2019-2020

Liquidity and market risk

Reviewed the adequacy of liquid assets maintained and the maturity mismatch, sensitivity
analysis and interest rate re-pricing gaps.

Reviewed liquidity stress test results and adequacy of contingent funding lines.

Reviewed the highlight reports of ALCO meetings submitted to the Committee in assessing
the effectiveness of liquidity and market risk management.

Market risk

Market risk is the potential risk that the value or earnings of a company may decline due to
exposure to market driven factors. Under this risk, there are four (04) sub categories affecting
the Company’s operations – interest rate risk, commodity price risk, equity investment risk
and exchange rate risk which are discussed below:

Market risk category Description Risk exposure

to the
Company
Interest rate risk This is the volatility in the value of interest High
rate sensitive products and the susceptibility
of the future income and expense levels to the
changes in the market interest rates
Commodity price risk Uncertainties of future market values and on Low
the future income due to the fluctuation in the
prices of commodities
Equity investment Possible losses arising as a result of volatility Negligible
risk and adverse movement in equity prices
Foreign exchange risk Foreign exchange risk relates to the losses Negligible
from adverse exchange rate movements

Interest rate risk

The Company is mainly exposed to Interest Rate Risk as the majority of its assets and
liabilities are interest rate sensitive. Treasury and ALCO play key roles in managing interest
rate risk. The Treasury regularly monitors the interest rate environment and the movement of
key interest rate indices such as the Average Weighted Prime Lending Rate (AWPLR) and
rates of Government securities (Treasury Bill Rates) and a comprehensive report thereof is
provided to the ALCO to make decisions on deposit rates and lending rates to maintain
desired margins. The ALCO monthly reviews the Interest Re-pricing Gap Analysis prepared
based on Interest Sensitive Assets and Interest Sensitive Liabilities into various time buckets
according to maturity (if they are fixed rates) or time remaining to their next re-pricing (if
they are floating rates). Sensitivity Analysis is also performed to assess the impact on Net
Interest Income for a 1% change in interest rate. During the period under review, the ALCO
set limits for each time bucket in Interest Rates Re-pricing Gap Analysis and for Interest Rate
Sensitivity Analysis to assess and monitor the risk exposures effectively. Key market risk
indicators such as interest rate sensitivity and re-pricing gap ratios were also reviewed by the
BIRMC quarterly against pre-defined risk tolerance levels. Stress testing is performed
quarterly to test the impact on the net interest margin and the profits under various stressed
scenarios of interest rate movements and the same is reviewed by the BIRMC. Interest rate
re-pricing analysis is presented on pages 280 and 281.

Commodity price risk

This risk results from exposures to changes in prices and volatilities of individual
commodities. The Company is exposed to commodity price risk due to its gold loan product.
A dedicated Gold Loan Unit is established centrally to monitor and coordinate operations of
gold loan units in the Branch network. RCD monitors the gold price movements daily and
assesses the gold price volatility based on Exponentially Weighted Moving Average
(EWMV) method as it places greater weight on recent price changes while diminishing the
weight on older price changes. The ALCO monthly reviews the gold price movement, price
volatility and product performance.

Equity investment risk

This relates to the losses arising from adverse movements in the value of any equity
investment held by the Company as a result of volatility in equity prices. Margin Trading
Department of the Company regularly monitors the movement in stock market prices,
broader economic conditions and political environment which could potentially have impacts
on share prices. ALCO monthly reviews the detailed equity investment report to decide on
appropriate action to mitigate risks. Board approved stop loss policy is in place to manage
equity investment risk exposure. The ALCO decided the appropriate action on equity that
exceeds the stop loss limit. The equity portfolio recorded a market value of Rs. 13.5 million
as at the year-end, which is insignificant compared to the size of the Company.

Foreign exchange risk

Foreign exchange risk relates to the losses from adverse exchange rate movements during a
period in which it has an open position in a currency. It is the Company’s policy to keep no
foreign currency in open position. Accordingly, no foreign currency exposure was held in
open position during the reporting year
2020/2021
Liquidity and market risk

Reviewed the adequacy of liquid assets maintained and the maturity mismatch, sensitivity
analysis and interest rate repricing gaps.

Reviewed liquidity stress test results and adequacy of contingent funding lines.

Reviewed the highlight reports of ALCO meetings submitted to the Committee in assessing
the effectiveness of liquidity and market risk management.

