With Stability - LB Finance | Best Retail Finance Company in … Stability We believe that the key to capturing hearts and minds is by possessing a firm foundation from which to grow

ANNUAL REPORT 2012/13

Contents

OVERVIEW001 Introducing the Report002 Timely Strategies004 Vision, Mission, Values and the Company005 Highlights006 Strategic Goals and Performance

MANAGEMENT REVIEWS007 Chairman’s Review009 Managing Director’s Review014 Board of Directors018 Senior Management

MANAGEMENT DISCUSSION AND ANALYSIS021 Management Discussion and Analysis036 Events During the Year038 Financial Review

RISK MANAGEMENT043 Risk Management Report059 Capital Adequacy

SUSTAINABILITY REPORT061 Sustainable Finance078 Ten Year Summary081 Investor Information097 CSR Photo Gallery

REGULATORY REPORTING099 Corporate Governance140 Annual Report of the Board of Directors on the Affairs of the Company145 Directors Statement on Internal Control over Financial Reporting146 Remuneration Committee Report147 Nomination Committee Report148 Audit Committee Report150 Statement of Directors Responsibilities

FINANCIAL REPORTS151 Independent Auditor’s Report152 Statement of Comprehensive Income153 Statement of Financial Position154 Statement of Changes in Equity155 Cash Flow Statement156 Notes to the Financial Statements

INFORMATION211 Glossary of Terms213 Distribution Channels217 Independent Assurance Report on Sustainability219 GRI Compliance Index228 Notes230 Notice of Annual General Meeting231 Form of Proxy Corporate Information - Inner Back Cover

When looking for a companion, there are many qualities one would look for in ensuring a connection that would last a lifetime. We at L B Finance have been partnering lives for more than 40 years and it is a feat that we have achieved through our values and characteristics that have won the hearts and minds of Sri Lankans all over the island. By displaying maturity and financial stability, we create compatibility and mutual trust and respect with all our stakeholders. And as always we ensure a transparency that shows you who we really are, a company that is based on a foundation of great connections and enduring partnerships.

With Stability

We believe that the key to capturing hearts and minds is by possessing a firm foundation from which to grow to new heights

With StabilityOVERVIEW001 Introducing the Report002 Timely Strategies004 Vision, Mission, Values and the Company005 Highlights006 Strategic Goals and Performance

ANNUAL REPORT 2012/13 | L B FiNANcE PLc Partnering Your Life 1

OVERVIEW 001-006MANAGEMENT REVIEWS 007-019

MANAGEMENT DISCUSSION AND ANALYSIS 021-042RISK MANAGEMENT 043-060

SUSTAINABILITY REPORT 061-098REGULATORY REPORTING 099-150

FINANCIAL REPORTS 151-209INFORMATION 210-232

IntroducIng the report

This year, in our first integrated report, we seek to present our business strategies, governance, risk management and other relevant factors that shape L B Finance’s performance to enable our stakeholders to make better informed decision about their interactions with our Company. The report combines our financial, social and environmental performance covering the entire business operations for the 12 months ended 31st March 2013 in a more holistic manner with the aim of providing one report that is clearly understood by all stakeholders and is an improvement on last year’s sustainability report within the annual report. And the previous report was presented for the year ended 31st March 2012 together with the Company’s annual report.

The statement of financial position, income statement, statement of other comprehensive income, statement of changes in equity and cash flow statement, together with accounting policies and notes, as at 31st March 2013 have been prepared in accordance with Sri Lanka Accounting Standards comprising of Sri Lanka Financial Reporting Standards (SLFRS) and Lanka Accounting Standards (LKAS) set by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 07 of 2007 and subsequent amendments. These financial statements for the year ended 31st March 2013 are the first set of statements the Company has prepared in accordance with SLFRS which are effective from January 1st 2012. The comparatives are reclassified and re-measured for the financial year ending 31st March 2012.

L B Finance adheres to the internationally recognised Global Reporting Initiative sustainability reporting guidelines which is a voluntary standard comprising a set of indicators for economic, environmental and social aspects of business performance that enables stakeholders to compare

Company’s performance. We have used the G3.1 financial services sector supplement guidelines and a compliance index is provided for easy reference on pages 219 to 227 of this report. Our disclosures have been drawn up to an application level C+ according to the criteria set out in the guidelines.

The Company’s financial statements for the year ended 31st March 2013 have been audited by Ernst & Young who have also provided assurance on the economic, social and environmental information presented in the sustainability report for the year ended 31st March 2013. The financial statements, accounting policies and significant assumptions used in the preparation of the financial statements for the Company are set out on pages 152 to 209 of this report. The environment, social and governance information relates to the Company and is derived mainly from factual records maintained by the business units using standard measurements and does not require assumptions or complex calculations to be performed in this regard.

We determine the materiality of the social and environmental issues presented in this report by assessing their impact on stakeholders. Our sustainable finance mainly prioritised on community activities in terms of enhancing knowledge and literacy and environment in terms of green initiatives. As a financial services organisation our business model relies on understanding their needs for our sustainable growth and brand building and therefore, understanding stakeholder needs remains a priority for us. We have engaged with all stakeholders using a variety of mechanisms which enable us to understand their needs in relation to their interactions with the Company which is fully explained elsewhere in this report.

In keeping with the integrated reporting principles, information on governance and risk management of the Company are

detailed in this unified document. The information in this report refers to the Company’s operations which take place locally and the Company does not have any subsidiaries, joint ventures, new facilities and other businesses for the purpose of reporting. The Management Discussion and Analysis preceding the sustainability report also contains information relevant to stakeholders including commentary on our economic performance. References to relevant sections of these reports are provided in the GRI Index for the convenience of our readers.

As a leading finance Company, we look to improve our sustainability strategy and incorporate more indicators focussed on the environment in the coming year and embed the 3Rs (Reduce, Re-use and Recycle) in to our business. We will also increase our focus on the product responsibility and design aspects to address the needs of our customers in line with our vision of making a positive contribution to their wealth creation. As sustainability reporting evolves, we are committed to making the changes necessary to remain on par with international best practice in sustainability reporting. We will continue to provide economic, social and environmental information in a single integrated report on an annual basis in the future ensuring that our annual report remains relevant to all our stakeholders.

For further clarification on any material contained in this report can be contacted to;

Treasury and Planning Department L B Finance PLCCorporate Office20, Dharmapala MawathaColombo [email protected]: 011 2155505Fax: 011 2575096

ANNUAL REPORT 2012/13 | L B FiNANcE PLcPartnering Your Life2

tImely StrategIeS

2005Our strategic focus in 2005 was on increasing business volumes, as we believed that this would be a catalyst to achieving future growth objectives. During the 15 months ended 31st March 2005 our top line surged to Rs. 779 Mn. a sharp growth of 44%, while the bottom line increased Rs. 45 Mn. to Rs. 48 Mn. We successfully ballooned our total advances to Rs. 3.730 Bn. while our deposit base increased by 30% to surpass Rs. 2,600 Mn.

2006The year 2006 was a year of consolidation, where strategies were adopted to sustain the growth achieved in the previous year. The total advances maintained a growth rate of 41% to record Rs. 5.262 Bn., while the Company’s deposit base grew by 28% to stand at Rs. 3,345 Mn. Gross income reflected the growth momentum with an increase of 17% to record Rs. 914 Mn. and net profit rose by 59% to Rs. 77 Mn.

20072007 witnessed a strategic focus on improving the quality of our lending portfolio. Successful measures taken to re-engineer internal processes especially on recoveries, credit and portfolio management, reflected in a year-on-year drop of Rs. 11 Mn. in our non performing advances balance for 2007, a reduction of 4%. The NPL ratio too was curtailed to 4.83% from 7.59%, in the previous year.

2008Diversification into new business sectors and exploiting new and under-developed market segments underpinned our strategies in 2008. Gold loans and micro financing segments were our key concerns during the year and plans enforced resulted in a mammoth 89% growth in gold loans advances to Rs.1.170 Bn

2009A measured growth tempered by tight internal control measures helped face the challenges of 2009. A determined adherence to strict guidelines especially in the areas of credit, administration and risk management, helped us to remove non-value adding activities and focus on the strategic direction.

2010A rapid expansion of our distribution channels in 2010 opened new vistas of opportunities presented by a post-conflict development climate. We expanded our lending and deposit operations with 6 new branches across the country, of which 3 were located in the former war-torn areas of Batticaloa, Trincomalee and Ampara. Rising to the challenge of a tight economic climate, we set up 18 new gold loans centers, including a centre in Sahindamarthu.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

enhancIng VolumeS

SuStaInIng groWth

ImproVIng portFolIo

QualIty eXplorIng opportunItIeS

StrengthenIng our BuSIneSS

FundamentalS






20112011 saw us preparing for success. The company continued to perform commendably through the challenging years of the past and has evolved into a solid financial institution etched in stone. L B Finance recorded impressive results in 2010/11; profit before tax reached Rs. 2 Bn., recording a whopping YoY growth of 90%. Our deposits grew tremendously during the year to reach Rs. 20 Bn. recording a remarkable increase of 57%. We successfully ballooned our total assets to reach Rs. 28 Bn. recording a YoY growth of 63%.

2012We believe in longevity and it is evident in how far we have come in the last eight years. The year under review enabled the company to sustain its growth trajectory while redefining the strength. One of the key initiatives taken to this is capacity building of our human capital through effective implementation of people management policies, processes and technology. The architectural elegance and grandeur of the new corporate office also reflects the glorious 40 year tradition that L B proudly flaunts which has an international level atmosphere for our customers and employees.

2013the key focus for 2013 was building brand value through wealth creation for our stakeholders. We have achieved 27.17% asset growth and increased our market share considerably by paying attention to the needs of our customers and improving the efficiency and effectiveness of our customer service. our footprint has increased and we have reached out to customers in all corners of the island to provide appropriately tailored financial solutions to suit their requirements. the accolades, rankings and awards we have won are testimony to the success of our corporate strategy.

2014our strategy for 2014 is based on reaching out to our stakeholders to identify their needs and address them differentiating us from other players. We expect our relationships to become deeper and add more value as we embrace responsiveness to a fine art and integrate it in to all aspects of our business operations to orchestrate a carefully co-ordinated solution that is relevant to the circumstances. this process will facilitate a lean business model that will benefit all stakeholders through ease of transacting and enhanced opportunities for wealth creation.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

aggreSSIVely eXpandIng our reach

Being responsive

gearIng For proFItaBIlIty Building

Brand ValueStrategISIng

a BeSt-In-claSS BuSIneSS

model


VISIon

To contribute to the quality of life experienced by our depositors, customers, employees and the general public through partnerships that fuel the growth of our Company and to create shareholder value both in the short and long term.

mISSIon

• To mobilise public funds by innovating investment products that will enhance the value delivered to our depositors.

• To engage in prudent lending to entrepreneurs to assist them in the creation of wealth. To embark on investments in which results can be clearly assessed and seize new opportunities in the market.

• To offer a caring and personalised service that will form the foundation for developing lasting partnerships with our stakeholders, employees and the general public.

• To use training and career development to create an empowered and committed group of employees who will drive the Company to high levels of achievement.

ValueS

• Excellence

• Ethics

• Professionalism

• Transparency

• Innovation

• Quality

a portraIt oF the company

L B Finance PLC (the Company) is a licensed finance Company, which was incorporated as a private limited liability Company in 1971, converted to a public limited liability Company in 1982. The Company was listed on the Colombo Stock Exchange in 1998 and re-registered as per the Companies Act, No.7 of 2007.

At the very start the majority shareholding was held by Lewis Brown & Company Limited and in 1994 Vanik Incorporation Limited (VANIK) acquired the controlling interest of the Company. Mr. Dammika Perera, a well-known iconic entrepreneur took over the Company in year 2003 to turn around the loss making to a profitable venture.

L B Finance PLC is now in the group of Vallibel One which is a diversified holding Company with strategic investments in financial services, tile and sanitary ware manufacturing, and leisure.

The Company has a strong financial tradition of over 40 years and deploys a portfolio of financial solutions trusted widely by corporate, SME and individuals. As of 31st March 2013, the Company operated a network of 89 branches, 37 gold loan centres totaling to 126 distribution channels.

The course towards a successful future was set after the acquisition by Mr. Perera, the business was given a new strategic direction with an emphasis on profitability and long- term value growth. Over the past three years, the Company has established itself as the undisputed trailblazer in the non-banking financial services industry. We offer our customers an unmatched product spread coupled with a delightful service. Our product portfolio extends from the acceptance of deposits, maintenance of savings accounts, to granting lease and hire purchase facilities, micro finance facilities, gold loans, vehicle loans, mortgage loans, factoring, margin trading, Islamic finance facilities and value added services.

The public’s immense confidence in the Company’s dynamic and far-sighted method of business has propelled it to its dominant position in the market as business jumped to new highs on all fronts, from deposits to leasing. Our activities will remain firmly focused as we continue to impress the business world with a refreshingly innovative and robust brand of financial stewardship.

VISIon, mISSIon, ValueS and the company






hIghlIghtS

FInancIal hIghlIghtSoperatIonal hIghlIghtS

2012/13 2011/12 change %

Operating Results - Income Statement DataIncome Rs. million 11,166 7,937 40.68Profit before taxation Rs. million 2,526 2,438 3.61Provision for income taxation Rs. million 823 724 13.67Profit after taxation Rs. million 1,702 1,713 -0.64Gross dividends Rs. million 450 346 30.06

Financial Position - Balance Sheet DataTotal assets Rs. million 54,222 42,638 27.17Lending portfolio Rs. million 44,724 36,457 22.68Deposits Rs. million 38,742 27,172 42.58Borrowings Rs. million 8,610 10,451 -17.62Shareholders’ funds Rs. million 5,328 3,968 34.27

Share Market InformationNet assets value per share Rs. 76.94 57.30 34.28Earnings per share (EPS) Rs. 24.58 24.75 -0.69Market price per share as at 31 March Rs. 132.70 134.90 -1.63Price earnings ratio (PER) No. of times 5.40 5.45 -0.92Dividend per share Rs. 6.50 5.00 30.00Dividend cover times 3.78 4.95 -23.64Dividend yield % 4.90 3.71 29.73Dividend payout ratio % 26.44 20.20 30.89Market capitalisation Rs. million 9,190 9,343 -1.64

Compliance Ratios RequirementCore capital ratio (Tier I) >5% % 14.02 12.53 11.89Total risk weighted capital ratio (Tier I & II) >10% % 15.40 14.81 3.98Liquid assets to deposits >10% % 14.18 10.86 30.57Equity to deposits >10% % 13.75 14.60 -5.82

Other IndicatorsReturn on assets (ROA) % 3.52 4.83 -27.12Return on equity (ROE) % 36.63 52.08 -29.67Interest cover times 1.42 1.69 -15.98Interest spread % 10.57 11.46 -7.77Net Interest margin % 10.42 11.84 -11.99Non performing loans ratio % 3.35 2.82 18.79

dIStrIButIon channelS 126

14 channels were opened during the year

StaFF Strength 2,055

new employment opportunities 376

ratIng a-/p2

maintained at the same level

cSr projectS 40+

over 40 cSr initiatives were undertaken

FInancIal SolutIonS 20+

over 20 financial solutions catering to different market segments


StrategIc goalS and perFormance

goal To be a major player in the financial services sector in Sri Lanka

The Company has been on a growth trajectory in the past three years to achieve the following four strategic goals. In the current year 2013 the Company has achieved two of its strategic goals in Deposits and Shareholder Value. While non-performing loans has remained under the industry average of 5%. Asset quality will require careful monitoring as well as strengthening of systems and processes to arrest and reverse the trend in the coming years. On credit the Company has made great strides to become the market leader, with growth rates better than industry peers in non-banking financial institutions (NBFI) sector.

npl ratIo 3.5%

roe 36%

ranKed no. 3 meaSured By total aSSetS oF nBFI Sector

largeSt depoSIt BaSe among nBFI Sector rS. 38 BIllIon

maIntaIn npl ratIo < 5%

maIntaIn roe > 30%

gaIn marKet leaderShIp

maIntaIn marKet leaderShIp

non perFormIng loanS

Shareholder Value

credIt

depoSItS

With Confidence

We are self-assured that the products and services that we provided this year to our stakeholders are unmatched

With StabilityMANAGEMENT REVIEWS007 Chairman’s Review009 Managing Director’s Review014 Board of Directors018 Senior Management






Mr. Thosapala HewageChairman

chaIrman’S reVIeW

ONCE AGAIN, OUR PERFORMANCE HAS SHOWN THAT WE ARE IN THE RIGHT MARKETS, WITH THE RIGHT STRATEGY, AND HAVE THE RIGHT LEADERSHIP IN PLACE TO DELIVER CONSISTENT VALUE FOR OUR SHAREHOLDERS.

8

chaIrman’S reVIeW

dear Shareholder,This is my first opportunity to write to you all in an Annual Report as Chairman of L B Finance PLC. As another financial year of accomplishments comes to an end I feel privileged and pleased welcome you all to the fortieth Annual General Meeting.

Once again, our performance has shown that we are in the right markets, with the right strategy, and have the right leadership in place to deliver consistent value for our shareholders.

• Interest Income rose 41.49% to Rs. 10.32 billion

• Profit before tax increased 3.63% to Rs. 2.52 billion

• Earnings Per Share was maintained above 24%

The Board is recommending a final dividend of Rs. 6.50 per share, totalling to Rs. 450.17 million.

In the past year, not only have we grown our income, profits and earnings per share, we have also increased our capital reserves and total dividends, delivering a return on equity of 36.63%.

We now employ over 2,000 staff deployed over our expanding distribution channels and among the largest in the licensed finance Company industry.

We remain the market leader with the largest deposit base, surpassing Rs. 38 billion among the non-bank financial institutions in the country.

Our customer centric focus and service excellence and ease of doing business have all been key differentiators of our continued success. The Company is now well positioned to expand its target market to include the financial requirements of more high-end clientele enabling greater penetration of our existing and new markets.

Our strategy this year has been to invest to build capacity and to become one of the strongest brands in the country’s non-bank financial sector.

Our capacity building has also seen an escalation on overhead costs and we will need to strive to balance expansion with productivity and efficiency measures to remain competitive going forward.

As a Company that is fully home-grown we have proudly upheld brand value through wealth creation for our stakeholders. The accolades, rankings and awards we have won are testimony to the success of our corporate strategy.

We continue to see opportunity in the markets we currently serve and our strategic outlook for next year is on reaching out to our stakeholders to identify their needs and differentiate ourselves from other players. This process will facilitate a lean business model that will benefit all stakeholders through ease of business transactions and enhanced opportunities for wealth creation.

We have achieved four decades of excellence in the finance industry and now as we look to another decade into the future, our unique identity, tradition and innovative spirit will pave the way for years of success.

acknowledgementsI wish to thank the Board of Directors for the support extended to me as well as for faith they have placed in appointing me to the position of leading L B Finance PLC as its Chairman. I also wish to acknowledge with gratitude the yeoman service the outgoing acting Chairman Mr. Lalit N de S Wijeratne has played in maintaining the growth trajectory and Mr. A M Weerasinghe the Chairman who resigned during the year for his valuable service to the Company.

Mr. Thosapala HewageChairman

31st May 2013






Sumith AdhihettyManaging Director

managIng dIrector’S reVIeW

WE TAKE MUCH PRIDE IN OUR POSITION AS HAVING THE LARGEST DEPOSIT BASE AMONG THE NON-BANK FINANCIAL INSTITUTIONS IN THE COUNTRY.

rs. 54 billiontotal asset Base

22%lending portfolio growth

rs. 38 billiondeposit Base

10


dear Shareholder,It is my pleasure to present to you, a review of another year of excellent performance. We move into our 42nd year in business, driven by our brand which has stood the test of time and is a hallmark for stability, excellence and strength.

economic environmentNearly four years after the collapse of Lehman Brothers, the global economy continues to feel the effects of the financial crisis; on-going market volatility continues to fetter economic growth throughout the world. Uncertainty about the pace of recovery in the United States, and the on-going challenges facing the European Union, concerns around the slowing of the Chinese economy, have all continued to weigh heavily on the global economy.

