CDB in Action

Our vision for the next decade is to transform into a Quarter Trillion Asset Base (Q-TAB) Company by leveraging two key pillars: Tech Disruption and Sustainability Agenda that encompasses both social and environmental dimensions.

Our Business and Context

Assessing our risks and opportunities

GRI 3-3

As a leading Non-banking Financial Institution (NBFI), we firmly believe that challenges and risks often bring forth opportunities for growth and innovation. While economic uncertainties may pose risks, they also present opportunities to adopt proactive risk management strategies and diversify our portfolios. Regulatory changes and increased competition, although challenging, can be viewed as catalysts for enhancing operational efficiency, streamlining processes, and exploring new avenues for revenue generation. Technological advancements, despite their inherent risks, offer opportunities to deliver digital services, improve customer experiences, and expand our market reach.

By adapting to evolving customer expectations and preferences, we can seize the opportunity to provide personalised solutions and foster long-term relationships. Embracing sustainability and social responsibility not only addresses pressing societal concerns but also creates avenues for entering new markets and engaging with different customer segments. We firmly believe that by embracing these challenges and risks head-on, we can unlock new opportunities for growth and differentiation.

Our proactive and innovative approach enables us to view risks as opportunities for growth. By effectively managing risks, we can identify and capitalise on the potential opportunities that arise from changing market dynamics, technological advancements, and evolving customer demands. This mindset allows us to leverage challenges as catalysts for our continued success and to stay ahead in the competitive landscape of the financial industry.

Strategic risk (Material topics 1, 2, 3, 5)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Overall macroeconomic stability, including factors such as inflation, exchange rates, and government fiscal policies, affects the financial institution’s strategic risk. Unstable economic conditions can lead to higher uncertainty, currency fluctuations, and increased systemic risks. Furthermore, during economic downturns or recessions, there may be increased credit risk, higher loan defaults, and reduced demand for financial services. Financial institutions certainly face challenges in maintaining profitability and achieving strategic objectives in such adverse economic conditions. In this context, the strategic risk includes the possibility of losses or reduced profits arising from the institution’s strategic direction and execution, as well as external factors like competition and adverse economic conditions. This risk can result in organisation’s inability to provide adequate returns to investors and shareholders.	By identifying untapped markets or niche segments, the Company can strategically position itself to capture new business opportunities and increase its market share. By staying responsive to changing market dynamics, the Company can change its strategic direction to minimise risks and capitalise on emerging opportunities. By continuously innovating and differentiating its offerings, the Company can gain a competitive edge and attract more customers.	Continued investment in product offerings and diversification of the lending product portfolio, along with the growth of digital businesses and channels. Adoption of the latest technology to enhance process efficiency, reliability, and deliver superior customer service. Ongoing monitoring of key risk indicators (KRIs) related to strategic risk and performance at ALCO (Asset and Liability Committee) and BIRMC (Board Integrated Risk Management committee) meetings to ensure that CDB stays on track in achieving set strategic objectives.	Leveraging big data and data analytics to support informed business decisions. Enhancing risk dashboards and monitoring tools including behavioural aspects of its customer portfolios to measure and monitor the strategic risk status of CDB and to obtain sound business decisions. Continuously improving the maturity of risk management practices within CDB, including refining risk modelling, monitoring, and reporting processes.