Market risk

Of the various components of market risk, People's Leasing’s exposure to interest rate risk
was high, with the exposure to other risks being either low or negligible. The year was
characterized by a low interest rates as CBSL maintained an accommodative monetary policy
stance to aid economic revival. We monitored market interest rate movements closely to
ensure re-pricing of deposits and lending rates to attract business whilst simultaneously
maintaining our profit margins.

Definition Components of market risk

The risk that movements in market Risk category Risk exposure
factors, such as foreign exchange rates, Interest rate risk High
interest rates, equity prices and Commodity price risk Low
commodity prices, will reduce our Equity investment risk Negligible
market value or earnings. Foreign exchange risk Negligible

Treasury ALCO BIRMC Board

Interest rate risk

 The Treasury  Monthly review of  Quarterly review  Review ALCO
regularly Interest re-pricing of interest rate minutes
monitored the gap analysis sensitivity and re- submitted
interest rate  Performance of pricing gap ratios monthly to the
environment and sensitivity analysis against pre- Board
the movement of to determine the defined risk
key interest rate impact on NII for a tolerance levels
indices. Eg: 1% change in  Quarterly review
AWLPR and interest rate of stress testing
treasury bill rates  Reviewed the on the impact of
 A report is interest rate interest rates in
provided to the environment and net interest
ALCO for decision determined margin and
making on deposit deposit and profitability
and lending rates lending rates to
to maintain ensure desired
desired margins margins are
maintained
Commodity price risk
 The centrally  Monthly review of  Held the primary
established Gold gold price responsibility for
Loan Unit movements, price integrated risk
monitors the gold volatility and management at
loan units in the product People's Leasing
branch network performance
 RCD monitors  Action taken on
daily gold price immediate
movements and escalations of
assesses gold negative price
price volatility movements in
gold prices
Equity investment risk
 The margin  Monthly review of  Board approved
trading the detailed the equity
department equity investment investment policy
regularly report and the share
monitored the  Decided on trading policy
movement in appropriate action
stock market to be taken on
 prices, broader equity exceeding
economic the stop loss limit
conditions and the
political
environment
which could
potentially have
an impact on
share prices
Foreign exchange risk
 Foreign currency was not kept in open positions during the year

2021/2022
Market Risk

Of the various components of market risk, exposure to interest rate risk is the most
significant as exposure to other components of market risk are relatively low. However,
exposure to commodity price risk increased during the year with the increase in gold loans
which are managed with conservative loan to value ratios. Interest rates, which were low at
the beginning of the year, commenced an upward trajectory by the second quarter signaling
the end of quantitative easing measures adopted with the onset of the pandemic. Increasing
economic challenges including soaring inflation gave rise to an unprecedented increase in
interest rates of 700 bps on 8 April 2022. The CBSL maintained an accommodative monetary
policy stance to aid economic revival. We monitored market interest rate movements closely
to ensure re-pricing of deposits and lending rates to attract business whilst simultaneously
maintaining our profit margins.

Risk category Risk exposure

Interest rate risk High

Commodity price risk Low

Equity investment risk Negligible

Foreign exchange risk Negligible

Treasury ALCO BIRMC Board

Interest rate risk

 The Treasury  Review of Interest  Quarterly review  Held the primary
regularly rate re-pricing of interest rate responsibility for
monitored the gaps and sensitivity and re- integrated risk
interest rate sensitivity analysis pricing gap ratios management at
environment and  Reviewed the against pre- PLC
the movement of interest rate defined risk
key interest rate environment and tolerance levels
indices. Eg: determined  Quarterly review
AWLPR and deposit and of stress testing
treasury bill rates lending rates to on the impact of
 A report is ensure desired interest rates in
provided to the margins are net interest
ALCO for decision maintained margin and
making on deposit profitability
and lending rates
to maintain
desired margins
Commodity price risk
 The centrally  Monthly review of  Held the primary
established Gold gold price responsibility for
Loan Unit movements, price integrated risk
monitors the gold volatility and management at
loan units in the product People's Leasing
branch network performance
 RCD monitors  Action taken on
daily gold price immediate
movements and escalations of
assesses gold negative price
price volatility movements in
gold prices
Equity investment risk
 The margin  Monthly review of  Board approved
trading the detailed the equity
department equity investment investment policy
regularly report and the share
monitored the  Decided on trading policy
movement in appropriate action  Held the primary
stock market to be taken on responsibility for
prices, broader equity exceeding integrated risk
economic the stop loss limit management at
conditions and the PLC
political
environment
which could
potentially have
an impact on
share prices
Foreign exchange risk
 Foreign currency was not kept in open positions during the year