Despite external and domestic challenges the Sri Lankan economy showed extraordinary resilience. Sri Lanka’s Gross Domestic Product expanded to 6.4% during 2012, slowing down in comparison to two consecutive years of 8% growth.

Consequent to the major growth momentum witnessed in 2010 and 2011 where policy makers allowed for rapid expansion, a mix of stringent policy measures by the Government and Central Bank of Sri Lanka (CBSL) aimed at macro economic stabilisation was adopted in early 2012. These measures aimed to overcome the challenges of a protracted recovery in the global economy as well as rapidly rising domestic credit.

Accordingly the CBSL imposed a ceiling of 18% on credit expansion by banks as a mechanism for rapid transmission of the tight monetary policy stance to

the system. As expected by the Central Bank, higher interest rates and limits imposed on credit disbursement lead to the growth rate of private sector credit reducing substantially, slowing to 17.6% as compared to 34.5% in the previous year. During the year the Sri Lankan rupee depreciated by over 10% against the US dollar as intervention was minimised with market conditions being allowed to determine the exchange rate. The depreciation of the rupee created upward price pressure on imports, which was further exacerbated by upward revision in energy costs adding to inflationary pressures. In addition adverse weather conditions also led to unfavourable supply side effects on inflation. Effective demand management policies that were in place moderated aggregate demand thereby maintaining inflation at single digit levels.

performanceYour Company recorded yet another year of strong performance, driven by our focus on volume expansion. Despite many challenges in the economic environment, your Company achieved its highest ever pre-tax profit of Rs. 2.52 billion this year, an increase of 3.63% compared to the previous year. In 2012/13, we focused on growing our market share further through the expansion of our geographical reach as well as focusing on building the brand. The Company added 14 locations to its network during the year, bringing its total reach to 126, among the largest in the licensed finance company industry. Furthermore, the Company sought increased diversity in its loan portfolio, strengthening its position in several non-traditional business lines such as gold loans on the lending portfolio and savings accounts on the funding portfolio.

The Company achieved an increase in the lending portfolio of 22.68% during the year, a commendable level, given the relatively higher interest rate scenario and the withdrawal of duty concessions on vehicles, which affected the leasing industry. Resultantly, our leasing portfolio expanded at a relatively slower 25% during the year. Meanwhile, our other loans and receivables portfolio grew by 28.83% during the year, supported mainly by the expansion of the gold loan portfolio.

Through our focus on micro leasing facilities such as three wheelers, motor cycles and gold loans we continued to cater to the SME sector, our key market. However, we believe the Company is now well positioned to expand its target market to cater to the financial requirements of more high-end clientele. This development will enable us to retain our loyal customer base that has grown with us as well as help us expand and capture new market share.

The Company continued to maintain strong growth momentum in its top line, with interest income expanding by 42% during the year. The growth stemmed mainly from leasing and gold loans, which collectively contributed around 65% to total interest income in 2012/13. The rising interest rates however had an adverse impact on the Company’s funding costs, owing to the short-term nature of our deposit liabilities. Resultantly, interest expenses increased by 67% during the period under review. Overall, the Company did well to maintain net interest margins at 10.42% in 2012/13, a slight decline compared to 11.84% the previous year. This still compared wider than most of our industry peers. Overall, the Company’s total operating income grew by 19%






during the year, to reach Rs. 5.22 billion. Significantly achieving its highest ever pre-tax profit of Rs. 2.53 billion this year.

The quality of our portfolio remained healthy, with a gross non-performing-loans ratio of 3.35% during 2012/13. This reflects an increase over the previous year’s level of 2.28% and going forward, we acknowledge the importance of further strengthening our risk management and recovery processes.

We take much pride in our position as having the largest deposit base among the non-bank financial institutions in the country. Reflective of the strength of our brand name, the Company’s deposit base expanded by 42% during the year to reach Rs. 38 billion by end 2012/13 supported by attractive deposit rates and the Company’s expanding geographical reach. Resultantly, the Company relied increasingly on deposits during the year, of its total funding requirements. In the latter part of last year we introduced Savings accounts to our portfolio with a view to diversifying our funding base and stabilising interest margins. The product in its full year of operations has successfully attracted more than Rs. 260 million by 31st March 2013.

We continue to be well capitalised, supported by our strong internal capital generation. The Company’s overall risk weighted capital adequacy ratio improved to 15.40% during the year, from 14.81% the previous year.

The Board has proposed a final dividend of Rs. 6.50 per share, an increase on the previous year’s dividend of Rs. 5.00 per share, taking the payout ratio for the year to 26.44% compared to 20.20% last year. This is a total of Rs. 450 million a 30% YoY

increase compared to the previous year’s total of Rs. 346 million.

Another focus this year has been in building our brand recognition and image. We moved into our new state of the art corporate office , which is a landmark in the Colombo skyline in the early part of 2012 and have now been in operating from the location for a full financial year. This has enabled us to consolidate our operations post a period of rapid expansion and growth. Bringing all the centralised operations under one roof and being close to the epicentre has allowed for quicker response and efficiency. We have room to expand and grow and build capacity for the future. In addition there have been several advertising and promotional campaigns, which have been undertaken during the year using various multimedia to create awareness and showcase our strengths. The success of these campaigns is reflected in the faith and confidence shown by the market where L B Finance has emerged among the strongest brands in the country.

Future outlookThe global economic outlook will continue to be unstable and susceptible to any changes to the fragile US recovery, European stability and slowdown in growth momentum in China and India. Domestically if the Sri Lankan economy can continue to maintain its resilience then the outlook for stable growth is expected with GDP growth forecast at 7.5% for 2013.

The Sri Lankan Rupee depreciation last year has stabilised and the market has adjusted well to the new levels. The Central Bank has been and will continue to ease the previously tightened monetary policy. It has already withdrawn the credit

ceiling of 18% giving a positive outlook for lending and has had a positive impact in a gradual lowering of the interest rates encouraged by easing of the CBSL repo and reverse repo rates.

The lower interest rate environment, greater access to funds and stabilisation of the exchange rate all create a positive environment for business growth and we expect to take full advantage of the economic environment to continue to strengthen our franchise. We believe that strength is critical to long-term sustainability, and a creator of opportunities for competitive advantage.

We will continue to reinforce and expand our market leadership position by aligning to last year’s successful strategies in which we invested to build reputation and capacity and reap the benefits while maximising resource utilisation. Our growth strategy will mainly focus on four main pillars; people, reach, technology and quality of service.

peopleOur people form an essential and core part of our business. We will continue to invest in people and strengthen our retention process. In recent years as competition has intensified retention of good trained staff has become challenging. We will continue to recruit talent as required to enhance our team. But more importantly we will invest to develop our people through enhanced talent programmes, by developing their skills, by promoting a learning culture by our commitment to our diversity goals, and by ensuring that our people continue to enjoy a safe, supportive and secure work environment.

12

We will continue to actively build a culture based on high integrity, collaboration, individual and collective accountability, and pride in the Company.

reachWe will build our network through further expansion. This expansion will be focused on strengthening our reach across the nation and being able to deliver our products and services to your doorstep.

We will continue our expansion of the branch network and add to the current network of 126 branches, as well as expanding our ATM network and reaffirming our partnership with Sampath Bank to use their ATMs. In addition we will develop beneficial partnerships with automobile suppliers and other business partners. We are also exploring web and mobile-based solutions to deliver more e-based solutions in the future.

technologyThe Company aspires to be a leader in the application of technology among the non-bank financial services sector. In the early part of 2012 we introduced a new cutting edge ICT platform that is integrated across all the business platforms and the general ledger. This enables the Company to have a fully integrated centralised hub that is accessible throughout our island-wide branch network. Now we require unwavering management focus in extracting the benefits from this investment.

Our efforts are focused on achieving productivity and efficiency gains that will enable us to maximise resource utilisation and have a beneficial impact on reducing overhead costs.

This enables our reach efforts through strengthening our mobile communication platform, thus increasing convenience to customers. Additionally, the Company intends to introduce a new Gold loan management system that will be fully integrated with the current e-financials system. We are constantly exploring further innovative ways to use the platform to provide more innovative products and a superior service to customers.

Now that the ICT platform enables us to have access to information on a centralised basis we need to develop ways to utilise this information better. This will help us get greater insights into the economy, and assist us to tailor better products for customers and price for risk more effectively. We believe that harnessing this information will help with innovation and development of new products tailored to the needs of our customers.

Quality of ServiceA key differentiator continues to be our service excellence. The Company needs to focus on finding better ways of delivering products and services to our customers, while at the same time improving efficiency. We are devoting considerable management attention to enhance the customer experience and the ease of doing business from which will develop new innovations in products and services.

We are making things simpler and intuitive, creating convenience by making processing faster and more efficient, providing greater access through expanded hours in some branch locations,

twenty four hour access through the ATM network and more e-based solutions in the near future. But most importantly our people are at the forefront of delivering a superior service and we will continue to ensure that our customer centric focus in everything we do is maintained and enhanced.

As stated previously we have been building our brand image and we will continue to build on the solid foundations we have laid to strengthen the brand. This goes beyond marketing campaign and billboards to ensuring that our customer centric approach which has served us well continues to be at the forefront of our product and service offerings. We will continue to innovate to meet the needs of the SME and the micro leasing segment, which is our core customer base. However we also see opportunity in expanding into the higher end segment. This will enable us to retain and grow with our existing loyal customer base as they grow and become large clients as well as open a new segment of customers to L B Finance reputation for excellent customer service.

Strengthening these four capabilities will drive on-going growth. In particular an opportunity exists to broaden our relationship with our existing customers, broaden our market to the new corporate segment, promote our products to identified niche markets and continue to drive volume growth in our core business. We will continue to grow our deposit base and retain our market leadership position in the non-bank financial sector. We will also look to further diversify our funding base with the savings product.







The available bank liquidity will allow us to meet our short term borrowing needs from the market at competitive interest rates. We will also explore the possibility of foreign funding to enhance our long-term requirements. In addition to the internal generation of funds through retained earnings, the Company will look to raise Tier II capital by way of debentures to strengthen its capital adequacy requirements.

As we grow we see the need to also strengthen risk management and compliance in the Company. So that we continue to maintain the rigorous lending standards that have served us well over time and helped us maintain an above industry average Non Performing Loans ratio, more on this in the risk management section.

Throughout the Company, we embrace the broader responsibility to the communities in which we operate. My team and I are committed to building on the proud legacy that we have inherited. In doing so, we need to be active and responsible members of our broader community. We have made great strides during the year in strategically aligning our corporate social responsibility strategies together with our business strategies. We seek to ensure that the wider community responsibility and social values pervades our operating model. We see the importance to both the Company and the communities in which we work and serve in continuing our efforts in creating a sustainable business model. We aspire that in the near term our efforts will put us at the forefront, leading the non-bank financial services sector. The

Company is well positioned for the future. I am confident that our Company has the ability to continue to deliver superior long-term performance for our customers, our shareholders, our people and the communities in which we operate.

acknowledgementsI am grateful to the Chairman and my colleagues of the Board for their invaluable contributions, guidance and support during the year in steering the Company. I wish to express my sincere appreciation to all for the confidence placed in me. I would also like to acknowledge and extend my appreciation to Mr. A M Weerasinghe, Chairman and Mr. K D A Perera, Director who retired from the Board during the year having completed 9 years since appointment. A special mention must be made for the Executive Deputy Chairman, Mr. Dhammika Perera who has continuously supported and guided us steadfastly from the beginning. We also welcome to the Board Mr. Thosapala Hewage Independent Non-Executive Director and new Chairman of the Board and Ms. Anandhiy K Gunawardena Independent Non-Executive Director.

I appreciate the contribution of Executive Directors Mr. Niroshan Udage and Mr. B D A Perera for the encouragement to drive the Company towards success. I would like to thank my management team and our staff for their tireless efforts and dedication during the year. Much of our achievements would not have been possible without your invaluable contribution in striving to achieve our vision.

To our loyal customers, and shareholders we take pride in the loyalty and confidence you have in our Company and we will continue to strive to enhance your customer experience as well as increase shareholder value.


31st May 2013

14

Board oF dIrectorS

mr. thosapala hewageChairman

mr. dhammika pereraExecutive Deputy Chairman

mr. lalit n de S WijeyeratneIndependent Non-Executive Director/Senior Director

mr. j a S Sumith adhihettyManaging Director

mr. nimal pereraExecutive Director

mr. niroshan udageExecutive Director

mr. B d a pereraExecutive Director

mrs. Kimarli FernandoIndependent Non-Executive Director

mrs. Shirani jayasekaraIndependent Non-Executive Director

mrs. anandhiy K gunawardhanaIndependent Non-Executive Director






mr. thosapala hewageChairman

Skills and Experience:Holds a Bachelor’s Degree in Social Science from the University of Ceylon, Peradeniya and a Master of Philosophy (Policy Analysis) from the University of Wales, UK. In addition, he holds a Post Graduate Diploma in Development Studies from the University of Cambridge, UK. He counts 40 years experience as a professional Development Administrator and Natural Resource Manager.

Appointed to the Board:Appointed to the Board on 23rd April 2013 and appointed as the Chairman on the same day.

Membership of Board Sub-Committees:Chairman of the Remuneration Committee with effect from 23rd April 2013.

Current Appointments: None

Former Appointments:Ambassador in Nepal from 2009 to 2012 prior to which he was Secretary to the Ministries of Ports & Aviation, Enterprise Development and Investment Promotion, Urban Development and Water Supply, Environment & Natural Resources.Additional Secretary to the Ministry of Forestry & Environment (Policy Planning), Additional Director General of Southern Development Authority (Ministry of Finance and Planning) and Director, Ministry of Lands, Irrigation & Mahaweli Development. Led Sri Lankan delegations in various fields from 2000 to 2008 to Mauritius, Los Angeles, New York, Europe, Middle East, Bangladesh, Senegal, Thailand, Philippines, India, Korea and Japan.

mr. dhammika pereraExecutive Deputy Chairman

Skills and Experience:Quintessential strategist and business specialist with 25 years of business experience.

Appointed to the Board:Appointed to the Board on 22nd October 2002, He was appointed the Chairman of the Board of Directors on 7th October 2010 and Executive Deputy Chairman on 21st October 2011.

Membership of Board Sub-Committees: None

Current Appointments:Secretary to the Ministry of Transport, Sri Lanka. Chairman Sampath Bank PLC, Vallibel One PLC, Vallibel Finance PLC, Vallibel Power Erathna PLC, The Fortress Resorts PLC, Delmege Limited. Deputy Chairman of Hayleys PLC, Royal Ceramics Lanka PLC, Orit Apparels Lanka (Pvt) Ltd. Director of Amaya Leisure PLC, Haycarb PLC, Hayleys MGT Knitting Mills PLC, Hotel Services (Ceylon) PLC, Dipped Products PLC, Horana Plantations PLC, Lanka Walltiles PLC, Lanka Floortiles PLC, Sri Lanka Insurance Corporation and Strategic Enterprise Management Agency of Sri Lanka.

Former Appointments:Chairman, Board of Investments, Sri Lanka.

mr. lalit n de S WijeyeratneIndependent Non-Executive Director /Senior Director

Skills and Experience:Fellow of the Institute of Chartered Accountants in Sri Lanka and counts over 38 years experience in Finance and General Management both in Sri Lanka and overseas.

Appointed to the Board:Appointed to the Board on 1st November 2008 and functioned as the Acting Chairman during the period 21st October 2011 to 21st August 2012.

Membership of Board Sub-Committees:Chairman of the Audit Committee and Nomination Committee and a Member of the Remuneration Committee.

Current Appointments:He is presently a Director ofDFCC Vardhana Bank, The Fotress Resorts PLC, Hotel Services Ceylon PLC, Talawakelle Tea Estates PLC, Nuwara Eliya Hotels PLC, Property Development PLC, Rockland Distilleries (Pvt) Ltd and Delmege Limited.

Former Appointments:He was the Group Finance Director of Richard Pieris PLC from January 1997 to June 2008 and also held Senior Management positions at Aitken Spence & Company, Brooke Bonds Ceylon Ltd and Zambia Consolidated Copper Mines Ltd.

16

Board oF dIrectorS

mr. j a S Sumith adhihettyManaging Director

Skills & Experience:A well-known professional in the marketing field. He has over 32 years of experience in the finance sector.

Appointed to the Board:Appointed to the Board on 10th December 2003.

Membership of Board Sub-Committees:Member of the Nomination Committee and Integrated Risk Management Committee.

Current Appointments:Serves on the Board of Vallibel Finance PLC, Vallibel One PLC and Pan Asia Banking Corporation PLC. He is also the Managing Director of The Fortress Resorts PLC.

Former Appointments:He was formerly the Deputy Managing Director of Mercantile Investments Limited and served as a Director of Nuwara Eliya Hotels Company Limited, Grand Hotel (Pvt) Limited, Royal Palm Beach Hotels Limited, Tangerine Tours Limited and Security Ceylon (Pvt) Limited.

mr. nimal pereraExecutive Director

Skills and Experience:Counts over 30 years of experience in the fields of Finance, Capital Market Operations, Manufacturing, Marketing and Management Services. Mr. Perera, is a member of the Sri Lanka Institute of Marketing.

Appointed to the Board:Joined the Board of L B Finance PLC on 2nd September 2003 and was designated as Executive Director on 1st September 2012.

Membership of Board Sub-Committees: None.

Current Appointments:Chairman of Pan Asia Banking Corporation PLC, Deputy Chairman of Vallibel One PLC, Managing Director of Royal Ceramics Lanka PLC, Director of Amaya Leisure PLC, Vallibel Finance PLC, Hayleys PLC, Hotel Services (Ceylon) PLC, Talawakelle Tea Estates PLC, Haycarb PLC, Lanka Floortiles PLC, Lanka Walltiles PLC and Horana Plantations PLC.

mr. niroshan udageExecutive Director

Skills and Experience:Holds a Bachelor’s Degree in Science from the University of Colombo and possesses 23 years experience in the field of Leasing and Finance, including 10 years at Lanka Orix Leasing Company PLC and 3 years at Mercantile Investments Limited prior to joining L B Finance PLC in 2004. Mr. Udage followed a course in 2007 conducted by Intentional Development Ireland Ltd in Dublin and London on Strategy and Management in Banking and also successfully completed High Potentials Leadership Program in 2012 at Harvard Business School in Boston, MA, USA.

Appointed to the Board:Appointed as a Director of L B Finance PLC on 1st January 2007.

Membership of Board Sub-Committees:Member of the Integrated Risk Management Committee.

Current Appointments:He serves as a Director of Hayleys Fibre PLC with effect from December 2011.

mr. B d a pereraExecutive Director

Skills and Experience:Counts over 16 years experience in the Leasing Industry that includes positions at Commercial Leasing Company Limited, Lanka Orix Leasing Company PLC and a Merchant Bank in Bangladesh. Mr. Perera is an Associate Member of the Chartered Institute of Management Accountants ACMA (UK) and holds a BSc. (Business Administration) Special Degree from the University of Sri Jayewardenepura. He has also successfully completed High Potentials Leadership Program in 2012 at Harvard Business School in Boston, MA, USA.

Appointed to the Board: Appointed as a Director of L B Finance PLC on 1st January 2007

Membership of Board Sub-Committees:Member of the Integrated Risk Management Committee.

Current Appointments:He serves as a Director of Hayleys Fibre PLC with effect from December 2011.






mrs. Kimarli Fernando Independent Non-Executive Director

Skills and Experience:Mrs. Kimarli Fernando holds a LLB (Hons) from the London School of Economics and Political Science, London, UK. She is a Barrister-at-Law, Lincoln’s Inn, UK. (1987) and an Attorney-at-Law, Sri Lanka. She has more than 23 years experience in the field of banking.

