Risk arising from the Banking Book as well as Trading Book and Foreign Exchange Risk arising from dealing in currencies other than local currency, continued to expose the Bank to associated risk elements.
Volatile interest scenarios experienced by the country during the period impacted the financial market in Sri Lanka and resulted in shrinking Net Interest Margin. Interest Rates of the Banking Book was subjected to varying degrees of rate shocks to identify impact on earnings perspective in such rate scenarios. The results reflected predictions which assisted the Bank in formulating strategies to manage the financial position in an effective manner with the limited choices available.
Trading Book too was subjected to Value at Risk (VaR) framework as described in the, Section on “Managing Risk: An Overview”. The Bank also carried out sensitivity analysis on a regular basis to ascertain the impact on portfolios maintained, mainly in Government Securities and marking to market such portfolios to reflect fair value for decision-making process.
Foreign exchange positions were maintained within the regulatory framework in a market where much volatility was observed in the major currency that the Bank deals in, i.e., US Dollars. The positions were subjected to sensitivity analysis to provide insight to possible losses/gains arising from currency appreciation/depreciation, as the reporting currency of the Bank being Sri Lankan Rupees.
Liquidity risk
The risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances.
To limit this risk, Management has arranged for diversified funding sources in addition to its core deposit base and adopted a policy of 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.
Management of liquidity risk
Market Risk Management Policy and the ALCO Policy of the Bank approved by the Board of Directors set the tone for managing liquidity risk of the Bank. Liquidity risk of the Bank is given utmost priority when managing a wide range of other risks due to the fact that it is considered as the most critical risk for any financial institution.
The Bank’s Treasury Department is entrusted with managing liquidity of the Bank on real time basis to ensure smooth functioning of business activities of all other business units of the Bank.
Having access to a substantial stable Current Account and Savings Account (CASA) base due to its wide branch network and the top of the mind perception created in the depositors in general, for stability provides immense strength to the Bank in managing liquidity.
Having high quality liquid assets at the disposal of the Bank is another plus factor for the Bank. The strength of such was amply reflected in the Basel III computation the Bank carries out for arriving at Liquidity Coverage Ratio as per the CBSL Guidelines that recorded very healthy results as compared to regulatory minimum threshold levels.
Contingency funding plans in force, constant monitoring of salient liquidity ratios, and scenario based stress testing being carried out regularly, provide the sense of Bank with required indicators enabling the Bank to take proactive measures that could provide time to overcome any adverse liquidity position on a future date.
Operational risk
The risk that the Bank will incur a loss due to systems failure, human error, fraud or external events. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks.
Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education, and assessment processes, such as the use of internal audit.
Management of operational risk
Sound Operational Risk Management practices are embedded into the work process through the Bank’s culture, internal policy framework, and as per regulatory requirements.
Circular instructions and Operational Risk Management Policy play a major part in bringing together business practices with accepted benchmarks to ensure minimum disruption to processes, personnel, technology, and infrastructure.
Internal control framework and audit function with firmly established “three lines of defences” serve the Bank to manage operational risk at current acceptable levels.
Risk and Control Self-Assessment (RCSA) framework is adopted to identify risks involved in business activities of the Bank and to implement appropriate mitigatory measures after assessing criticality of such risks.
IT Risk of the Bank is managed through strict monitoring of Key IT Risk Indicators while Vulnerability Assessment and Penetration Tests are being carried out by both internal and external parties at regular intervals to identify the relevant risks.
Refer Note 69 for “Financial Risk Review”.
A detailed write-up on how the risk management is carried out within the Bank’s Risk Management Framework with due consideration given to factors such as governance, identification, assessment, monitoring, reporting, and mitigation are discussed in the Section on “Managing Risk: An Overview”. The said write-up on “Managing Risk: An Overview” does not form part of the Financial Statements.