Year on year trend

Increased

Anticipated short term trend

Stable

CDB’s level of control

Medium

Credit risk (Material topics 1, 2)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Economic downturns increase default rates, increased inflation affects repayment capability of borrowers specially individuals and corporates who are exposed to risk elevated industries. Interest rates, regulatory changes, and collateral values also influence credit risk. The impact on CDB includes concentration risk, credit default risk, counterparty/settlement risk, and securitisation risk. Improper credit risk management can reduce profitability, affect asset quality, increase credit losses and non-performing loans, and potentially lead to financial distress. This can result in inadequate returns for investors and shareholders.	By implementing robust credit risk assessment practices, institutions can identify potential risks early on and make informed lending decisions. Exploring opportunities to diversify the lending activities across different sectors and borrower profiles. Offering loan restructuring options and support mechanisms to help borrowers manage their financial obligations. Implementing sophisticated credit risk assessment models, utilising data analytics, and leveraging artificial intelligence can enable institutions to proactively identify emerging credit risks, monitor portfolio performance, and obtain timely risk management decisions.	Implemented automated credit decision-making for 3W (three-wheelers) and credit card facilities to enhance the quality of credit decisions. Diversification of asset classes, particularly focusing on gold loans and credit cards, to reduce concentration risk. Close monitoring of non-performing loan (NPL) ratios and successful recovery campaigns leading to a significant improvement in credit quality of the portfolio. Improved data analytics capabilities through the business intelligence (BI) team to design optimal follow-up strategies based on customer behaviour and early warning signals. Further enhancement of credit risk management processes, including robust loan monitoring to detect doubtful loans early and actively manage them to prevent non-performance. Maintaining strong client relationships and obtaining reliable insights into their financial positions.	Implement automated credit decision for auto finance facilities to enhance the quality of credit decisions. Implement credit underwriting processes/systems for new product verticals (Agri, fisheries, EV etc.). Continuous revision and review of credit evaluation criteria based on evolving external market environment variables and in line with the risk appetite of the Company. Portfolio NPL levels and age movement to be closely monitored giving special focus to special products, sectors, geographical areas etc. to identify contracts which are vulnerable to default. Further enhance the automated recovery follow-up systems by implementing a more intelligent approach based on customer repayment patterns and recovery history. This would involve incorporating advanced data analysis techniques to identify and adapt to individual customer behaviours in order to optimise the recovery process and increase the chances of successful repayments.

Year on year trend

Increased

Anticipated short term trend

Stable

CDB’s level of control

Medium

Operational risk (Material topics 1, 2, 3, 6)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Impact on CDB includes, financial loss due to internal process inadequacies or failures, system issues, human error, or external events. The impact of these failures can be material, unexpected, and pervasive. Staffing challenges and turnover further heighten operational risks while internal and external frauds resulting from lack of preventive and detective controls may result in significant irrecoverable financial losses to the institute.	By providing training programmes, career advancement opportunities, and competitive compensation packages, institutions can attract and retain skilled professionals. A well-trained and motivated workforce can contribute to the risk culture by effectively adapting to risk management framework and minimizing/avoiding frauds. By identifying inefficiencies, streamlining workflows, and leveraging automation and technology solutions, institutions can enhance operational efficiency and reduce the likelihood of errors or failures. This can result in cost savings, improved productivity, and more reliable risk control framework.	Continuously promote a risk reporting culture by appointing risk representatives for each division. Continuous investment in IT infrastructure to improve internal efficiency and effectiveness of business processes, and reducing bottlenecks. Enhanced business continuity planning (BCP) and disaster recovery (DR) planning for operational resilience against unforeseen incidents. Immediate response to operational risks through an ERP-based operational risk reporting mechanism. Review and update existing procedures, subject to the approval of the Senior Management to ensure sufficient controls are in place addressing process-related risks. Radical operational changes were effected subject to detailed review by a cross functional team including representatives from risk, compliance, and internal audit to reasonably assure that related operational risks are adequately mitigated.	Develop a centralised dashboard for monitoring and reporting operational risk status and related key risk indicators (KRIs). Automate risk registers with an improved follow-up and monitoring mechanism. Ongoing training programmes to enhance team awareness in identifying and proactively responding to operational risks. Strengthen stress testing scenarios to clearly identify points of failure ensuring our resilience and appetite against potential operational losses.