Appointed to the Board:Appointed to the Board of L B Finance PLC on 26th August 2008.

Membership of Board Sub-Committees:Member of the Remuneration Committee, Integrated Risk Management Committee and the Nomination Committee.

Current Appointments:Director of Vallibel One PLC, National Development Bank PLC, Delmege Limited and Sri Lanka Sustainable Energy Authority

Former Appointments:Senior positions at Pan Asia Banking Corporation PLC, Standard Chartered Bank, Sri Lanka and Deutsche Bank AG, Sri Lanka.

mrs. Shirani jayasekaraIndependent Non-Executive Director

Skills and Experience:She has over 30 years experience combining Finance and IT, Audit and Risk Management in Sri Lanka, Zambia and Bahrain. She is a Fellow of the Institute of Chartered Accountants of Sri Lanka and a fellow member of the Chartered Institute of Management Accountants UK.

Appointed to the Board:Appointed to the Board of L B Finance PLC on 25th August 2010.

Membership of Board Sub-Committees:Chairman of the Integrated Risk Management Committee and Member of the Audit Committee

Current Appointments:Director of Asian Hotels PLC, a subsidiary of John Keells Holdings PLC. Serves as advisor to Internal Audit of Carson Cumberbatch PLC.

mrs. anandhiy K gunawardhana Independent Non-Executive Director

Skills and Experience:An Attorney-at-Law and a partner of Julius and Creasy, Attorneys-at-Law and Notaries Public, she graduated from the University of Colombo’s Faculty of Law in 1995 with Second Class (Upper Division) Honours and also secured First Class Honours at the Attorneys-at-Law (Final) Examination in 1996, conducted by the Sri Lanka Law College. She is a Fulbright Scholar and was awarded the Master of Laws (LLM with Distinction) by Georgetown University, Washington DC, in May 2000 and, thereafter, served a 7 month intern-ship with the International Monetary Fund’s Legal Department in Washington D.C. Her areas of specialization are Capital Markets, Corporate and Commercial Law, Insurance Law, Mergers & Acquisitions and Taxation.

Appointed to the Board:Appointed to the Board on 1st March 2013.

Membership of Board Sub-Committees:Member of the Audit Committee

Current Appointments:Director of Messrs. Jaycey and Company, Jacey Trust Services (Private) Limited, Jacey Advisory Services (Private) Limited and Jacey Secretarial Services (Private) Limited, affiliate companies of the Messrs Julius & Creasy engaged in providing ancillary services and of Corporate Holdings (Private) Limited, which is an investment Company and of The Colombo Fort Land & Building PLC. She is also a Director of G S Investments (Private) Limited, S V Investments (Private) Limited, A S Investments (Private) Limited, S S Investments(Private) Limited, G T Investments (Private) Limited M B Investments (Private) Limited, G J Investments (Private) Limited, S A Investments (Private) Limited, S T investments( Private) Limited and V P Investments (Private) Limited.

18

lt col chandana WijeratneAssistant General Manager – Human Resources

BA (def) (Kothalawala Defense University)Joined LBF in 2011, counts over 22 years of experience in Military in the fields of management personnel, management of resources, training and development and civil operations.

mr. ravi yatawaraGeneral Manager

B.Sc. Business Administration (Oklahoma State University USA)Joined LBF in 2010,counts over 18 years of experience in the finance industry.

mr. roshan jayawardenaAssistant General Manager – Marketing

DipM, MCIM (UK), MBA (University of Sunderland UK), FSSM (UK)Joined LBF in 2007, counts over 22 years of experience in the fields of banking, finance, retail, and telecom and food industry.

mrs. Shyamalie WeerasooriyaChief Financial Officer

ACA (Sri Lanka), B.Sc. (University of Colombo)Joined LBF in 2001, counts over 17 years of experience in the finance industry.

mrs. Sandhya Silva hasthimuniGeneral Manager- Administration

Joined LBF in 1984, counts over 26 years of experience in the finance industry and her career features many managerial positions.

mr. marlon pereraAssistant General Manager - Deposits

Joined LBF in 1986, counts over 27 years of experience in the finance industry and has held many managerial positions.

mr. manjula gooneratneDeputy General Manager – Credit and Operations

M.Sc. Finance (UK),B.Sc. (Hons.) (University of Colombo)Joined LBF in 2005, counts over 15 years of experience in the finance industry.

mr. chethana KahandugodaAssistant General Manager – IT

M.Sc Information Technology (University of Colombo)Joined LBF in 2010, counts over 13 years expertise in the ICT field.

mr. athula jayasekeraAssistant General Manager - Business Development

MBA (ICFAI University of India), FIMSL, FCPM, Dip in Bank Management (IBSL)Joined LBF in 1999, counts over 29 years of experience in banking and finance industry.

mr. palitha abeysekeraAssistant General Manager – Treasury and Planning

ACA (Sri Lanka), ACMA (Sri Lanka), B.Sc. Accountancy and Financial Management (University of Sri Jayewardenepura)Joined LBF in 2011, counts over 12 years of experience in the fields of accounting, auditing, treasury management and planning.

SenIor management






mr. lakshman WanniarachchiSenior Manager - Micro Finance

MBA (ICFAI University of India), EDBA (University of Colombo)Joined LBF in 2006,counts over 16 years of experience in the fields of accounting, auditing, administration and credit.

mr. Bimal pereraChief Risk Officer

CFA charterholderJoined LBF in 2013, counts close to 10 years of experience in fields of corporate treasury, investment and strategic finance and risk management both locally and overseas.

mr. prasad amarawaradanaSenior Manager- Factoring and Corporate Credit

Joined LBF in 2013, counts over 21 years of experience in the finance industry

ms. harshani mapatunaSenior Manager - Legal

LLB (University of Colombo), Attorney-at-LawJoined LBF in 2004, counts over 15 years of experience in the finance industry.

mrs. chandrika manel alwisSenior Manager – Gold Loans

Joined LBF in 1984, counts over 29 years of experience in the areas of deposits, credit, recoveries and gold loans and her career features many managerial positions.

mrs. nirosha amanullaSenior Manager Kandy – Branch

Joined LBF in 1985, counts over 27 years of experience in the finance industry and her career features many managerial positions.

mr. amal SilvaSenior Manager – Recoveries

Joined LBF in 1987, counts over 25 years of experience in the finance industry.

With Trust

Partnering your life with Trust – You can rest assured that you have created a union with a business that you can trust with regard to the most important matters in your life

With TrustMANAGEMENT DISCUSSION AND ANALYSIS021 Management Discussion and Analysis036 Events During the Year038 Financial Review






management dIScuSSIon and analySIS

operating environmentglobal economyGlobal economic growth was curtailed at 3.2% in 2012, as economic and financial conditions in the European region continued to soften and fiscal consolidation weighed down on the United States. Advanced economies thus expanded at merely 1.2%, compared to 1.6% in 2011 with notable economic contractions being seen in Italy and Spain. Emerging markets and developing economies continued to drive global growth with an output expansion of 5.1% during the year, although this was a slowdown in comparison to the previous year’s growth of 6.4%.

Spill-over effects of the slowdown in advanced economies continued to affect emerging markets, mainly through weak external demand whilst tighter policy environments also contributed towards the slowdown. Additionally, internal constraints such as policy uncertainty and supply bottlenecks in several emerging economies including India and Brazil have constrained growth in these respective regions.

Looking ahead, the outlook for 2013 has improved slightly with global output projected to expand at 3.25% in 2013 and improve to 4% in 2014. With policymakers being successful in averting two key threats to global recovery, namely the breakup of the Eurozone and a sharp fiscal contraction in the United States, funding conditions as well as overall confidence has improved.

Advanced economies are anticipated to grow by 1.2% in 2013 with a pronounced improvement during the second half of the year. The Eurozone is still expected to record a contraction in output affected by continued fiscal consolidation and balance sheet weaknesses, although the contraction is not expected to be as marked as in 2012. On the other hand, emerging economies will continue to be the engine of growth in 2013 with output forecast to expand by 5.3% during the year. Growth is expected to be propelled by resilient internal demand conditions, now recovering exports as well as an anticipated easing of policy conditions.

domestic economySri Lanka’s Gross Domestic Product expanded by 6.4% during 2012, slowing down in comparison to two consecutive years of 8% growth, due to a tighter policy environment and weak external demand. The services sector remained the largest contributor to GDP with a share of 58.5% in 2012 followed by the industry (30.4%) and agriculture (11.1%) sectors. Expansion during the year was supported largely by the industry sector which grew by 10.3% against the backdrop of large scale government infrastructure projects which propelled construction sub-sector growth. The agriculture sector performed well in comparison to 2011 as weather conditions during the first half of the year was conductive to paddy production; the agriculture sector expanded by 5.8% during the year. On the other hand, the services sector was adversely impacted by a slowdown in the retail and wholesale trade sub-sector following the sharp depreciation of the exchange rate during the year which resulted in a decline in imports. Exports too suffered against weak external demand. Consequently, the service sector’s growth moderated to 4.6% in 2012, from growth levels of 8.6% last year.

projected regional economic growth

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8

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12

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-12

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-12

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AWDRAWPR



During 2012, the government and the Central Bank of Sri Lanka adopted a tighter fiscal and monetary policy stance with the primary objectives of curtailing credit growth and stabilising the external sector. This was a result of heightened domestic challenges during the year following excessive credit growth and monetary expansion during 2010 and 2011. Consequently, the policy rates were raised twice during the year; in February 2012 the repurchase rate and the reverse repurchase rate of the Central Bank were both raised by 50 bps each, and a further 25 bps and 75 bps respectively in April 2012. In addition, a credit growth cap of 18% (with an additional 5% allowed for foreign funding) was placed on all licensed banks. As anticipated, market interest rates followed an upward trajectory during the year. For instance, the Average Weighted Deposit Rate increased by around 37% during 2012, whereas the Average Weighted Prime Lending Rate also escalated by 25%.

The higher interest rate environment coupled with the credit ceiling on Banks, also kept credit growth in check with commercial banks’ lending to the private sector slowing to 17.6% during the year, compared to 34.5% in 2011. Resultantly, the non-bank financial sector also faced funding constraints as bank lending to the sector was curtailed. Despite the slowdown in credit growth, the financial sector was increasingly competitive and showed improvements in its stability indicators. In addition, the regulatory framework governing financial institutions, mainly the non-bank financial institutions was further strengthened during the year. International investors’ confidence in the country’s banking sector was demonstrated by several commercial banks tapping international markets for long-term funding. The banking sector

secured a total of USD 973 million via foreign funding in 2012, of which nearly 70% were long-term funds. With the expiry of the credit ceiling on commercial banks as well as the expected easing of interest rates of the short to medium term, credit growth is expected to rebound by the second half of 2013.

Meanwhile, on the exchange rate front, the Sri Lankan Rupee depreciated by over 10% against the US dollar during 2012, as intervention in the foreign exchange market was minimised with market conditions being allowed to determine the exchange rate in a bid to stabilise the country’s external sector. In addition, the government also increased import tariffs and withdrew duty concessions of selected items in a bid to curb imports. This coupled with the sharp depreciation of the exchange rate led to country’s imports declining by 5.8% during the year. Export earnings also declined mainly due to weak external demand as well as lower internal commodity prices which impacted the prices of the country’s key exports. Thus, export earnings fell by 7.4% during 2012. Despite the drop in exports, the trade deficit contracted by 3.1% during 2012 whilst the trade deficit as a percentage of GDP also declined to 15.8% during the year, from 16.4% in 2011.

USDGPBEuro

Sri lanka rupee against major currencies

0

50

100

Apr-

12

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-12

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12

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150

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With credit growth and monetary expansion slowing as a result of the tighter policy environment, inflation was maintained at single digit levels during the year. Annual average inflation (as measured by the Colombo Consumer’s Price Index) clocked in at 7.6% by December 2012. The increase in comparison to last year’s inflation levels of 6.7% was felt primarily towards the latter part of the year, driven by upward price revisions in energy prices. Inflationary pressures further intensified owing to the depreciation of the exchange rate, which resulted in imports being more expensive. Unemployment continued to decline with economic expansion, reaching its historically lowest ever level of 4.0% in 2012.

credit growth to private Sector

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Share market performanceThe performance of the country’s share market suffered during the year, affected by higher yields on fixed income avenues, frequent changes in regulations allowing stock brokers to extend credit to clients as well as volatilities in the exchange rate. As a result, the All Share Price Index fell by 7.64% during the year to close at 5,643.0 points, whilst the Milanka Price Index also declined by 2% to 5,119.1 points by end 2012. However, the equity market has shown some signs of rebound in the 1st quarter of 2013 with interest rates easing and investor sentiments improving; the All Share price Index improved marginally to 5,705.2 points by end March 2013.

non- Bank Financial SectorIntroductionThe non-bank financial sector plays a vital role in the Sri Lankan economy, catering to the financial requirements of small and medium enterprises, a relatively high risk market segment that has limited funding avenues. The non-bank financial sector consisted of 47 Licensed Finance Companies (LFCs) and 13 Specialised Leasing Companies (SLCs) by end December 2012. During the year, four companies obtained LFC licenses and 4 SLCs converted to LFC status. On the lending side, the sector’s key products include leasing, hire purchase, gold loans and working capital loans. On the funding side, public deposits remain the key funding source for LFCs whereas SLCs rely on borrowings. The sector continued to expand its geographical reach during the year with a total network of 972 branches, of which 206 were opened during the year. The sector had also focused on strengthening its presence in rural areas of the economy, with 75% of the new branches added in 2012 being opened outside the Western Province.

Distribution of Branches of NBFIs by Province

province 2011 2012

Western 265 316

Southern 91 112

Sabaragamuwa 59 76

North Western 67 99

Central 82 107

Uva 43 52

North Central 55 69

Eastern 60 78

Northern 44 63

Total 766 972

Source: CBSL Annual Report 2012

Industry asset growth

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asset growthThe sector’s total assets expanded by 22% during 2012 to Rs. 597 billion which comprised 6.4% of the country’s financial sector assets. Meanwhile the sector recorded a credit growth of 21% during the year slowing down in comparison to the growth of 46% achieved the previous year. Credit growth was impacted by a multitude of factors in the macro economic landscape including the tighter policy environment adopted by the government and the Central Bank of Sri Lanka. For instance the increase in policy rates and the resultant high interest rate scenario coupled with the withdrawal of duty concessions on vehicles as well as the sharp depreciation of the exchange rate resulted in a slowdown in credit demand. Resultantly, lease and hire purchase facilities which constitute the bulk of the sector’s credit assets grew by a moderate 19% during 2012, compared to 55% the previous year. On the other hand, gold loans and loans against deposits showed strong growth during 2012. Overall however, lease and hire purchase continued to dominate the sector’s credit assets with a share of 72% during 2012.



asset QualityThe sector’s credit quality was affected by the high interest rate and inflationary scenario during the year. Total non-performing assets (NPA) increased by 19% to Rs. 24 billion during the year, translating to a gross NPA ratio of 5% in 2012 (2011: 5.1%). The improvement in the ratio was driven primarily by loan growth during the year. Meanwhile the net NPL ratio stood at 1.6% by December 2012.

asset Quality

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Sector profitabilityThe sector’s profitability indicators weakened in comparison to 2011 impacted by the higher interest rates and slower credit demand for vehicle financing. The sector’s return on assets (ROA) declined from 6% in 2011 to 4% in 2012, whilst the return on equity (ROE) also fell sharply from 34% to 16% in 2012. Meanwhile, the sector’s net interest margin remained relatively unchanged at 6.8% by December 2012. Overall the sector’s profit after of tax of Rs. 15 billion in 2012 was a decline of 21% compared to the profit levels achieved the previous year.

liquidityWith the relatively slower loan growth during the year, the sector’s liquidity levels were strengthened by December

2012. The LFC sector recorded a surplus of Rs. 4.4 billion over the required minimum liquid assets of Rs. 26 billion during the year.

FundingThe LFC’s total deposit base amounted to Rs. 254 billion by end December 2012, reflecting a 37% increase over the previous year. The strong growth in the sector’s deposit base was supported by its expanding branch reach, more attractive deposit rates during the year as short tenured deposits reprised faster in a rising interest rate environment as well as the conversion of four SLCs to deposit taking institutions during the year. Resultantly, deposits accounted for the bulk of the LFC sector’s funding base, with a share of 43% during the year. Short-term time deposits formed the bulk of the sector’s deposit base. Meanwhile, the higher interest rate scenario and the credit ceiling placed on licensed banks during the year deterred the LFC sector from increasing its borrowings base; borrowings increased by a mere 3% to Rs.176 billion during the year.

capitalisationThe NBFI sector’s capitalisation strengthened during the year, supported by internal capital generation as well as capital infusions totalling Rs. 5 billion. LFCs and SLCs were both required to increase their minimum core capital requirements to Rs. 300 million and Rs.150 million by 1st of January 2013, owing to which most players sought infusions and retained capital during the year. Meanwhile, the sector’s overall Risk Weighted Capital Adequacy Ratio improved to 16% during the year, compared to 14% in 2011.

regulatory FrameworkThe regulatory and supervisory framework governing the sector continued to be strengthened during 2012. During the year, an internal risk rating model and an early warning system were implemented so as to identify potential risks in the sector. Meanwhile, several new directions were issued to both LFCs and SLCs; LFCs were issued specific guidelines with regards to requirements on information security as well as revisions in the upper limit of interest rates that could be offered for deposits. For SLCs, regulations were introduced with regards to the minimum liquidity requirements, fitness and propriety of directors as well as an increase in the minimum core capital ratio. Additionally, the regulator also intervened and closely monitored several distressed companies during the year; strategic investors were found for several of such entities. Overall the regulatory measures taken to strengthen the industry and continued supervision and monitoring by the Central Bank of Sri Lanka have contributed towards improving the stability indicators of the sector.

Snapshot of the Industry

Indicator 2011 2012

No of LFCs 39 47

No of SLCs 16 13

Number of Branches 766 972

Total Assets Rs. 489.9 Bn Rs. 596.6 Bn

Total Deposits Rs. 186.0 Bn Rs. 254.1 Bn

NPA Ratio 5.10% 5%

PAT Rs. 19 Bn Rs. 15 BnSource: CBSL Annual Report 2012






our product portfolio

product type Stakeholder product logo

Investments

Children

Senior Citizens

General Public

Shairah Compliant

Credit

Individual

Corporate/ SMEs

Self Employed

Shariah Compliant

Value Added Services

Individual



Leasing– “L B Finance is one of the leading providers of lease finance largely on which the Company’s reputation and identity has been built” overviewThe Company has over 40 years of expertise in the local leasing industry and provides leasing solutions for a range of vehicles and equipment. The Company’s lease portfolio comprises of micro and other leases. The main income generating asset which has been the mainstay of the leasing business.

The withdrawal of duty concessions on vehicles, the sharp depreciation of the exchange rate and the relatively high interest rates had an adverse impact on vehicle imports during the year, thus adversely affecting the leasing industry. Total vehicle imports to the country declined 43.81% during the year, compared to an increase of 93.63% in 2011.

StrategyProvide tailor made product and service offerings to meet the needs of the different customer segments.

Promote a greener national conscience through the introduction of products such as ‘Green Leases’, which offers hybrid environmentally friendly vehicles on competitive terms.

To offer customers a full service the Company expanded its role to also become a supplier of high end vehicles direct to customers with competitive leasing packages.

Aggressively grow our marketing team to drive aggressive volume growth has seen us become the largest sales and marketing team among NBFI’s.

performanceLeasing is the largest contributor to the Company’s loan portfolio, accounting for 48.52% of its lending portfolio. It is also the principal income generator, contributing 44.56% to the Company’s interest income during the year.

BuSIneSS lIne oVerVIeWOur business lines are organised by product lines. There are two broad categories of product lines.

lending Lending expansion strategy was focused on volume driven growth while ensuring that the quality of the portfolio was maintained at acceptable levels. The lending strategy went beyond income generation for the Company but was also an engine for developing and creating wealth for individuals and the betterment of community as a whole.

depositDeposit products form the primary funding source for the Company. Mobilising and maintaining a healthy deposit base is critical for further expansion and growth. To date the strength of our brand and market confidence has helped us mobilise the largest deposit base among the licenced finance companies.

Ably supported by specialised cross functional business support units, finance, treasury, information technology, human resources, recovery, marketing and legal.






lease portfolio composition - 2012/13

MicroOther

41%

59%

lease portfolio composition - 2011/12

MicroOther

47%

53%

The Company’s leasing portfolio grew by 25% to Rs. 29.69 billion during the year despite the slowdown in the industry. However, growth rates in 2012/13 were much slower than the previous years’ growth of 80.58%. Due to the reduction of duties on imports of motor vehicles which provided a significant boost to the industry in the last financial year. The granting amounted to Rs. 13.89 billion in 2012/13 compared to Rs. 14.90 billion in the preceding year. The green lease portfolio was more than Rs. 250 million during the year, which is an addition to our green lease stock.

The growth during 2012/13 stemmed mainly from micro leasing. Micro leasing, consisting of three wheelers, small trucks and motor cycles continue to be the Company’s mainstay contributing 40.77% to its leasing portfolio. Through these products, the Company caters to low and middle income earners who have limited access to alternative financing. This is also in line with the government’s agenda of promoting economic growth through financial inclusion. Our competitive edge stems from our speedy service delivery, superior customer care and well diversified distribution channels across the country.

In addition to its use as a taxi, three wheelers are also now commonly used to fulfil the personal transport requirements of rural families. Resultantly, this has helped improve the quality of life among rural families, which had previously relied on public transportation.

Mean while, the delinquency rates of the three wheeler segment continue to be well below that of other asset classes.

outlookWe are optimistic about the outlook for the Company’s leasing business, given the declining interest rate scenario which is anticipated to uphold demand. Furthermore, the Company’s expanding geographical reach as well as the memorandum of understanding the Company has signed with a leading automobile providers to provide favourable financing terms and facilities for certain classes of vehicles will allow us to access new markets to further grow our portfolio.Serving the rural and SME sector through leasing solutions will continue to be a strategic priority for the Company in the coming year.



hire purchaseoverviewHire purchase is one of the Company’s pioneering products. The benefit of hire purchase facilities stems from its non attraction of value added tax for registered vehicles in use for over 12 months.

StrategyThis year the Company made a strategic decision to concentrate on developing and enhancing the leasing portfolio as we expected low demand for hire purchase.During the latter part of the year we have invested in marketing efforts through local TV programmes to educate the public on this product and expect to see increase in demand in the future.

performanceThe Company’s hire purchase portfolio grew marginally by 3.38% during the year to reach Rs. 6.57 billion. Performance during the year was impacted by the rise in the prices of registered vehicles, which resulted in subdued demand for hire purchase facilities. The granting amounted to Rs. 3.82 billion in 2012/13 compared to Rs. 3.64 billion in the preceding year which grew only by 4.93%. This slower growth rate was anticipated by the Company.

outlookIn the forthcoming year the Company expects to further expand the hire purchase portfolio . We expect that initiatives like the ‘Riya Pola’ and the educative knowledge building through the local TV program will provide impetus to expansion of the Company’s hire purchase volumes. Gold Loans- “A strong product with great potential for further growth where risk reward and market trends needs to be carefully balanced” overviewGold loans have emerged as a pivotal line of business with a significant contribution to the company’s growth in recent years. This is an attractive short term small ticket financing product by its very nature.

StrategyA volume driven strategy to create greater penetration of the market through enhanced distribution channels by creating dedicated gold loan centres with especially trained staff.

Driving ease of business with seven day service, rapid processing of applications to cater to client needs.

The strategies were redefined in the latter part of the financial year as the Company forecast a plunge in the gold market. Therefore the Company reduced the advance percentages as a prudent measure.

Enhancing the recovery process through automated reminders direct to customers and a dedicated call centre to follow through on these reminders.

We anticipated a decrease in the gold prices and reduced the duration mainly to one month loans against gold. This has reduced the negative impact of gold prices to the Company.

performanceThe Company’s gold loan portfolio has seen strong growth over the last few years, emerging as the second largest contributor to the Company’s lending portfolio during the year. Gold loans accounted for 23.86% of the Company’s lending portfolio and 21% of its interest income during the year. During 2012/13, the Company’s gold loan portfolio expanded by 26.22% to reach Rs. 10.67 billion. The product serves as an effective funding source for individuals who are in need of urgent liquidity, given the speed and ease with which a facility could be obtained.

hp portfolio

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gold loan portfolio

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As the strategy the Company was able to shift the portfolio to one month tenor which accounted for 46% in 2012/13 compared to 18% last year.

From the Company’s perspective gold loans are a highly lucrative segment. Given the sentimental value attached to gold and the high level of redemption, whilst the easily liquefiable nature of the asset further reduces its risk exposure. The short-term nature of the asset also results in improving the Company’s asset liability maturity mismatch.

Competition in this segment has intensified with several bank and non-bank financial institutions foraying to the industry. The Company has continued to maintain a good competitive position, supported by its network of 37 gold loan centres and 89 branches. Furthermore, our extended service hours such as opening of gold loan centres seven days a week, have made our services more accessible to our customers and have helped strengthen our competitive position.

Overall profitability of the product was however impacted by a sharp decline in gold prices during the year. The loss in value of the security as well as losses upon disposal of unredeemed gold required the Company to make an impairment provision amounting to Rs. 220.26 million for the year 2012/13.

We have identified the importance of monitoring and forecasting gold price movements, on a more consistent and accurate basis. Also, underwriting and monitoring of this segment will be strengthened.

outlookThe Company is in the process of introducing a new integrated system for gold loans. Its also exploring the provision of flexible repayment schemes to customers via monthly instalments.

With the strengthening of the business line the Company is confident that gold loans will continue to be a key growth area in the coming year.

Other Products- “The Company has ventured outside its traditional lines of business to provide a variety of financial solutions including factoring, Islamic finance and value added services” FactoringoverviewAs a part of the product development strategy the Company launched factoring in 2010. We provide our clients with innovative, tailor made working capital solutions to meet their specific business requirements with greater funding flexibility. Supported by custom built state of the art factoring and working capital management system. The Company’s factoring services are primarily targeted towards the SME sector.

StrategyBuild a quality portfolio, based on pure factoring create a disciplined market.

performanceFactoring is structured on the principle that businesses of all forms and sizes could sell their invoices to a factoring company, converting them into ready cash while the factoring company accepts the responsibility of collecting the invoice value from the customer at the expiry of the credit period. Businesses need not tie down their working capital and profits in long-term credit periods required by customers.

During the year, the Company’s factoring portfolio contracted to Rs. 617 million, from over Rs. 1 billion the previous year.

gold loan tenor Wise composition 2012/13

1 Month3 Months6 Months12 Months

46%

51%

1% 2%

gold loan tenor Wise composition 2011/12

1 Month3 Months6 Months12 Months

18%

77%

1% 4%



With the higher interest rate scenario and the relatively subdued business sentiments during the year, demand for factoring services declined whilst the Company did not pursue growth in this product aggressively.

outlookLooking ahead, the Company intends to pursue stronger growth in factoring, with focus placed on expanding its regional presence through recruitment of well trained experienced staff

Islamic FinanceoverviewAl Salamah, the fast-expanding islamic finance unit of the Company offers three key products under its islamic finance unit, namely ijarah leasing facilities, murabaha trade finance and mudharabah investment accounts. The operations of this unit are governed by the islamic Shariah Law and overlooked by a certified Shariah Supervisory Council.

The Company offers its Shariah compliance services through the island wide branch network, as well as at dedicated standalone centres in the distribution channels.

StrategyDrive market share through promotional campaigns.

Develop new products that will attract this segment of the market in compliance with Shariah Law.

performanceThe Company’s ijarah leasing facilities and murabaha trade finance funded by a combination of mudharabah investments as well as the companies own investments. In 2012/13 ijarah

portfolio grew by 23.57% to reach Rs. 808.42 million and murabaha grew 64.32% to Rs. 421.33 million during the year. Mudharabah investments saw a significant growth of 286.52% in 2012/13 reached to Rs. 456.73 million.

In September 2012, the unit introduced mudarabah savings regular accounts and special accounts for senior citizens and minors.

As a first in the local islamic finance sector, the seniors’ savings account rewards customers over 55 years a higher profit ratio. Customers have access to these accounts conveniently using their L B Finance ATM cards.

The rapid progress of Al Salamah over a short period of time has been remarkable. The units’ ability to cater to specific customer demands in a consistent and efficient manner has enabled the Company to improve on capacity and provide more dedicated staff members to the branches.

outlookWe hope to expand our product offering and grow our business through extending the reach of these products as well as enhancing knowledge and training at branch level to improve the sales efforts.

Deposits- “The Company has the largest deposit base among non-bank financial institutions in the country” The Company with a base of Rs. 38.74 billion now has the largest deposit base among non-bank financial institutions in the country. This is reflective of the trust and confidence placed in us by our loyal customers.

Deposits fulfil the bulk of our funding requirements, accounting for nearly 75% of total funds during the year. In 2012/13, our total deposit base expanded 42.58%, relatively faster than the industry average and most peers.

Fixed depositsoverviewThe Company’s deposit base primarily constitutes fixed deposits, offering a range of tenures. Funds raised through deposits are channelled to various avenues of lending.

StrategyThe confidence of our depositors is a key asset and this was achieved through our consistent financial performance and building of the brand to signify strength and stability.

During the year, the Company’s deposit strategy was focused on expanding its regional deposit inflow through its widespread branch network.

In addition longer-term deposits 15 and 18 months deposits were introduced to enable bridging the maturity mismatch gap.

performanceIn 2012/13, the fixed deposit portfolio grew 42.9% to reach Rs. 38.1 billion, supported by the more attractive deposit rates and the Company’s aggressive marketing and promotion activities. Especially the two seasonal promotional campaigns in April and December were instrumental to the strong mobilisation during the year resulting in serving a total number of 33,140 customers.






With the strategy of expanding its regional inflow of deposits, 19% of the Company’s deposit base now stems from regions outside the Western province.

In order to improve the Company’s asset liability maturity mismatches, we have attempted to expand medium and long-term deposit funds. Currently 15.22% of the fixed deposits comprise of deposits maturing after one year, compared to 15.42% the previous year.

outlookThe Company’s growing geographical reach is anticipated to support its deposit inflow in the coming year. The Company also intends to improve its service quality by opening premier centres for personalised services and increase convenience to the customer through e-statements and SMS alerts.

Savings depositsoverviewThe Company’s savings accounts aim to offer multiple benefits to its account holders, functioning both as an effective savings and investment tool. As reflected by its tag line ‘benefits without boundaries’, the savings accounts offer a secure way savings funds with a range of added benefits.

StrategyAs the product was launched in the early part of this year the main strategic aim has been to promote the product. Product promotion has been multifaceted including seasonal promotional campaigns,

• Encouraging cross sell by various other business lines

• Enabling lending and fixed deposit customers to service their due amounts and to collect their interest by ways of integrating internal system modules

• Promoting the savings habit among employees by offering special features and gifts

performanceThe Company launched its savings deposits product, ‘L B Savings’ during the latter part of the last financial year. Within a relatively short time period, the

Company has been successful in growing its deposit base to Rs. 263 million, with over 21,000 accounts.

‘L B Savings’ offers a range of benefits to its depositors. The three month seasonal promotional campaign brought about a festive spirit across the savings spectrum as savings account holders too lined themselves up for a range of exciting gifts.

The Company also launched the Kids Savings Zone account for children and the Senior Savings Account for senior citizens. Both come with special benefits for the target group and look to finance them according to their specific needs.

Our depositors are able to utilise the island wide ATM network of Sampath Bank PLC to conveniently access their accounts. Further, maintenance of a minimum cash balance is not required, with interest being paid irrespective of the account balance.

In a high interest rate environment the savings accounts even though paying competitive rates was able to mobilise funds at a lower cost than that on offer for fixed deposits helping to lower the overall cost of funds which was showing spiralling trends.

outlookOver the medium to long-term, the Company intends to widen its savings deposit base with the objective of creating a stable low cost source of funding. Thus, the Company expects to carry out several promotional campaigns targeting areas outside the capital.

Additionally, the Company intends to introduce a proprietary ATM network in selected branches for the convenience of

Fixed deposit Base and growth

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FD base (Rs. Bn)FD base growth (%)

deposits-geographical concentration 2013

WesternOther

81%

19%



its customers. VISA debit cards will also be issued, enabling customers to make purchases at a range of retail outlets. Concurrently, e-statements and SMS alerts will also be introduced, allowing account holders to obtain real-time information with regards to their account details.

Borrowings- “As anticipated the Company reduced its reliance on borrowings during the year”

overviewBorrowings comprise of overdraft facilities, money market loans, term loan facilities, syndicated loans, debentures, securitisation facilities, commercial papers, finance lease facilities and other facilities.

StrategyPromote short term debt instruments among corporate clients and high net worth individuals to mobilise short term funds.

As access to bank borrowings was limited in year 2012/13 the Company set the strategy giving priority to the main funding source of deposits.

Another strategy was to raise Tier II capital by way of debentures to strengthen its capital adequacy requirements.

performanceSecuritised borrowings form the largest portion of the Company’s borrowings base, with a share of 37.67% during 2012/13, which was 41.79% during 2011/12. Meanwhile, the reliance on direct bank borrowings declined to 26.73% during the year, compared to 30.76% the year before.

The main Bank borrowing sources which are overdrafts, term and money market loans declined 28.4% during the year to Rs. 2.3 billion. This is line with the credit ceiling of 18% placed on commercial banks by the Central Bank of Sri Lanka.

The Company successfully raised Rs. 683.1 million in commercial paper which increased to Rs.1.18 billion compared to Rs. 498.37 million the previous year.

outlookIn 2013 the credit ceiling imposed by the Central Bank has been lifted and there are indications that the Banks can lend more credit to the NBFI sector. The Company is looking positive into this and will enable to negotiate more facilities with Banks and other lending institutions. Moreover the Company’s strong credit rating of A- by RAM Ratings Lanka Limited will help the Company to sources these lines at competitive rates.

Furthermore, with the government taking initiatives to develop the corporate debt market by providing income tax exemptions on interest income on quoted corporate debt securities, the Company intends to pursue this as a viable funding option.

new product offeringsValue added Services The Company has today moved beyond its initial role as a pioneer and a provider of financial services to an enhanced role to offer value added services. This includes entering into collective agreements with third parties to do their collections for them for a commission percentages (%) based on the total value of collections. Today the Company has engaged with Dialog, Etisalat, Lankabell and Sri Lanka

Borrowings composition 2013

10.20%

9.26%

6.50%

10.04%

13.72%11.97%

37.67%

0.27% 0.37%

Bank OverdraftsSyndicated LoansTerm LoansMoney Market LoansCommercial PapersUnsecured DebenturesSecuritised BorrowingsFinance LeaseOther Borrowings

Borrowings composition 2012

41.79%

0.33%0.28%

9.70%

14.20%

12.37%

7.37%

9.19%

4.77%

Bank OverdraftsSyndicated LoansTerm LoansMoney Market LoansCommercial PapersUnsecured DebenturesSecuritised BorrowingsFinance LeaseOther Borrowings






Telecom. This offering allows easy and fast access to customers to settle their bills more conveniently at our island wide distribution channels. These give mutual beneficial business outcomes for both parties.

outlookThe Company is in the process of joining hands with other utility service providers.

credit ratinga-/p2 StableLB Finance continues to be among the highest rated non-bank financial institutions in the country. In 2012/13, the Company retained its respective long and short-term financial institution ratings of A- and P2 for the second consecutive year (with a stable outlook) by RAM Ratings Lanka Ltd., the market leader in non-bank financial institution ratings. A credit rating of a financial institution is dependent on several factors, including its asset quality, capitalisation, performance, funding and liquidity levels as well as management quality. The Company’s current ratings reflect its strong market position among licensed finance companies, strong franchise, healthy asset quality and good performance.

A long-term financial institution rating of A- reflects an adequate capacity to meet its financial obligations. The financial institution is more susceptible to adverse changes in circumstances, economic conditions and/or operating environments than those in higher rated categories. Meanwhile, a short-term financial institution rating of P2 reflects an adequate capacity to meet its short-term financial obligations. The financial institution is more susceptible to the effect of deteriorating circumstances than those in the highest rated category.

The consistent improvement in the Company’s financial stability and creditworthiness is reflected by the upgrade of its credit rating over several years. Within a time span of 5 years, the Company’s long-term financial institution ratings were upgraded by three notches, a rare achievement in the industry. The rating upgrades reflected improvements in its market share and performance indicators, whilst maintaining asset quality at relatively healthy levels.

The Company’s rating history by RAM Ratings Lanka Ltd.

Financial Institution rating long term Short term outlook

May 2006 BBB- P3 Stable

July 2009 BBB P3 Stable

November 2010 BBB+ P2 Stable

July 2011 BBB+ P2 Positive

November 2011 A- P2 Stable

Current Rating A- P2 Stable

Improvement in Financial Indicators corresponding to rating upgrades

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Support Services human resourcesAttracting and retaining the best talent in the industry is a key priority for the company. Our people have undoubtedly been the driving force behind the company’s success in recent years. In 2012/13, 376 employees were added to the work force, bringing the total number of employees to 2,055. The expansion of the company’s geographical reach and its new product lines have necessitated the strengthening of its human capital.

The Company prides itself in its ability to attract the best talent in the industry. Focus on training and development, opportunities for career progression and above industry remuneration has enabled the company to consistently attract high performing individuals. The training needs are centralised and handled by the Human Resources division on a structured and consistent manner. In addition to providing specialised in-house training, the company also places emphasis on increasing employee participation at external training programs targeted towards the financial services industry. Reflecting the importance placed on training and development a new position was added to our team during the year.

The entire industry faces the challenge of relatively high staff turnover, particularly with several new entrants foraying to the industry. In order to maximise staff retention,the company has introduced new selection criteria to recruit individuals who have certain characteristics and display the correct attitude for the respective positions. Additionally, we aim to minimise staff turnover through our focus on consistent training, which would enable our employees to further develop their skills and knowledge.

marketingThe Company’s marketing arm plays an integral role in the development and delivery of all lending and deposit products. The key objectives of the Company’s marketing division are to ensure customer satisfaction in all dealings with the Company, supporting the achievement of the business objectives as well as building and maintaining the brand image.

In recent years many initiatives have also been taken to strengthen the Company’s brand image. Resultantly, “L B Finance” has emerged among the strongest brands in the country’s non-bank financial sector. During 2013 the Company was ranked 38 among the top 100 brands in the country by Brand Finance. Meanwhile, the Company is also a new entrant to the coveted LMD’s 50 most respected entities in Sri Lanka and is also the only licensed finance Company to be ranked in the top 50.

The Company follows a customer-centric approach in all its key business functions. Customer complaints are monitored and attended to consistently, with proactive measures been taken to address any shortcomings which led to the respective complaint. Meanwhile, a system of ‘Mystery Shoppers’ was also introduced last year, to effectively monitor the level of customer service provided by the employees.

The marketing arm also plays an important role in supporting the achievement of the business objectives, particularly with regards to credit and deposit growth. For instance, offering gift items to depositors as a promotional campaign to improve the deposit inflow was very successful during the year. Further, the ‘LB Finance Riya pola’, which enables buyers and sellers of vehicles to meet face to face has helped expand the lending portfolio. The Company launched a savings product with a three months promotional campaign targeting savings account holders. An array of exciting

“I graduated from RMIT University Australia with a bachelors’ degree in business management. I am also a sports woman in Sri Lanka having held the title of the youngest table tennis national champion and represented at international tournaments. Further, I captained Sri Lankan senior and junior table tennis teams and was awarded the most outstanding sports woman title in year 2006. I joined LB Finance because it is a well reputed, fast growing company, with a friendly and helpful environment which enables me to grow and gives me courage to express and pursue new ideas that makes me feel empowered.” Kalpani Herath (Executive – Strategic Planning and Implementation Unit)






gifts, ranging from LED televisions to smart phones was on offer for individuals opening savings accounts during the promotional period.