Year on year trend

Stable

Anticipated short term trend

Stable

CDB’s level of control

High

Liquidity and funding risk (Material topics 1, 2, 3)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
The economic environment significantly impacts the liquidity and funding risk of financial institutions. During economic downturns, institutions may face reduced market liquidity and increased challenges in accessing funding sources. Depositor confidence may decline, leading to deposit withdrawals and decreased external funding. Increasing portfolio default levels also may further strain liquidity status of the Company. Regulatory measures implemented including the changes in market interest rates also may influence liquidity and funding risk as a result of depositors’ behavioral changes and increased borrowing costs.	Proactive and effective liquidity and funding risk management practices assures an optimum return from liquid assets while safeguarding the Company from liquidity stresses. Ability to explore alternative funding channels such as accessing capital markets, establishing relationships with multiple funding partners, and developing innovative funding mechanisms ahead of a stressed liquidity condition. Financial institutions can instil confidence and strengthen relationships by maintaining open lines of communication, providing transparent information about the institution’s financial health, and demonstrating prudent risk management practices.	Strategic goal of increasing foreign borrowing for a more stable funding base and lower cost of funding. Continued and proactive assessment of macro-economic variables and their impact on CDB assured that liquid assets were maintained at an optimum level balancing risk and return. Conducted regular stress testing to assess the Company’s tolerance for liquidity risk. Ongoing monitoring of maturity mismatch position to ensure availability of sufficient cash flows to meet the contractual obligations. Regular updates to cash flow forecasts considering expected business movement and fund inflows to implement precautionary measures to ensure financial stability in the face of unexpected changes.	Effectively improve the contingency funding plan covering various stress scenarios Further strengthen relationships with both local and foreign counterparties to secure funds at a reasonable cost/interest rate Automate liquidity report with real time alerts

Year on year trend

Increased

Anticipated short term trend

Stable

CDB’s level of control

High

Market risk (Material topics 1, 2)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Financial Institutions get significantly impacted by the unfavourable fluctuations in the value of investments in companies, funds, or financial instruments. These fluctuations can arise by adverse market movements such as changes in interest rates, exchange rates, equity prices, or commodity prices. Financing against precious metal indirectly increases financial institutions exposure to commodity price risk in a customer default scenario. Economic factors such as interest rates, inflation, and economic growth directly impact asset prices, market volatility, and investor behaviour. Economic downturns increase market risk, with declining asset values, whilst changes in interest rates may squeeze margins from its impact on interest rate sensitive balance sheet items resulting from maturity mismatch composition which is called as repricing risk. Geopolitical events and regulatory changes also result in increasing market risks.	Collaborating with strategic partners, such as asset managers, investment advisors, or research firms, can provide financial institutions with valuable insights and expertise. By leveraging external resources, institutions can gain a competitive edge in identifying market trends, assessing investment opportunities, and making informed decisions. Technologies such as artificial intelligence, data analytics, and digital platforms can provide institutions with real-time market insights, improved risk assessment capabilities, and streamlined investment processes supporting sound decision making.	Optimum pricing on lending and deposit products by analysing the movement in WAR (Weighted Average Rate) and anticipated NIM and top-line impact based on comprehensive forecast based analyses. Maintaining an optimal balance between interest-earning assets and interest-bearing liabilities based on different maturities to ensure sufficient net return. Ongoing monitoring of gold price movements and adjusting gold loan advances to manage the gold loan portfolio and mitigate commodity price risk ensuring portfolio exposure is managed with the risk appetite. Fully hedging foreign currency exposures with adequate mechanisms to minimise the impact of adverse fluctuations in exchange rates. Regularly conducted stress testing on market risk elements measuring their impact on capital adequacy in order to obtain proactive measures if any probable scenario gets triggered against set risk appetite.	Implementing and practicing a fund transfer pricing framework to improve product pricing and maximise profitability at the product and branch level. Continued focus on maintaining an optimal balance between assets and liabilities. Enhancing capability in forecasting macroeconomic variables and their impact on financial performance through Business Intelligence (BI) tools.