In addition to the above campaign, during the year the marketing division carried out bus branding initiatives, advertising on social media networks and sponsoring television programs to build brand awareness.

The marketing arm will continue to play a key role in further strengthening the L B Finance brand and promoting its products and services.

recoveriesThe consistent strengthening of its monitoring and recoveries unit has complemented the Company’s aggressive loan growth. This has enabled the Company to persistently record healthy NPL ratios.

Success of this model stems from each customer being assigned both a marketing officer as well as a recovery officer to ensure timely payment of instalments. A systematic process has been implemented for all collections, including frequent reminders through letters and calls. During 2012/13, the unit was further strengthened by establishing call centres in several key branches, in addition to the centralised call centre at head office.

Information technologyA robust information technology framework is essential for any organisation in today’s business environment, in order to disseminate timely and accurate information to all business units, monitor performance on a consistent basis as well as provide convenient solutions to internal as well as external customers. Over the years, the

Company has placed much emphasis on strengthening and consistently improving its IT framework, enabling to benefit from rapid technological advancements.

As part of the strategy for capacity building a new integrated IT system been introduced to enable increased efficiencies in most of the key departments. For instance, all major systems are now linked with the common general ledger system, thus allowing the Finance department to substantially reduce time spent on routine manual activities.

More efficient utilisation of resources have also come about through the improvements in the IT system; for instance, the virtualisation of the server has enabled the Company to reduce the energy and space requirements in the data centre. During the year, a Document Management System was also introduced with the objective of digitizing and storing all documents, thus moving towards a paperless work environment.

Looking ahead, over the medium to longer term the Company intends to strengthen its mobile communication platform, thus increasing convenience to customers. Additionally, the Company intends to introduce a new gold loan management system that will be fully integrated with the current e-financials system. Building a new IT simulation facility for hands on training is also in the pipeline.

treasury and planningKey among many of the functions of the Company’s, treasury and planning department is maintaining the funding mix at optimum levels as well as ensuring that the Company meets its regulatory capital adequacy requirements. The division is responsible for monitoring trends in market interest rates and

seeking funding options which minimise the Company’s funding costs. Additionally, it also plays an integral role in setting guidelines for the management of asset liability maturity mismatches and investing short term surplus funds.

In recent years, the department has been successful in diversifying the Company’s funding profile by tapping the debt market.

Looking ahead, the department intends to seek out opportunities to obtain long-term foreign funding, thus improving the Company’s asset liability mismatches whilst reducing its cost of funds. And also to mobilise funds by way of debentures to strengthen the Tier II capital. Streamlining the processes within the department have also been given priority, with a treasury management system being developed to improve timeliness and efficiency.

legalThe Company’s legal division ensures that all business activities are carried out in a manner which complies with the laws and regulations applicable in the country. Among others, the division is responsible for advising senior management on any legal issues, reviewing all contracts and agreements, examining documentation related to collateral, and representing the Company in courts of law when necessary.

During the year, the division was instrumental in developing and deploying instruction manual to the credit and recovery departments as well as procedural guidelines for the gold loan division. In addition, the legal arm also created a policy manual for the Company’s islamic finance unit. The division continues to utilise internal and external expertise as required by the Company.


eVentS durIng the year

Dam Street Gold Loan Centre upgraded as a new branch

Blood donation held in commemoration of 41st anniversary

Launch of “Riya Pola” the vehicle mart acts as the meeting point for prospective buyers and sellers

Warakapola Gold Loan Centre upgraded as a new branch

Islamic Financing Unit Al Salama awarded as the Emerging Islamic Finance entity of the year

New Branch opened at Matara City

apr 2012

may 2012

jul 2012

Sep2012

jun 2012

aug 2012

Today we are accepting deposits that save lives

Date: 28th May 2012Time: 09.00am - 3.00pmVenue: OPA Building (Head Office)






New Branch opening at Delkanda Partnering with Lanka Bell for bill settlement and reload network

International Women’s Day Savings Promotion raffle draw winner

Pita Kotte Gold Loan Centre upgraded as a new branch

New Gold Loan Centre opened at Elakanda New Gold Loan Centre opening at Ganemulla

nov2012

jan2013

mar2013

oct 2012

dec2012

Feb2013


FInancIal reVIeW

IntroductionDuring the year, the Company placed emphasis on growing the Company’s market share further, through expansion of business volumes. Resultantly, continued to maintain faster than industry growth in our lending portfolio and deposit base, as has been the case during the last few years. This growth was achieved through the expansion of the Company’s geographical reach as well as aggressive marketing and promotion efforts. However, the Company’s lending portfolio growth above 22% during the year was relatively slower than its growth levels of previous year’s, affected by several factors in the economic landscape, including the higher interest rate scenario as well as the withdrawal of duty concessions on vehicles. Profitability during the year was marginally affected by increased provisioning requirements on our gold loan stock, as gold prices reversed its upward trajectory. Overall, the Company’s pre-tax profits increased by 3.63% to Rs. 2,526 million during 2012/13.

Interest IncomeThe Company continued to maintain strong growth momentum in its top line, with interest income expanding 41.49% to reach Rs. 10.32 billion during the year. The growth stemmed mainly from the Company’s leasing and gold loan portfolios which expanded by 25% and 28% respectively during the year. Leasing continued to be the largest contributor to interest income with a share of 44.56% when compared to last year’s 41.82% whilst gold loans emerged the second largest contributor with a share of 19.65% during the year, relatively lesser compared to last year’s 21.07%. Meanwhile, income from the Company’s hire purchase portfolio dipped from 20.98% to 14.36% during the year

as demand for hire purchase facilities declined in line with the changes in the tax legislation for some categories in the registered vehicles.

costs grew by 67.39% to Rs.5.94 billion during 2012/13. Short tenured deposits form the bulk of the Company’s funding base, and as these reprised upwards, interest costs on deposits grew by 77% to Rs. 4.77 billion during the year and accounted for 80.33% of the Company’s total interest cost. Borrowing costs which comprises of banks, debt instruments and other sources grew by 37.04% and the composition of the total interest expenses declined to 19.67% compared to 24.03% financial year 2011/12, as the Company reduced exposure to borrowings during the year.

Interest expensesThe Company’s funding costs which include deposits and borrowings escalated during the year, attributed to the higher interest rate environment and a significantly larger deposit base. Interest

Interest Income composition - 2012/13

Leasing Gold Loan Hire Purchase Vehicle Loans Factoring Other

44.56%

19.65%

14.36%

6.32%

1.92%

13.19%

Interest Income composition - 2011/12

Leasing Gold Loan Hire Purchase Vehicle Loans Factoring Other

41.82%

21.07%

20.98%

4.59%

1.13%

10.41%

Interest expenses - 2012/13

Banks and Securitised BorrowingsDepositsDebt Instruments and Other Borrowed Funds

14.67%

80.33%

5.00%

Interest expenses - 2011/12

Banks and Securitised BorrowingsDepositsDebt Instruments and Other Borrowed Funds

19.90%

75.96%

4.14%






net Interest Income and net Interest marginThe surge in the Company’s funding costs impacted the growth in net interest income which grew at 16.92% to Rs. 4. 37 billion during the year, relatively slower than the past few years. Meanwhile, the Company’s net interest margin (NIM) eased slightly to 10.42% compared to 11.84% the previous year. However, the Company’s NIM still compares wider than the industry average and most of its peers, supported by the Company’s relatively high-yielding loan portfolio.

million during 2012/13. Other operating income was largely supported by the Company’s hiring income which contributed 97.25% due to increased portfolio of operating leases.

operating expenses and cost to IncomeTotal overhead expenses increased by 26% during the year, driven by an escalation in the Company’s administration and establishment expenses and personnel expenses. Administration and establishment expenses grew by 34%. The Company shifted to a new corporate office with dedicated space for personalised financial services and state-of-the-art facilities which is anticipated to support the Company’s expanding business volumes over the medium to long-term.

Personnel expenses continued to form the largest share of overhead expenses during the year, with a share of 48.45%. Personnel expenses grew by 19% during 2012/13, as new branches and gold loan centres were added to the Company’s network, creating over 370 job opportunities. Meanwhile, the Company’s advertising and business promotion expenses grew by 21.94%, owing to several brand building and promotional initiatives during the year. Strengthening of its brand image will enable the Company to increase recognition among its existing and potential new customer base. These capacity building initiatives are expected to bear fruit over the medium to longer term.

Overall the Company’s cost-to-income ratio increased to 43.94% during 2012/13, compared to 41.75% in the previous year.

net Interest margin

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Fee and commission IncomeFee and commission income comprises of fees and commissions charged from credit related activities and service charges received mainly from gold loans and factoring. This income counted 13.98% from the total operating income. The growth in fee and commission income was 29.77% during the year which indicated a relatively slower growth compared to year 2011/12.

other operating IncomeThe Company’s interest income was supplemented by its other operating income which grew 31.64% to Rs.110.85

operating expenses composition 2012/13

Personnel ExpensesDepreciation of Property and EquipmentAmortisation of Intangible AssetsProfessional and Legal ExpensesOffice Administration and Establishment ExpensesAdvertising and Business Promotional ExpensesGeneral Insurance ExpensesDeposit Insurance PremiumOther Expenses

48.45%

9.34%0.30%1.75%

18.41%

11.67%

2.61%2.10% 5.36%

operating expenses composition 2011/12

Personnel ExpensesDepreciation of Property and EquipmentAmortisation of Intangible AssetsProfessional and Legal ExpensesOffice Administration and Establishment ExpensesAdvertising and Business Promotional ExpensesGeneral Insurance ExpensesDeposit Insurance PremiumOther Expenses

51.30%

10.40%0.31%

1.76%

17.30%

12.06%2.58%

1.74% 2.55%


FInancIal reVIeW

Quality of the loan portfolioImpairment chargesIn accordance with the new Sri Lanka Financial Reporting Standards/Lanka Accounting Standards, the Company’s provisioning policy shifted from a time-based policy to an individual and collective impairment policy. According to the new accounting standards, the Company’s provision for impairment and other losses amounted to Rs. 400.31 million for the year 2012/13, a significant increase in comparison to that of Rs. 116.02 million for the previous year based on the new methodology. Further as at 31st March 2013, the impairment balance on gold loan portfolio was Rs. 310.68 million compared to last year’s Rs. 90.42 million. This increase of Rs. 220.26 million was mainly driven by fall in gold prices in the global market. The same on lease portfolio was Rs. 536.10 million compared to Rs. 378.03 million in the preceding year, making an increase of Rs. 158.07 which was pressured by the relatively higher growth in lease portfolio.

As at 31st March 2013 impairment on lending portfolio includes Rs. 150.46 million from individually significant loans and Rs. 1,093.73 million from collective impairment, and increase of Rs. 20.55 million and Rs. 395.88 million compared to previous year.

non performing loansDuring the year, the Company’s asset quality was pressured by the relatively higher interest rate scenario coupled with the Company’s aggressive credit expansion in recent years. However, the NPL ratio (as per the Central Bank of Sri Lanka’s regulation) was contained at healthy levels at 3.35% for the current

year, as compared to 2.82% the previous year. This continues to remain under the industry average of 5%. The increase in NPLs is mainly due to gold loans. As the Company continues to grow, it will require to balance asset quality by ensuring that the Company continues to strengthen our risk management and recovery systems and processes as well as continue to be proactive in pre-empting asset deterioration.

taxationDuring the year under review income tax of the Company amounted to Rs. 823.89 million compared to previous year’s Rs. 724.11 million. Resulting in an effective tax rate of 32.67% similar to 29.70% in 2011/12. VAT on financial services increased from Rs. 149.95 million to Rs. 176.24 million.

overall profitabilityThe year’s overall profits were supported by the Company’s strong top line growth against expanding volumes despite a higher cost base and a slight contraction in NIMs. Although at operating level the Company’s profitability marginally declined compared to the previous year, overall profits were affected by increased impairment charges on unredeemed gold stock resultant from the decline in gold prices. Overall the Company’s pre-tax profits marginally increased by 3.63% to Rs. 2.52 billion during the year. Whereas profit after tax marginally dipped by 0.64% to Rs. 1.7 billion. Meanwhile, the Company’s Return on Assets and Return on Equity dipped to a respective 3.52% and 36.63% during 2012/13.

profit Before tax and profit after tax

0

500

09 10 11 12 13

1,000

1,500

2,000

2,500

3,000

Rs. Mn

Profits Before Tax Profits After Tax

lending portfolioThe Company’s credit growth slowed in comparison to the previous year’s highs, affected by the high interest rate scenario as well as the withdrawal of duty concessions on vehicles. Despite the slowdown, the Company’s lending portfolio growth of 22% during the year was relatively faster than most of the industry peers.

The Company’s key leasing portfolio grew by 25% during the year, a deceleration compared to 80.58% last year. Hire purchase grew only by 3.88% during the year. Loans and receivables including gold loans grew by 28.83% during the year. The largest contributor to loans and receivables is gold loans with a share of around 65%. Gold loans grew by 26.22% compared to 49.01% in the preceding year. Overall, leasing continues to dominate the Company’s loan book with a share of 48.52% during 2012/13. However, we note that over the years the relative importance of leasing in the Company’s portfolio has declined gradually as steps were taken to diversify the Company’s loan book whereas gold loans account nearly for 24% of the loan book.






lending portfolio composition - 2012/13

LeaseHPGold LoansVehicle LoansTerm Loans Factoring ReceivableOther

48.5%

14.7%

23.9%

7.4%3.5%

1.4%0.6%

lending portfolio composition - 2011/12


47.6%

17.4%

23.2%

5.2%2.9%

3.0%0.7%

Funding positionThe Company continued to see sturdy growth in its deposit base, reflective of the strength of the Company’s brand name as well its rapidly expanding geographical reach. Total deposits increased by 42.58% during the year, to reach Rs. 38.74 billion. This is the largest deposit base held by any non-bank financial institution in

the country. Resultantly, the Company’s funding profile was dominated by deposits which accounted for an increased 73.54% of its total funding during the year compared to 65.33% last year. The Company’s exposure to borrowings reduced during the year, accounting for 16.34% of total funding compared to 25.13% the previous year. This was mainly due to the credit ceiling placed on banks which resulted in restriction of lending by the banks and non-availability of long term funds in the market.

Shareholders’ Funds and capitalisation, capital adequacy ratiosThe Company continues to be well capitalised, with total shareholders’ funds growing 34.29% during 2012/13 to reach Rs. 5.32 billion. The Company’s profitability and internal capital generation have strengthened the shareholders’ funds.

Capital adequacy is the measure of financial strength of a Company and the minimum levels set by the Central Bank of Sri Lanka serves to protect and promote the stability and efficiency of the financial system. The Company shows an improvement in the core capital ratio (Tier I) and overall risk weighted capital adequacy ratios (Tier I and II) improving to 14.02% and15.40% respectively (from 12.53% and 14.81%). These are well above the minimum set by the Central Bank at 5% and 10% respectively providing sufficient buffer for future portfolio expansion.

liquidityThe Company maintained a prudent trade-off between its liquid and yielding assets. As loan growth slowed in comparison to previous years, the Company’s liquid asset ratio increased. Total liquid assets amounted to Rs. 5.49 billion in 2012/13 compared to Rs. 2.95 billion in the previous year. The liquid asset ratio clocked in at 14.18% during the year, compared to 10.86% in the preceding year.

Funding mix - 2012/13

DepositsBorrowingsEquity

73.54%

16.35%

10.11%



65.33%

25.13%

9.54%


Shareholder returnsEarnings per share marginally decreased to Rs. 24.58 in 2012/13 from Rs. 24.75 the previous year.

The proposed dividend of Rs. 450.17 million for 2012/13 is a 30% YoY increase compared to the previous year’s total of Rs. 346.28 million. On the proposed basis, dividend per share would be Rs. 6.50 in comparison to last year’s Rs. 5.00 which is an increase in the dividend payout ratio to 26.44% compared to 20.20% in the previous year.

dividend

0

50

09 10 11 12 13

100

150

200

300

250

450

350

Rs. Mn

FInancIal reVIeW

400

With Security

Peace of mind is a key aspect of any relationship and we have taken every measure to ensure that security is foremost in the values we offer

With SecurityRISK MANAGEMENT043 Risk Management Report059 Capital Adequacy






rISK management report

IntroductionAs a financial institution engaged in a varied offering of financial services, assuming and active management of financial risks are integral parts of our business strategy. This implies that the core mission for risk management is adequate risk steering, as opposed to mere risk avoidance or minimisation. Risk management therefore is an integral part of the management and control system, ensuring the timely identification, analysis, measurement, management and reporting of risks. This system provides the basis for successful value-based management, including the efficient allocation of capital and the optimisation of key performance measures through consistent consideration of risk-return implications.

Company’s risk management process is mandated by the Board of Directors and steered by the Board appointed Integrated Risk Management Committee (IRMC). The Board of Directors defines what levels of risk-taking are deemed adequate for the Company, taking into account all relevant limitations as well as the Company’s business strategy.

An appropriate and effective risk management system ensures that risks and their impacts are identified and evaluated at an early stage and that contingency plans and measures are in place where necessary to handle risks and to prevent their accumulation.

Through proper implementation of an enterprise risk management system, the Company works towards the following goals:

• Development of a risk culture that fosters awareness of risks and a common understanding of risks across functions and departments

• Capital protection, both for internal as well as regulatory purposes

• Limitation of earnings volatility

• Risk-based performance measurement and decision making

• Ability to act proactively or to respond quickly and effectively to adverse events

• Better understanding of risks for competitive advantage

• Increase transparency and optimise information flows between business functions, control functions, the management committee and the Board of Directors

risk management processManagement of risks within the Company takes place in several steps. These apply in principle to all risk categories. The risk management process on its broadest level can be broken down into the following generic steps;

Risk Management

Decision

Risk Monitoring and Reporting

Risk Analysis and

Measurement

Risk Identification

Continuous and timely controlling

and recording

Detecting new risks and vulnerabilities

Quantitative and qualitative evaluation

Risk mitigating decisions

and prompt execution


Precise procedures, frequency of analysis and reporting requirements for specific risk management processes depend on the methodology employed and are specified in greater detail under “Risk Mitigation in Practice” section in this report. The following sections provide deeper insights into each of the four generic process steps provided above.

risk IdentificationIn the context of risk identification, all existing risk categories, their sub-risks as well as their risk sources within the Company’s business are determined and clearly distinguished from each other on an ongoing basis.

New risks can occur, given that the business environment is constantly changing and that new products are being developed and brought into the market. Early and comprehensive identification of risk is an essential element for the early warning system.

Before commencing business with new products, types of business and in new markets, the risks inherent in them and the resultant effects on risk management must be identified.

risk analysis and measurementFollowing on from risk identification, risks are analysed and measured using quantitative as well as qualitative risk appropriate methods and procedures. The methods used are verified continuously using sensitivity analysis, stress tests, back testing and validation tests.

Interdependencies are to be taken into account, and risk concentrations or accumulation risks are to be continuously analysed and evaluated.

risk management decision and executionThe risk management function initiates suitable strategies and concepts aimed at the avoidance/prevention, reduction, mitigation, transfer/diversification of all identified and analysed risks in accordance with defined objectives.

risk monitoring and reportingThe quantifiable risks are restricted by risk limits. The development of risk limits for controlling and monitoring risk positions, risk exposure in particular to avoid risk concentrations for sectors, customers and security types forms an essential part of the Company’s risk approach.

All non-quantifiable risks are managed and limited via appropriate approaches or methods.

Monitoring ensures that the risk management decision is implemented appropriately and on timely manner. It includes both the monitoring of deviations from the prescribed risk limits and the monitoring of methods, procedures and processes used for quantifiable and non-quantifiable risks.

risk governance FrameworkThe Company has adopted a “three lines of defence” governance framework. The three lines of defence framework operate as follows;

• First line of defence represents risk owners. They have the first and direct responsibility for the assessment and control of the Company’s risks (management committees, management and staff attached to different business units)

• Second line of defence comprises of units providing the independent risk oversight. They co-ordinate, facilitate and oversee the effectiveness and integrity of the Company’s risk management framework (IRMC, Audit Committee and Integrated Risk Management Unit)

• Third line of defence provides independent review of effectiveness of risk management practices and internal control framework and recommend for improvements where necessary (internal and external audit, compliance function)


First line of

defence

Management Committees

Second line of

defence

third line of

defence

Heads of Different Business

Units

IRMC Audit Committee

Internal Audit

Compliance FunctionIRMU External

Audit






management committeesassets and liabilities management committeeAssets and Liabilities Management Committee (ALCO) is chaired by the Managing Director and comprises of Executive Directors (Asset Management and Asset Finance), General Manager,Head of Treasury, Head of Fixed Deposits, Chief Financial Officer and Chief Risk Officer. The committee meets regularly to monitor and manage the assets and liabilities of the Company and also overall liquidity position to keep the Company’s liquidity at healthy levels, whilst satisfying regulatory requirements.

credit committeeCredit Committee is chaired by the Managing Director and comprises of Executive Directors, representatives from Credit Department, and Chief Risk Officer. The committee meets regularly to monitor and manage the Company’s lending portfolio, asset quality and recovery actions. The committee also periodically reviews Company’s credit policy and lending rates to different business segments, in line with prevailing market conditions and industry dynamics.

corporate Social responsibility committeeThe Corporate Social Responsibility (CSR) Committee was formulated during the financial year 2011/12. The committee is responsible for the formulation and the review of the Company’s CSR policy, and ensuring that CSR activities are integrated into the Company’s operations. Keeping in line with the Company’s triple bottom line focus, the committee is tasked with the responsibility of steering the Company’s CSR activities aimed at uplifting the communities we work with and preserving the environment. The

committee is headed by the Head of Marketing, reflecting the close links of our social and environmental initiatives and brand visibility which demonstrates how the CSR strategy will be integrated in to our business strategy.

Information technology Steering committeeInformation Technology (IT) Steering Committee is headed by the Executive Director – Asset Management and comprises of Head of IT and representatives from relevant departments. The committee is responsible for providing leadership for the planning and management of IT investment on a Company wide basis.

Members of the IT Steering Committee ensure that the Company’s Information Technology needs and objectives are being adequately addressed. The committee helps to ensure that IT strategy is aligned with the strategic goals of the Company whilst its strongest mandate is to find and align business solutions that may leverage technology.

Board Sub committeesaudit committeeAudit Committee is a formally constituted sub-committee of the main Board, and consists of three Board members who are Non-Executive Directors. The members of the committee are appointed by the Board. The primary function of the committee is to assist the Board to fulfill its stewardship responsibilities with regard to financial reporting requirements and information requirements of the Companies Act and other relevant financial reporting regulations and requirements. It also has oversight responsibility for reviewing the effectiveness of internal control and risk

management systems. The committee assesses the independence and performance of the Company’s auditors, both internal and external.

Integrated risk management committeeThe Board has delegated its authority to Integrated Risk Management Committee which is responsible for developing and monitoring Company’s risk management policies. The committee is headed by an Independent Non-Executive Director and comprises of Executive and Non-Executive Directors, Chief Risk Officer Chief Financial Officer and Head of Treasury. Meetings of IRMC are held regularly, and the Board of Directors are duly updated of its activities.

Integrated risk management unitThe Integrated Risk Management Unit (IRMU) provides an independent oversight function, acting as a second line of defence within the organisation. IRMU is tasked with the responsibility of assisting the business units and functional departments in identifying and managing the risks related to their respective operations and processes and independently monitoring the status and effectiveness of the mitigation action plans. IRMU is headed by Chief Risk Officer who directly reports to the Managing Director and also has a functional reporting to the IRMC.


Key risks Face by the companycredit riskCredit risk constitutes the Company’s largest risk exposure category. This can be broadly categorised into two types; default and concentration risk.

We consider default risk as the risk of the potential financial loss resulting from the failure of customer or counterparty to meet its debt or contractual obligations and arise principally from the Company’s loans and advances to customers.

Concentration risk is the credit exposure being concentrated as a result of excessive build up exposure to a single counterparty, industry, product, geographical location or insufficient diversification.

The Company has a well-structured credit process that spells out the guidelines and parameters within which the Company’s credit decision process takes place.

The credit risk management guidelines play a vital role in managing day to day lending activities. They define the principles about delegation of lending approvals, client selection, due diligence, early problem recognition, tolerable levels and portfolio monitoring in line with the Company’s risk appetite.

The Company uses various credit indicators to identify the emerging credit risks and analytical tools to manage such risks.

credit processcredit appraisalThe credit process comprises of preliminary screening and credit appraisal. This process focuses on the borrower’s ability to meet its obligations in an appropriate manner. An investigation procedure is taken place to assess physical identification, document evidence, inquiries, income and the past track records.

credit approvalThe Company has clearly defined guidelines for credit approvals and approves extension of credit up to its delegated authority limits or makes appropriate recommendations.

credit operationThis is carried out by credit operations department which ensures efficient and effective customer service to support disbursement, settlements and processing letters.

monitoring and recovery processMonitoring and recovery process is carried out by the recoveries department and it reviews and renews portfolio exposures and remedial actions in respect of deterioration in the financial health of a borrower are taken appropriately.







risk category rating assessment mitigation Strategy

credit risk

Default RiskPotential loss due to borrower/ counter party unable or unwilling to meet its obligations

Low Non-performing loan ratio is analysed over a period of time

npl ratio

0

1

09 10 11 12 13

2

3

4

5

6

%

npl Stress testStressed Scenario - An increase in the level of NPL, impacting capital adequacy Current capital adequacy ratio (Tier I and II) - 15.40%

Scenario 1 2 3

Magnitude of shock 10% 25% 50%

Capital adequacy ratio 14.99% 14.36% 13.30%

top 20 customers Stress testStressed Scenario - Top 20 customers falling to NPL category impacting on capital adequacy Current capital adequacy ratio (Tier I and II) - 15.40%

Scenario 1 2 3

Magnitude of shock 10% 25% 50%

Capital adequacy ratio 15.21% 14.92% 14.43%

Clearly defined credit procedures, framework, and periodical reviews

Structured and standardised credit evaluation process

Pre-credit evaluation/ loan review mechanism

Adequacy of credit control procedures are assessed regularly

Managing gross NPL within the tolerance level of 5% and reviewed annually considering the industry performance




Concentration Risk arises from uneven distribution of counter parties, business sectors or geographical regions

High Concentration levels are identified in evaluating and assessing the risk associated to lending

credit exposure to top 20 customers 2012/13

Top 20 CustomersOther Customers

97.41%

2.59%

credit exposure to top 20 customers 2011/12

Top 20 CustomersOther Customers

97.99%

2.01%

Setting of prudential limits on maximum exposure reviewed periodically

Maintain single borrower limits defined by Finance Companies Direction No. 4 of 2006 issued by Central Bank of Sri Lanka

Internally defined guidelines on single borrowers are reviewed periodically







Concentration Risk contd.

product concentration - 2012/13

48.52%

14.70%

23.86%

7.44%

3.53% 1.38%0.57%


product concentration - 2011/12

47.61%

17.36%

23.19%

5.24%

2.89% 3.04%0.67%





Concentration Risk contd.

Industry concentration - 2012/13

48.69%

33.45%

5.32%4.78%

2.32%2.05%

0.64% 2.75%

ServicesTradingAgricultureTransportConstructionManufacturing & DistributionHotel & TourismOther

Industry concentration - 2011/12

52.72%

27.51%

4.50%4.23%

3.66%4.98%

0.99% 1.41%

ServicesTradingAgricultureTransportConstructionManufacturing & DistributionHotel & TourismOther






liquidity riskLiquidity risk is the possibility of the Company not having sufficient cash to meet its obligations. This arises due to unmatched maturities of assets and liabilities and would hamper the Company’s capacity to honour its commitments. Cash is required to meet the Company’s financial commitment and to accommodate business expansions on a timely basis under various market conditions.

The Company’s primary objective in liquidity risk management is to ensure adequate funding for its businesses throughout market cycles, including periods of financial stress. In order to achieve this objective the Company analyses and monitors liquidity risk, maintains an adequate margin of safety in liquid assets to meet liquidity requirements.

ALCO meets weekly and is responsible for managing and controlling the overall liquidity of the Company and reviews the impact of strategic decisions on Company’s liquidity.

Furthermore the Company maintains the statutory liquid assets ratio at its required level as a method of measure and control liquidity risk.


Liquidity Risk

Liquidity Risk Medium Monitor and evaluate key liquidity risk indicators

maturity analysis of assets and liabilities

0

5

10

Within 12 Months

2013 2012

After 12 Months

Within 12 Months

After 12 Months

15

20

25

30

35

40

Rs. Bn

AssetsLiabilities

Proper coordination of funding activities by identifying maturity mismatches

Contingency funding plan

Diversify funding sources

Maintain a proper funding mix

Focus on gold loan advances and factoring portfolio which cover a significant percentage of short term maturing liabilities

Set maximum tolerance size of short term buckets in the maturity gap

Manage within the strategic limits of the funding mix

Maintaining deposit renewal ratio above the threshold

Promote long term deposit products to reduce liquidity gaps

Maintain liquidity ratios above the statutory minimum limit




Liquidity Risk contd.loan to deposit ratio

0

20

09 10 11 12 13

40

60

80

120

100

140

%

liquid asset to deposits

0

4

09 10 11 12 13

8

12

16

20

%

liquid asset Stress testStressed Scenario - Sudden fall in deposit base impacting liquid assets ratio

Current liquid asset ratio - 14.18%

Scenario 1 2 3

Magnitude of shock 2.5% 5.0% 10.0%

New liquid asset ratio 11.98% 9.66% 4.64%







Liquidity Risk contd.deposits renewal ratio - 2012/13

0

10

Apr

Aug

DecJun

Oct

Feb

May

Sep

Jan

Jul

Nov

Mar

30

20

50

40

70

60

90

80

%



73.54%

10.11%

16.34%

Strategic Funding mix - 2012/13


75%

10%

15%


market riskMarket risk refers to the possible losses to the Company that could arise from changes in market variables like interest rates, exchange rates, equity prices and commodity prices. Among them, interest rate risk and commodity risk have been identified as the most critical risks given Company’s business profile.

In managing the market risk Company uses a variety of quantitative methods to assess the Company’s market risk exposures, portfolio performance and impact on earnings. IRMU in particular is responsible for quantifying the impact, advising the top management on acceptable tolerance levels and monitoring the set levels regularly.

Interest rate riskInterest rate risk is a key constitute of the market risk exposure of the Company due to adverse and unanticipated movements in future interest rate which arises from core business activities; granting of credit facilities, accepting deposits and issuing debt instruments.

Due to the nature of operations of the Company, the impact of interest rate risk

is mainly on the earnings of the Company rather than the market value of portfolios. Several factors give rise to interest rate risk; among these are term structure risk, which arises due to the mismatches in the maturities of assets and liabilities; basis risk which is the threat to income arises due to differences in the bases of interest rates.

Excessive movements in market interest rate could result in severe volatility to Company’s net interest income and net interest margin. Company’s exposure to interest rate risk is primarily associated with factors such as;

• Re-pricing risk arising from a fixed rate borrowing portfolio where re-pricing frequency is different to that of the lending portfolio

• Yield curve risk arising from unanticipated shifts of the market yield curve

Interest rate risk is managed principally through minimising interest rate sensitive asset liability gaps. In order to ensure interest rate margin and spreads are maintained the Company conducts periodic reviews and re-prices its assets accordingly.

commodity price riskCommodity risk refers to the uncertainties of future market values and the size of the future income, caused by the fluctuation in the prices of commodities. Given the importance of gold loan business to Company’s overall lending operation, fluctuations to the gold prices could have an adverse impact to earnings from this particular segment. Gold price risk could arise from either of adverse movement in spot gold prices in world market or movements in USD/LKR exchange rate or both.

The Company currently manages the gold price risk by adopting the following strategies;

• Quicker re-pricing cycle: Company as a strategy grants for shorter periods allowing it to re-price its cost promptly

• Frequent revision of Loan-To-Value (LTV) ratio: Company practices a process of revising advancing ratio to allow for market value fluctuations








Market Risk

Interest Rate Risk Medium Gap analysis on rate sensitive assets and liabilities monitored on a regular basis

Net Interest Margin is monitored periodically by ALCO

net Interest margin

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2

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4

6

8

10

12

14

%

ALCO closely monitors the interest rate movement, forecasts the future trends by extrapolation and informs the relevant parties of the potential variations of the interest rate movement

Negotiate interest rate caps on new borrowings

Increase proportion of fixed rate borrowings

Promote short cycled products such as factoring, gold loans and power draft which re-price in short periods

Commodity Price Risk Medium Gold price fluctuations and safety margins are monitored closely

Gold PriceAdvance 24 KAdvance 22 K

gold loan Safety margin - 2012/13

40

45

Apr-

12

May

-12

Jun-

12

Jul-

12

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

50

55

60

%

Frequent revision of Loan-to-Value (LTV) ratio: Company practices a process of revising advancing ratio to allow for market value fluctuations

Quicker re-pricing cycle on gold loan portfolio: Company as a strategy grants for shorter periods enabling it to re-price promptly

Company is in the process of exploring opportunities available for hedging the commodity price risk

Exchange Rate Risk Low Indirect impact intensifying the commodity price risk due to changes in local gold prices as a result of the fluctuations in the USD/LKR even as the global gold prices remain steady

Managing the risk arising from the USD/LKR volatility through maintaining an adequate safety margin on gold advances



regulatory riskRegulatory risk is the financial loss and damage to the reputation of the Company that arises from failing to comply with the laws and regulations applicable. The financial industry is highly regulated and is continuously monitored for compliance by the regulatory bodies.


regulatory risk

Regulatory Risk Low Timely reviews are carried out to assess the extent of compliance

Compliance function regularly reviews the Company’s compliance with regulatory bodies

Monitoring of adherence to regulatory reporting CBSL guidelines and directives

operational riskOperational risk is the risk of financial losses due to the failure or inadequacy of internal processes or systems, human error or external events. Management of operational risk is integrated across the functions since occurrence of one such risk may compound another.

Fraud riskThis risk arises due to loop holes in internal controls and may result in a financial loss and a reputation risk to the Company.

In managing the fraud risk within LBF the management’s efforts are focused towards:• Understanding the fraud and misconduct risks that can undermine Company’s business objectives• Gaining insight on better ways to design and evaluate controls to prevent, detect, and respond appropriately to fraud and misconduct• Reducing exposure to corporate liability, sanctions, and litigation that may arise from violations of law or market expectations• Achieving the highest levels of business integrity through sound corporate governance, internal control, and transparency

technological riskTechnology permeates the operations of an entire institution and hence the risks to and risks arising from technology cannot be considered in isolation or as applicable only to a particular area or a function. Technology is an enabler of key processes in an organisation that involves the development, delivery and management of its services, operations and support functions. Understanding the role of technology in enabling core business operations establishes the framework for understanding where relevant technology risks lie.







operational risk

Fraud Risk Low Operational process reviews are conducted regularly to identify loopholes

Segregation of duties, well defined demarcated responsibilities for employees, procedure manuals, dual controls

Periodic internal audits are conducted to cover the entire branch channel. The scope of the audit includes the review of adequacy and application of accounting, financial and operational controls

Transferring insurable risk by obtaining insurance policies

Establishment of an information security system

Business impact assessment study has been undertaken and impact analysis is currently on-going

Technological Risk

Medium IT system audits are carried out to check the integrity of the system

Number of system break downs, telecommunication failures, malfunctions and hacking incidents are analysed over a period of time

Gap analysis to identify vulnerabilities in systems are conducted periodically

Agreed with the developer to resolve the identified issues and time lines have been agreed for the completion

Currently developing an up-to-date and comprehensive system and network diagram, reviewing controls over data transfer points, having comprehensive service provider contracts

Installing access control to identified high impact areas

Staff training on technical aspects to comply with security regulations

Conduct post completion audits after a successful implementation of systems

Disaster recovery planning

Strategic riskStrategic risk can be seen as the impact on the Company’s earnings or capital, due to poor business policy decisions, improper implementation of business strategies or lack of responsiveness to industry changes. Hence, strategic risk could arise due to internal or external factors.


Strategic risk

Strategic Risk Medium Comparison of pre and post implementation of financial reviews for every product, project and investment

Conducting regular reviews on strategic decisions

Periodic budget reviews



reputation riskReputational risk arises from an event or behavior that could adversely impact market ‘perception’ of the Company reducing its brand value. Since reputation itself is a valuable business asset, we take great care in the management of reputation risk. As all other risks impact reputation risk, efficient management of other risks also forms part of our management of reputational risk.


Reputation Risk Low Number of CSR events and number of lives touched

Number of complaints and types of complaints set out in the page 76

Legal cases pending against the Company and the approximate compensation

Establishment of CSR committee to conceptualise and monitor CSR initiatives

Development of a corporate communication policy to standardise the communication process is in the process

Close monitoring of any events which could lead to reputation risk by adopting an early warning system including media reports, inputs from frontline staff and market survey results

Training given to employees on professionalism, behaviour and educate them on business ethics






capItal adeQuacy

Capital adequacy is the measure of financial strength of a Company expressed as a ratio of its capital to its risk weighted assets. This ratio indicates the Company’s ability to maintain adequate capital in the form of equity and subordinate debts to meet any unexpected losses.

Applying minimum capital adequacy ratios serves to protect and promote the stability and efficiency of the financial system. Higher the capital adequacy ratio, higher the level of protection available.

The Central Bank of Sri Lanka being the regulator in our sector has introduced two measures in ratio terms which define acceptable levels of capital that finance companies should maintain at a given

moment. Namely the core capital ratio and the total risk weighted capital ratio.