Year on year trend

Increased

Anticipated short term trend

Stable

CDB’s level of control

Medium

Capital risk (Material topics 1, 2)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Economic conditions impact capital risk, affecting profitability, credit defaults, and asset quality. Regulatory changes may require higher capital buffers. Increased losses due to financial risks may result in squeezing capital buffer due to their impact on retained earnings and subsequently challenge on organisational growth. Effective capital management through stress testing, planning, and proactive risk management ensures resilience in adverse economic scenarios.	Robust risk management practices and capital forecasts measuring impact from economic downturns and financial crises supports institutions in adopting adequate strategies ensuring organisational resilience. Effective capital management and adherence to capital adequacy regulations can enhance investor confidence and attract capital investments.	CDB successfully maintained capital adequacy in accordance with its capital plan, even amidst challenging macro-economic conditions. Through effective capital management, CDB ensured that it remained within the Well Capitalised category as per the PCA framework of the CBSL during the financial year under review. ALCO routinely monitored capital adequacy levels. Performed regular stress testing to ensure Company’s capability in maintaining capital ratios at an acceptable level.	CDB is committed to adopting international best practices in capital management. This includes Internal Capital Adequacy Assessment Process (ICAAP) and following BASEL III practices.

Year on year trend

Stable

Anticipated short term trend

Increasing

CDB’s level of control

High

IT and Cyber security risk (Material topics 2, 5)

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
Inadequate system controls, system failures and cyber-attacks may result in financial and reputational losses to the Company. New vulnerabilities which arises as a result of obsolete security measures may result in sensitive information leakages as well as misusing those may cause reputation damages and/or financial damages through ransom-ware attacks.	By implementing robust system controls and continuously monitoring and updating the systems, the Company can enhance the security and reliability of its operations. By demonstrating the commitment to cybersecurity, institutions can build trust with clients and stakeholders, leading to increased business opportunities and customer loyalty. By leveraging its expertise and investing in cybersecurity capabilities, institutions can enhance its resilience against cyber security threats which ultimately safeguard stakeholder interests.	Staff members were given comprehensive trainings and participated in cyber drills to increase awareness and identify potential cyber-attacks. Vulnerability assessments were conducted by third parties to identify and address any weaknesses. Improved BCP and DR Planning to ensure the CDBs’ operational resilience against unforeseen incidents. Establishing the technology risk criteria proposed by the CBSL for all Licensed Finance Companies under the Finance Business Act (Technology Risk Management and Resilience Direction No. 01 of 2022)	Continuous monitoring of cyber risks and IT risks associated with new and evolving IT platforms. Proactive measures to enhance system controls, prevent system failures, and mitigate the impact of cyber-attacks. Implementation of robust cybersecurity measures and ongoing training to keep pace with emerging threats.

Year on year trend

Stable

Anticipated short term trend

Increasing

CDB’s level of control

Medium

Regulatory and compliance risk (Material topics 1, 2, 4, 5, 7, 11)

GRI 2-24, 2-25

Potential Impacts for CDB	Potential Opportunities for CDB	CDB’s Strategic Response in 2022/23	Future Focus
The risk of exposure to legal penalties, financial forfeiture, and material loss resulting from failure to act in accordance with laws and regulations, internal policies or prescribed best practices. This can lead to grave reputational damage and/or the loss of our financial license.	By ensuring strict adherence to laws and regulations, internal policies, and best practices, institutions can establish a strong reputation for compliance and ethical conduct. Building a solid compliance framework can differentiate the entity from competitors and position the Company as a reliable and trustworthy partner in the industry. By demonstrating its commitment to compliance, institutions can attract high-value clients, secure partnerships, and access new markets.	Improved training initiatives to enhance compliance awareness and knowledge among team members. Continued refinement and investment in compliance systems and processes. Ongoing monitoring and review of compliance-related matters, including newly formed regulations and guidelines, through monthly compliance meetings. Summary reporting to the Board-level Integrated Risk Management Committee (BIRMC). Strengthen the processes with regard to anti-money laundering aspects such as revisiting the AML Policy of CDB and introduction of new digital platform for Customer Due Diligence (CDD) process.	Strengthening processes related to anti-money laundering (AML) to mitigate the risk of financial crime. Enhancing the capacity for AML and transaction monitoring through the implementation of a real-time automated alert mechanism. Proactively adapting to new and evolving compliance requirements and best practices to maintain regulatory compliance and prevent legal and financial risks.

Year on year trend

Stable

Anticipated short term trend

Stable

CDB’s level of control

High