According to the Finance Companies Direction No. 2 of 2006 every finance Company shall maintain:

• The core capital not less than 5% of risk weighted assets

• Total capital at a level not less than 10% of its total risk weighted assets

For the purpose of computing the capital adequacy ratio of finance companies, the constituents of capital shall be:

• Tier I – Core capital: representing permanent shareholders equity and reserves created or increased by appropriations of retained earnings or other surpluses. This capital which

is permanently and freely available to absorb losses without the Company being obliged to cease operations

• Tier II – Supplementary capital: representing revaluation reserves, general provisions and other capital instruments which combine certain characteristics of equity and debt. This capital which generally absorbs losses only in the event of a winding-up of a Company, and so provides a lower level of protection for depositors and other creditors

In computing the total risk weighted assets, each asset category in the balance sheet is organised in the order of their risk. Thereafter relevant risk weighting factors are allocated to each category to obtain the total risk weighted assets.

computation of risk Weighted assets (rs. ‘000’)

assets principle amount of on-Balance

Sheet Item

credit equivalent of

off-Balance Sheet Item

total risk Weight %

risk Weighted assets amount

Cash in hand and Bank Balances 1,171,637 - 1,171,637 0% -

Fixed Deposits with Other Institutions

Fixed Deposits with Banks 1,459,767 - 1,459,767 20% 291,953

Fixed Deposits with Finance Companies 27,632 27,632 20% 5,526

Sri Lanka Govt. Treasury Bills 2,848,036 - 2,848,036 0% -

Central Bank Securities/other Sri Lanka Govt. Securities 368,323 - 368,323 0% -

Investments (excluding items deducted from total capital) 112,739 112,739 100% 112,739

Loans and Advances :

Against Fixed Deposits held with the Company 1,125,180 7,800 1,132,980 0% -

Loans against gold and gold jewellery

If share of such advances is: between 10% to 50% in total advances

10,671,742 - 10,671,742 10% 1,067,174

Non-performing SRE Loans 2,784 2,784 100% 2,784

Other Loans and Advances (Other than specified above) 32,924,628 89,638 33,014,266 100% 33,014,266

Fixed Assets 2,124,608 - 2,124,608 100% 2,124,608

Other Assets 1,385,781 - 1,385,781 100% 1,385,781

Total 54,222,857 54,320,295 38,004,832


constituents of capital (rs. ‘000’)

capital amount

Tier I: Core Capital

Issued and Paid-up Ordinary Shares/Common Stock 692,572

Share Premium 145,711

Statutory Reserve Fund 1,637,916

Published Retained Profits/(Accumulated Losses) 2,852,402

Total Tier I Capital 5,328,601

Tier II: Supplementary Capital

Total Tier II Capital 995,000

Eligible Tier II Capital 526,000

Total Capital 5,854,601

Capital Base 5,854,601

computation of ratios for 2012/13 (rs. ‘000’)

Item amount

Total Tier I (Core Capital) 5,328,601

Capital Base 5,854,601

Total Risk Weighted Assets 38,004,832

core capital ratio (minimum requirement 5%)

Core Capital = 5,328,601 X100 = 14.02%Risk-Weighted Assets 38,004,832

total risk Weighted capital ratio (minimum ratio 10%)

Capital Base = 5,854,601 X100 = 15.40%Risk-Weighted Assets 38,004,832

Item 2009/10 2010/11 2011/12 2012/13

Core Capital Ratio (Tier I) 14.39% 12.90% 12.53% 14.02%

Total Risk Weighted Capital Ratio (Tier I and II)

17.34% 14.23% 14.81% 15.40%

core capital ratio (tier I)

0

2

10 11 12 13

4

6

8

12

10

16

14

%

Core Capital RatioMinimum Requirement

total risk Weighted capital ratio (tier I and II)

0

2

10 11 12 13

4

6

8

12

10

20

18

16

14

%

Total Risk Weighted Capital RatioMinimum Requirement

capItal adeQuacy

With Responsibility

Our business touches the lives and environments of so many and it is our duty to ensure that our activities incorporate ‘give’ as well as ‘take’

With ResponsibilitySUSTAINABILITY REPORT061 Sustainable Finance078 Ten Year Summary081 Investor Information097 CSR Photo Gallery






SuStaInaBle FInance

managing director’s message

dear StakeholderThis year we present our first integrated report where we have combined our financial, social and environment performance in one report. We are committed to widening the scope of our sustainability initiatives in line with our vision of, to enhance the lives of our stakeholders and have implemented a number of new initiatives during the year. Sustainability to us means integrating the sustainability principles within our business strategy and ensuring that we review impacts of our actions on all three aspects of people, planet and profits whilst balancing stakeholder needs. Therefore, we constantly review our actions to ensure that we keep pace with changing needs and innovate in the belief that we can make a positive impact to the stakeholders whose lives we touch.

This year we have adopted the G3.1 guidelines issued by Global Reporting Initiative for our sustainability reporting framework as we had been reporting on its previous framework in the past. The CSR Committee which is headed by the Head of Marketing is responsible for driving the Company’s sustainability agenda and has been active during the year in policy and project formulation to embed the sustainability principles in to the day to day operations of the Company. We developed a model for our community and environment based initiatives to ensure that our support covers all these

aspects which we consider important for sustainable development in our country and created six logos which are Future 1st, Health 1st, Heritage 1st, Environment 1st, Help 1st and Safety 1st. Apart from the financial support provided for these projects, it was encouraging to see the enthusiasm, talent, skills and expertise of our employees supported to complete more than 40 projects during the year to ensure success.

Integrated reporting is still in its infancy both globally and locally and we look forward to embracing the new concepts in this evolving field and keeping pace with new developments. We recognise that there is much more to be done both within our organisation to move towards a leaner consumption model with better resource management and externally to ensure that we preserve our environment and improve the lives of our stakeholders.

Our plans for the new financial year include monitoring and reducing per employee consumption of energy and water and improving waste management. The team at L B Finance is committed to pursuing our sustainability goals to achieve the annual milestones we set ourselves and look forward to playing an ever increasing role in this important sphere of activity.


2012/13

42

20

2011/12

No of CSR Projects

Team CSR

SUSTAINABILITY TO US MEANS INTEGRATING THE SUSTAINABILITY PRINCIPLES WITHIN OUR BUSINESS STRATEGY AND ENSURING THAT WE REVIEW IMPACTS OF OUR ACTIONS ON ALL THREE ASPECTS OF PEOPLE, PLANET AND PROFITS WHILST BALANCING STAKEHOLDER NEEDS


SuStaInaBle FInance

our SustainabilityBeing a leading finance Company in the country, our performance and stability is of concern to a variety of stakeholders who count on us to contribute positively in their wealth creation process. The global headlines this year have also heightened the need for further strengthening our focus on the environment, social and governance aspects of our business. In view of this we have developed the following model which encapsulates our approach to sustainability.

The above diagram shows the how management of the economic, social and environment aspects feed in to corporate strategy and how the vision, mission and corporate values, risk management and corporate governance underpin all aspects of operations within the Company.

corporate Strategy

economic Social environment

performance Stability Stakeholder management

product portfolio management

awareness preservation

riskmanagement

corporategovernance

Vision,mission, Values






our approach to Sustainability Impacts, risks, and opportunities

triple Bottom line

challenges opportunities risks Strategies

Economic Fluctuation in commodity price and exchange rate

Collapse of an industry player

Tight liquidity situations

Infrastructure developments create business opportunities

Volatility in the capital market will attract more deposits

Decrease of market share as a result of intense competition

More options in the market place will create a higher bargaining power among customers thereby will affect on the churn rate

Enhance customer reach and with new channels and products

Focus on product differentiation

Comply with industry standards and practices

Social Employee retention

Protection of human rights

Adoption according to the changing needs of community

Increasing community expectations of sustainability practices

Role played by women in business activities

Advancement in literacy and wealth create a greater demand for our core products

Strain on certain social and cultural aspects due to expansion in certain business activities

Need based training and development

Initiative to nurture and increase value of our staff

Clearly understood policies and procedures

Business growth through community participation in value chain

Environment Global warming and eco-system changes

Increasing consumption of natural resources due to increased population

Increasing customer demand for greener value chain

Adaption of green practices, technologies and behavioural changes

Higher operational cost due to increased cost of natural resources

Fall in future availability of natural resources

Reputational impact due to non-conformity

Adoption of greener practices wherever possible

Training and development on sustainability issues


SuStaInaBle FInance

performanceA comprehensive annual corporate plan and budget approved by the Board of Directors set out directions and targets for all our Strategic Business Units (SBUs’) and is communicated to employees at the beginning of the year. Financial performance is measured against budget on a monthly basis and forecasts are revised when required, capturing significant changes in both external and internal factors in order to ensure that corporate management and the Board have a realistic view of its expected performance. A comprehensive review of our financial performance is presented as part of the Management Discussion and Analysis on pages 21 to 35 and the financial statements together with the accounting policies and notes are presented on pages 152 to 209 of this integrated report and are not duplicated in this segment.

The concept of Economic Value Added measures the creation of wealth by an organisation and demonstrates the organisation’s contribution to the sustainability of a larger economic system which we do at national level. Here we disclose the economic value generated and its distribution amongst shareholders for the financial year ended 31st March 2013.

economic Value added Statement

2012/13 2011/12 rS. 000 rS. 000

Economic Value AddedShareholders Fund 5,328,601 3,968,097Accumulated Allowance for Impairment Losses 474,110 218,307 5,802,711 4,186,404

Profit Attributed toShareholders 1,706,790 1,656,233Add: Impairment (Charges)/Reversal for Loans and Other Losses (400,307) (116,023) 1,306,483 1,540,210

Economic Cost % (Avg TB rate + 2% risk premium) 14,34% 10.19%Economic Cost 716,220 349,564Economic Value Addition 590,263 1,190,646

economic






Value added Statement 2012/13 2011/12 rs.000 rs.000

Value AddedIncome from Interest Related Activities 10,325,027 7,297,591Income from Real Estate 21,576 67,353Income from Fee Based Activities 729,610 562,247Income from Other Activities 111,813 77,234 11,188,027 8,004,425

Depositors and Lenders (5,945,707) (3,551,986)Cost of Sales and Services (904,955) (763,673)Impairment (Charges)/Reversal for Loans and Other Losses (400,307) (116,023)Total Value Added 3,937,058 3,572,741

Distribution of Value AddedTo Employees: Salaries and Other Benefits 1,026,041 862,316To Providers of Capital: Dividends Proposed 450,171 346,286To Government: Taxes 1,000,144 874,071To Expansion and Growth: Depreciation 204,084 180,121Retained Profits 1,256,618 1,309,947 3,937,058 3,572,741

distribution of Value added - 2012/13

12%

26%

25%

37%

To EmployeesTo Providers of CapitalTo GovernmentTo Expansion and Growth

distribution of Value added - 2011/12

10%

24%

24%

42%

To EmployeesTo Providers of CapitalTo GovernmentTo Expansion and Growth

Our business operations are not directly exposed to adverse results arising from climate change. However the Company provides financial assistance to customers engaged in sectors such as agriculture and fisheries which are impacted by climate change and therefore we can be indirectly impacted by climate change. The agriculture sector represents 5.32% of our total advances and losses arising from this sector are likely to be manageable in view of the relatively small exposure.


SuStaInaBle FInance

StabilityThe financial stability of the Company is of concern to nearly all our stakeholders, but of particular importance to depositors, employees, shareholders who derive income based on the operations of our Company and the regulators who are tasked with maintaining the stability of the country’s financial system. The key measures for stability are the capital adequacy ratios for which Central Bank has set prudential limits. We have consistently maintained the ratios above the prudential limits set by Central Bank as graphically depicted below.

core capital ratio (tier I)

0

2

10 11 12 13

4

6

8

12

10

16

14

%

Core Capital RatioMinimum Requirement

total risk Weighted capital ratio (tier I and II)

0

2

10 11 12 13

4

6

8

12

10

20

18

16

14

%

Total Risk Weighted Capital RatioMinimum Requirement

Other factors affecting the long term sustainability of the Company are sufficiently discussed in the Risk Management and the Management Discussion and Analysis and therefore are not duplicated here.






Stakeholder managementWe engage with diverse stakeholders in the course of conducting our business and our intention is to make a positive impact in the lives that we touch. A firm’s stakeholders are the individuals, groups, or other organisations that are affected by and also affect the firm’s decisions and actions. Stakeholder engagement is our starting point to determine what we do and how we do it. A variety of tools and mechanisms are used to engage with our stakeholders to understand their changing needs and respond to them in a manner that is appropriate to our business, skills and expertise. We recognise that our stakeholders have diverse needs and that some needs are common to all stakeholder groups. Stakeholder needs are prioritised depending on the level of connectivity and impact we make to them as a collective group. The table below captures the stakeholder engagement mechanisms, the needs identified through the various engagements and our response whilst the engagement wheel summarises our process of stakeholder management.

Social

Identify

engage

review

action

plan

engagement Wheel


SuStaInaBle FInance

Stakeholder engagement methods needs Identified

Employees News letters and e-mails, meetings, regional conference, satisfaction surveys, open door policy, intranet

• Reward and recognition

• Work life balance

• Career development

• Competitive remuneration

Customer Meetings, call centre, survey and field visits, information dissemination through letters, leaflets, media, telephone, SMS alerts, website

• Wealth creation

• Financial inclusion

• Excellent customer service

• Ease of transacting

• Ethical business practices

Shareholders Annual report, Annual General Meeting, press releases, quarterly financial statements in all three languages, corporate website

• Maximise shareholder wealth

• Good governance

• Brand building

• Building a sustainable organisation

Suppliers and business partners

Regular meetings, field visits, supplier events, communication through dedicated staff members

• Timely payments

• Business growth

• Ethical sourcing policies

• Information

• Strategic partnerships

Regulatory authority and Government

Discussion and meetings, periodic disclosures, annual report, advisory meetings, compliance reporting

• Compliance

• Contribution to economic growth and stability

• Good governance

• Support for financial reforms

Community Meetings with various community leaders, community and public workshops, press conferences and networking.

• Employee participation in local community projects

• Contribution towards economic development and well-being of the society

• Minimising the negative impacts towards the environment and society


Competitors Memberships in industry associations, corporate website, advertisements, annual report and quarterly financial statements, industry forums

• Information

• Fair competition


• Market development

• Representing the industry






nurturing our employeesWe have a focused team of 2,055 highly motivated employees who are responsible for the achievements of the organisation and we count on them to live our brand in every stakeholder interaction. We recruited 875 employees during the year of which 376 were for new positions created whilst 499 were recruited to fill vacancies that occurred during the year. Additionally 224 employees were

promoted during the year in line with our policy of giving preference to internal candidates for vacancies thus providing opportunities for career development within the organisation. As part of their career development plans and/or to provide a better work life balance we rotate employees to positions within the Company. Our investment in training during the year was Rs. 5,074,457 which resulted in an average of 2,130 hours

of training per employee. The employee retention rate was contained to 73% despite intense competition for people of talent and ambition within the entire financial services sector.

Stakeholder map

EXTERNAL

CONNECTED

INTERNAL

Shareholder

Customer

Employees

Suppliers and business partners

Regulatory authority and Government

Community support

Competitors

LBF


SuStaInaBle FInance

Human resource department’s role in overall corporate strategy is captured in the diagram below:

hr Strategy

attract • Regional inclusion

• Diversity

• Equal opportunity

develop • Training

• Development

• Appraisal

retain• Remuneration

• Reward and recognition

• Benefits

• Effective labour relations

• Health and safety

the total number of permanent employees Broken down by gender - 2012/13

MaleFemale

61%

39%

the total number of permanent employees Broken down by gender - 2011/12

MaleFemale

61%

39%

the total number of permanent employees Broken down by employment type

category 2010/11 2011/12 2012/13

Senior Management 17 19 20

Middle Management 79 83 108

Executive 289 341 497

Clerical 826 1,176 1,360

Minor 53 60 70

Total 1,264 1,679 2,055

the total number of permanent employees Broken down by employment type

0

200

10/11 11/12 12/13

400

600

800

1,200

1,000

1,600

1,400

No ofEmployees

Senior ManagementMiddle ManagementExecutiveClericalMinor






the total Workforce Broken down by province and gender - 2012/13

0

100

Cen

tral

East

ern

Nor

ther

n

Nor

th -

Cen

tral

Nor

th -

W

este

rn

Saba

raga

muw

a

Sout

hern

Uva

Wes

tern

200

300

400

600

500

800

700

No ofEmployees

MaleFemale

attractWe seek to attract people of talent, ability and ambition who are passionate about excelling in their roles and have formulated strategies, policies and procedures to ensure that we achieve this and then develop and retain them as we sincerely believe that our team is our greatest asset. As an equal opportunity employer, we recruit from local communities wherever possible in line with business requirements and endeavour to ensure that there is diversity within the team with regards to gender and ethnicity. We have a zero tolerance policy towards child labour and forced labour and have no reported cases of human rights violations. As a leading player in the financial services sector, we are able to attract talent of the required calibre to fulfil our recruitment requirements and also have a successful employee referral programme which is testimony to the satisfaction and engagement of our employees.

The tables below provide further information about our recruitment during the year.

no of new employees hired Broken down by gender 2012/13

2012/13

Male 547

Female 328

Total 875

no of new employees hired Broken down by age group 2012/13

age group no of new employees

51-60 years 2

41-50 years 10

31-40 years 39

21-30 years 748

20 and below 76

no of new employees hired Broken down by gender - 2012/13

MaleFemale

63%

37%

procedure for Senior management hiring from the local community All our recruitments for senior management positions are hired locally whilst our distribution channels gives this more meaning as we have a policy of hiring from the localities whenever the criteria is met. We also consider the commuting distance and the preferred locations of an employee when placements arise for many locations of our operations.


SuStaInaBle FInance

developTraining and developing our talent pool is a key strategy to maintaining a performance oriented culture where employees are inspired to fulfil their career aspirations. Training needs are identified based on the organisation’s business needs, the career development needs and potential of the employees through regular performance assessments. Depending on the needs, the relevant employees will be provided training through one of the following training and learning interventions:

• Internal training programmes• External local programmes• Overseas training programmes• Job rotation• Special assignments• On-line learning

Additionally, we have regular knowledge sharing forums and guest lectures which serve to broaden their vision and enhance their performance. All new recruits are also given an orientation course to

ensure they integrate successfully in to the organisation. The Company has a mentoring culture and line managers are expected to coach and develop their direct reports to high levels of performance. Our approved employer status with professional organisations and universities are testimony to this mentoring culture and we also provide our trainees/interns with relevant supervised training in specific areas to enable them to gain membership with these organisations which is certified by their line managers. We also encourage our staff to undertake professional qualifications to develop themselves and reimburse their exam fees on successful completion of each exam as part of our initiatives to support lifelong learning and employability. We also reimburse professional subscriptions of employees who are members of recognised professional bodies and support their participation in continued professional education which is now a requirement of many such organisations.

approved employer programmes

organisation no. of trainees/Interns during

the year

Institute of Chartered Accountants of Sri Lanka

4

Chartered Institute of Management Accountants UK

1

Association of Accounting Technicians, Sri Lanka

4

Certified Institute of Management Accountants, Sri Lanka

1

University of Colombo 1

University of Sri Jayewardenapura

1

University of Kelaniya 2

National Institute of Business Management

2

Corporate Attire






Support for lifelong learning

organisation no. of professional Subscription beneficiaries

Institute of Chartered Accountants of Sri Lanka

5

Chartered Institute of Management Accountants UK

5

average number of hours of training per year per employee category

2012 2013

Senior Management 5 2

Middle Management 83 31

Executive 341 1,051

Clerical 1,176 990

Minor 75 56

average number of hours of training per employee category - 2012/13

49%

3% 1%

47%


average number of hours of training per employee category - 2011/12

70%

5%

20%

4% 1%


Investment on training

0

5

10/11 11/12 12/13

10

15

20

30

25

40

35

Rs. Mn

training programmes conducted 2012/13

programme name

no. of programmes

no. of participants

person - hours

Internal

Induction 5 356 56

Customer Care/Marketing (GL) 9 541 124

Technical/Product Training(Savings & FD) 8 256 32

Finance 5 544 28

Safety 1 44 4

Regional Training 2 109 16

Spot Training 2 33 3

Other 4 205 28

External 7 42 56

Total 43 2130 347


SuStaInaBle FInance

retainWe seek to retain employees who have demonstrated the ability to perform in line with expectations and target an employee retention rate of approximately 70% which we have surpassed. Our retention strategy focuses on remuneration, reward and recognition, benefits and effective labour relations. In terms of remuneration, we ensure that our remuneration is either on par or above par with the non-banking financial sector and well above minimum wage rates prevailing in the country. Additionally, the Employer Provident Fund contributions are 15%, which is 3% above the norm in the corporate sector. We also have in place a component of remuneration based on performance to motivate and inspire employees to aspire to reach higher goals. Programmes to recognise exceptional achievements are also held annually where high achievers in defined areas of business are rewarded and their contribution to the organisation is acknowledged and celebrated. Permanent employees are also entitled to benefits in addition to their remuneration. These benefits include:

• Medical insurance covering both out patient treatments and surgical within defined limits.

• Staff loans and vehicle loans at concessionary rates.

• Workmen’s compensation

• Membership at gymnasium

• Subscriptions of professional organisations.

• Donations on death of employees and immediate family members

• Retirement benefit plans (gratuity fund)

Fostering a performance oriented and team working culture with respect for individual’s capabilities, beliefs, skills and knowledge is a key pillar of our retention strategy. A number of social events such as L B night, a kiddie’s party and religious ceremonies are organised to encourage employee interaction in an informal atmosphere. We also recognise achievements in the field of sports where employees come together as teams under the L B Finance banner and compete in Mercantile Tournaments, as such teams foster inter departmental relations and develop leadership skills. Additionally, policies that cover harassment, discrimination, grievance resolution etc., have been set in place to create a culture where employees are able to perform at their full potential. A written code of conduct is also available on the intranet and introduced at orientation courses to ensure that all employees are aware of the standard of conduct expected of them.

We monitor exits from employment and conduct exit interviews to determine the causes for resignations and terminations to ensure that there are no undue causes for voluntary exits. Work life balance is encouraged for all employees and we switch off lifts and air conditioning to encourage efficient work practices and departure from work premises in a timely manner. Safety of employees is a key concern and we have set in place a preventive programmes with annual medical checks and the gym membership for employees to facilitate general fitness and early detection of health issues. Additionally, programmes on fire drills and safety in the lifts were carried out to minimise the severity of impact in the event the relevant situations occur.

total number of employees leaving employment Broken down by gender 2012/13

Male 322

Female 177

Total 499

total number of employees leaving employment Broken down by age group 2012/13

51-60 years 4

41-50 years 3

31-40 years 55

21-30 years 424

20 and below 13

Total 499

total number of employees leaving employment Broken down by gender

2012/13

MaleFemale

65%

35%






An external consultant conducting a fire drill to provide training on how to react in a situation where a fire has occurred

Safety training programmes

A programme of lift safety conducted by the maintenance department covering how to react if the lift gets stuck and safety methods that needs to be carried out to get out safely

Bronze medal winner in 5,000M at Mercantile Athletic Meet

employee events

Christmas party organised for the kids of staff members

Bronze medal winner in long jump at Mercantile Athletic Meet

Runners up in Basketball organised by Finance House Association

Semi finalist in 7 a-side tournament and B division champion in league tournament organised by Mercantile Football Association

Bronze and silver medal winner in 1,500M and 5,000M respectively in Mercantile Athletic Meet

achievements in Sports


SuStaInaBle FInance

mutually Beneficial customer relationshipsAs stated in our mission, we want to have mutually beneficial partnerships that positively impact the lives of our customers through wealth creation for both the customer and our organisation. This means structuring products that are relevant to the needs of our existing and potential customers, ensuring that it benefits both the customer and the organisation and communicating clearly the features. The governing structures within the Company ensure that these criteria are met in line with the corporate vision for all products including investment, credit and value added service products. As the non-banking financial sector is a regulated industry, we obtain approval from Central Bank for all our products and advertisements to ensure compliance with the directions issues by them to protect the interests of our customers. These mechanisms facilitate deeper relationships where customers who start a relationship with a single product continue with us to add other products to their portfolios as they gain confidence in our ability to understand their needs and cater to them in a manner that creates a positive customer experience.

customer ServiceIn compliance with the above approach, we provide our customers with a personalised service where they can discuss their needs in confidence with a trained member of our staff who can advise them regarding their requirement. This could be done through visits to our offices or by telephone through our call centre. Our leaflets provide the information regarding all products in English, Sinhala and Tamil to ensure that customers are aware of the same.

customer SatisfactionAs a service organisation, our growth depends on customer experiences being positive through excellent customer service. To ensure that high customer service standards are maintained throughout our entire network, we have instituted several mechanisms to monitor customer satisfaction and obtain feedback regarding our levels of service which include mystery shopper, a customer complaints hotline, and customer surveys as described below.

customer complaints hotlineWe have established a customer complaint hotline to ensure that there is a communication channel for dis-satisfied customers. The hotline number is displayed at all our branch offices and is also given on every offer letter issued by us. The service is available in three languages to ensure that the customer is able to communicate in the language he/she is most comfortable in. All complaints are handled within 48 hours with most complaints being handled within 24 hours. We have initiated the following actions in response to the calls received on this hotline which has significantly reduced the number of complaints received during the second half of the financial year:

• Introduced a new offer letter including translations in Sinhala and Tamil as may be required

• Changed processes used by branches

• Centralised certain functions

• Enhanced training for back office staff

• Changed IT systems

“A friendly family atmosphere which always prevails at L B Finance gave me the confidence to invest my retirement funds which I’m sure will grow stronger through the years, as I feel L B stands for Lanka’s best.” Mr. & Mrs. Wijesinhe






other InitiativesWe have initiated a mystery shopper programme to provide feedback on customer service as well for which we provide the opportunity to university students who require intern-ship experience. Additionally we have carried out customer surveys on random samples of customers who have used of our products to measure their level of satisfaction with the level of service offered.

catering to customer needsIn response to our customer requirements we have introduced 2 new products during the year and modified several products to better meet their needs. Some examples are the three wheeler leasing which has been structured to include one year’s insurance free coupled with a discount to enable the customers to manage their cash flow and protect their livelihoods better and we also offer variable leases for artistes, farmers and executives whose cash flow is seasonal. The tractor leasing product has been structured taking in to account the seasonal cash flow patterns of our customers to enable higher repayments during harvesting season and lower instalments in lean periods. We have also negotiated discounts with importers of vehicles for our customers of which the benefit is passed to in its entirety to the customers. We have organised vehicle trade fairs called “Riya Pola” to enable buyers of vehicles to meet sellers in a common market place which caters to the customers need for ease of transacting as it eliminates the need to visit many individual sellers who may be located in a very wide geographic area in order to purchase a vehicle. Riya Pola has been held in Krunegala, Kandy, Matara, Pita-Kotte and Malabe which has been complemented with an online market place as well.

complaint hotline Statistics

67%

20%6%1%

4% 2%

Credit IssuesLetter Understanding DifficultiesRecovery IssuesInsurance Related IssuesService DelaysNew Business Inquiries

complaints trend

0

100

200

300

500

400

700

600

900

800

No. ofCallers

1st Six Months2nd Six Months

Cre

dit I

ssue

s

Lett

er U

nder

stan

ding

D

ifficu

ltie

s

Rec

over

y Is

sues

Insu

ranc

e R

elat

ed

Issu

es

Serv

ice

Del

ays

New

Bus

ines

s In

quir

ies

enhancing Financial literacyWe have commenced a televised programmes broadcast in Sinhala which seeks to educate viewers about lease and hire purchase and the features of vehicles to enable them to determine which vehicle suits their requirements. We believe it fulfills a need in the market as financing of vehicles is an increasingly popular product and customers frequently have little understanding of the product. During this financial year we telecasted 104, 30 minute programmes focusing on vehicle dealerships located outside the Colombo District. We believe that this programme has benefited self-employed persons and employed persons in making the right choice with regards to both the financial product and the asset acquired.

Fulfilling Shareholder expectationsShareholder wealth is created mainly through business growth, brand building and profitability which is reflected in the financial performance and the market value of the shares of the Company. The following pages provide a factual record of how we have created shareholder wealth over the past decade. Additionally, we were ranked amongst the Most Respect Companies in Sri Lanka by LMD and ranked within the top 50 most valuable brands in the country which is a testimony to our brand building efforts.


SuStaInaBle FInance

ten year SummaryFinancial Statements prepared under SlaS

12 months 15 months 12 months 12 months 12 months 12 months 12 months 12 months 31.12.03 31.03.05 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 31.03.11 rs ‘000 rs ‘000 rs ‘000 rs ‘000 rs ‘000 rs ‘000 rs ‘000 rs ‘000

Income StatementGross Income 541,873 779,175 914,463 1,310,792 2,778,862 3,580,173 4,130,993 5,501,885Interest Income 425,837 677,403 849,978 1,229,406 2,082,418 3,431,950 3,953,032 5,138,718Interest Expenditure 297,083 383,401 432,856 655,624 1,318,058 2,238,847 2,249,805 2,418,480Net Interest Income 128,754 294,002 417,122 573,782 764,361 1,193,103 1,703,227 2,720,239Other Operating Income 33,000 42,784 29,917 65,247 165,682 122,326 174,285 353,647Operating Expenditure 158,545 251,929 243,391 309,632 509,225 647,561 839,479 1,171,025Profits before Taxation 3,209 73,344 173,108 282,401 355,214 555,315 878,290 1,667,820Provision for Taxation - 24,936 96,051 103,625 149,381 195,707 378,129 647,452Net Profits 3,209 48,408 77,056 178,776 205,833 359,608 500,161 1,020,368

Balance SheetAssetsCash and Amounts due from Banks 40,062 24,242 57,232 90,555 152,581 217,642 277,083 347,446Placements with Banks 95,101 140,940 171,786 247,918 415,918 550,496 364,918 302,584Treasury Bills and other Bills Eligible for Re-discounting with Central Bank 185,702 234,323 297,939 361,369 476,877 799,698 1,165,157 1,622,158Amounts due from Department of Inland Revenue - - - 14,099 8,377 - - -Real Estate Stock 184,457 161,755 170,963 238,641 218,198 211,241 246,928 237,520Loans and Advances 861,373 997,211 977,435 1,100,386 1,805,471 2,834,414 4,193,815 7,543,231Lease Rentals Receivable and Stock out on Hire 995,656 1,726,591 2,830,052 4,641,290 7,256,655 9,006,955 10,440,329 16,332,007Investment Securities 18,328 12,945 9,021 9,032 9,032 6,226 5,994 28,594Trading Portfolio - - - - - - - 211,818Other Debtors, Deposits and Prepayments 75,399 43,874 32,768 129,921 142,570 141,619 104,271 675,235Deferred Taxation - - 35,650 - - - - -Vehicle Stock - - 15,620 58,242 118,686 41,939 156,502 519,706Intangible Assets - - 4,760 11,289 9,959 9,311 7,333 9,682Property, Plant and Equipment 47,242 58,957 63,117 87,773 129,775 189,920 237,613 432,359Total Assets 2,503,320 3,400,838 4,666,343 6,990,515 10,744,099 14,009,461 17,199,943 28,262,340

LiabilitiesDeposits from Non-Bank Customers 2,006,061 2,606,792 3,344,671 4,561,445 7,309,101 9,558,370 12,489,789 19,619,681Borrowings 86,585 314,197 561,612 1,401,839 1,658,593 1,527,997 1,065,377 3,526,374Debentures 100,000 100,000 100,000 100,000 100,000 450,000 450,000 450,000Trade Payables and Accrued Charges 139,166 147,566 230,727 303,445 559,993 846,978 916,729 1,529,035Tax Payable - 11,375 48,972 - - 67,751 352,626 396,413Deferred Taxation - - - 16,993 114,615 186,703 141,728 93,249Dividends Payable - - 13,500 - - - - -Provision and Other Liabilities 7,987 8,978 12,207 19,367 26,778 21,565 27,262 33,870Total Liabilities 2,339,799 3,188,908 4,311,689 6,403,089 9,769,080 12,659,364 15,443,511 25,648,622

Shareholders’ FundShare Capital 135,000 135,000 135,000 202,000 418,411 491,996 491,996 838,282Reserves 28,522 76,930 219,654 385,426 556,608 858,101 1,264,436 1,775,436Total Shareholders’ Funds 163,522 211,930 354,654 587,426 975,019 1,350,097 1,756,433 2,613,718Total Liabilities and Funds Employed 2,503,321 3,400,838 4,666,343 6,990,515 10,744,099 14,009,461 17,199,944 28,262,340






Financial Statements prepared under SlFrS

12 months 12 months 31.03.12 31.03.13 rs ‘000 rs ‘000

Statement of Comprehensive IncomeGross Income 7,937,072 11,166,449Interest Income 7,297,591 10,325,027Interest Expenses (3,551,986) (5,945,707)Net Interest Income 3,745,605 4,379,320Other Operating Income 639,480 841,422Total Operating Income 4,385,086 5,220,743Impairment (Charges) / Reversal for Loans and Other Losses (116,023) (400,307)Operating Expenses (1,680,998) (2,117,628)VAT on Financial Services (149,952) (176,248)Profit before Tax 2,438,112 2,526,560Tax (724,118) (823,895)Profit for the Year 1,713,994 1,702,665

Statement of Financial PositionAssetsCash and Cash Equivalents 1,954,237 4,019,673Financial Investments - Held for Trading 6,740 7,323Loans and Receivables 12,771,108 16,452,987Lease Rentals Receivable and Stock out on Hire 23,686,392 28,271,347Financial Investments - Available for Sale 128,068 473,739Financial Investments - Held to Maturity - -Other Financial Assets 1,019,834 1,487,399Other Non Financial Assets 1,066,622 1,205,230Intangible Assets 19,340 23,669Property, Plant and Equipment 1,868,286 2,100,939Deferred Tax Assets 117,779 180,551Total Assets 42,638,405 54,222,859

LiabilitiesDue to Banks 8,910,255 6,366,217Due to Customers 27,172,161 38,742,700Debt Instruments Issued and Other Borrowed Funds 1,541,555 2,244,210Other Financial Liabilities - 638,011Other Non Financial Liabilities 757,275 694,933Retirement Benefit Liability 44,231 60,230Current Tax Liabilities 244,831 147,956Total liabilities 38,670,307 48,894,257

Shareholders' FundsStated Capital 838,282 838,282Retained Earnings 2,075,561 2,852,402Reserves 1,054,254 1,637,917Total Shareholders' Funds 3,968,097 5,328,601Total Liabilities and Shareholders' Funds 42,638,405 54,222,859


SuStaInaBle FInance

Key Indicators 12 Months 15 Months 12 Months 12 Months 12 Months 12 Months 12 Months 12 Months 12 Months 12 Months 31.12.03 31.03.05 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12 31.03.13 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000

RatiosEarnings per share Rs. 0.24 3.59 5.71 8.85 6.79 10.38 7.22 14.73 24.75 24.58Net Assets per Share Rs. 12.11 15.70 26.27 29.08 32.18 38.99 25.36 37.74 57.30 76.94Return on Shareholders' Fund % 2.00 25.79 27.20 37.95 26.35 30.93 32.20 46.70 52.08 36.63Return on Average Assets % 0.14 1.64 1.91 3.07 2.32 2.91 3.21 4.49 4.83 3.52Total Assets to Shareholders' Fund Times 15.31 16.05 13.16 11.90 11.02 10.38 9.79 10.81 10.75 10.18Interest Spread % 6.56 11.16 10.73 10.11 8.12 7.92 9.32 11.63 11.46 10.57Net Interest Margin % 6.33 11.23 11.31 10.80 9.38 10.31 11.60 12.96 11.84 10.42Efficiency Ratio % 98.02 74.80 54.45 48.45 54.75 49.23 44.71 38.10 40.98 48.23Growth in Gross Income % 8.01 43.79 17.36 43.34 112.00 28.84 15.39 33.19 44.26 40.68Growth in Interest Income % 13.50 59.08 25.48 44.64 69.38 64.81 15.18 29.99 42.01 41.49Growth In Interest Expense % 10.48 29.06 12.90 51.46 101.04 69.86 0.49 7.50 46.87 67.39Growth in Net Interest Income % 21.12 128.34 41.88 37.56 33.21 56.09 42.76 59.71 37.69 16.92Growth in Profit Before Taxes % (71.41) 2,185.58 136.02 63.14 25.78 56.33 58.16 89.89 46.19 3.61Growth in Net Profit % (71.41) 1,408.51 59.18 132.01 15.13 74.71 39.09 104.01 67.98 -0.64Growth in Total Assets % 12.26 35.85 37.21 49.86 53.64 30.39 22.77 64.32 50.87 27.17Growth in Total Advances % 11.14 46.68 39.79 50.80 57.83 30.67 23.58 63.15 54.48 22.68Growth in Deposits % 9.96 29.95 28.31 36.38 60.24 30.77 30.67 57.09 38.49 42.58Growth in shareholder's Funds % 4.31 29.60 67.34 65.63 65.98 38.47 30.10 48.81 51.82 34.27No. of Branches 5 5 7 9 15 21 27 34 65 89No of Gold Loan Centres 9 17 19 23 25 36 48 58 47 37Total No of Distribution Channels 14 22 26 32 40 57 75 92 112 126






Investor Information20 major Shareholders

as at 31/03/2013 as at 31/03/2012 no of no of Shares (%) cum.% Shares (%)

1 Vallibel One PLC 35,321,200 51.000 51.000 35,321,200 51.0002 Royal Ceramics Lanka PLC 15,647,893 Commercial Bank of Ceylon PLC/Royal Ceramics Lanka PLC 2,348,000 17,995,893 25.984 76.984 17,903,277 25.8503 Esna Holdings (Pvt) Ltd 7,003,081 10.112 87.096 7,000,200 10.1084 Sri Lanka Insurance Corporation Ltd-Life Fund 1,842,900 2.661 89.757 1,842,900 2.6615 Mercantile Investments and Finance PLC 953,600 1.377 91.134 953,600 1.3776 Seylan Bank PLC/W D N H Perera 361,421 Mr. Nimal Perera 272,571 633,992 0.916 92.050 330,898 0.4787 Environmental Resources Investment PLC 188,300 0.272 92.322 188,300 0.2728 Mr. E Bianchi 154,400 0.223 92.545 154,400 0.2239 Mr. L W A De Soysa 150,976 0.218 92.763 150,976 0.21810 Mr. H A M P Algama 150,000 0.217 92.980 200,000 0.28911 Mr. A M Weerasinghe 148,850 0.215 93.195 148,850 0.21512 Mr. K D A Perera 147,733 0.213 93.408 - -13 Waldock Mackenzie Ltd /Mrs G Soysa 111,252 0.161 93.569 111,252 0.16114 Mrs. P C Cooray 97,204 0.140 93.709 97,004 0.14015 Mr. P S R Casie Chitty 84,900 0.123 93.832 84,400 0.12216 Mr.T Jeremiah 77,582 0.112 93.944 77,582 0.11217 Mr. K Karunanayake and Miss. P N Karunanayake 74,162 0.107 94.051 74,162 0.10718 Mr. P Somadasa 71,372 0.103 94.154 70,072 0.10119 Mr. K Sabaratnam 70,000 0.101 94.255 55,200 0.08020 Commercial Bank of Ceylon PLC/Capital Trust Holdings (Private) Limited 62,994 0.091 94.346 - - 65,340,391 94.35 3,916,751 5.65Total 69,257,142 100.00

distribution of Shareholdings as at 31st march 2013

From to no. of Shareholders no. of Shares %

1 - 1,000 1,125 317,719 0.46 1,001 - 10,000 448 1,511,029 2.18 10,001 - 100,000 99 2,626,217 3.79 100,001 - 1,000,000 11 2,639,103 3.81 Over 1,000,000 5 62,163,074 89.76 1,688 69,257,142 100.00


SuStaInaBle FInance

analysis of Shareholders as at 31st march 2013

category no. of Shareholders no. of Shares %

Local Individuals 1,564 4,389,199 6.34Local Institutions 96 64,494,587 93.12Foreign Individuals 26 348,773 0.50Foreign Institutions 2 24,583 0.04Total 1,688 69,257,142 100.00

directors’ Shareholding as at 31st march 2013

names of directors no. of shares percentage (%)

Mr. K D D Perera - -Mr. L N de Silva Wijeyeratne - -Mr. J A S S Adhihetty 53,060 0.077Mr. Nimal Perera } 272,571 633,992 0.915Seylan Bank PLC/Mr. Nimal Perera } 361,421Mr. A M Weerasinghe (Ceased to be a Director as of 5th January 2013) - -Mr. K D A Perera (Ceased to be a Director as of 5th January 2013) - -Mr. N Udage 4,200 0.006Mr. B D A Perera - -Mrs. K Fernando 1,600 0.002Mrs. Shirani Jayasekara - -Mrs. A K Gunawardena - -

Share prices for the year

31.03.2013 date 31.03.2012

Market price per shareHighest during the period Rs.172.00 08.10.2012 Rs.200.00Lowest during the period Rs.95.00 06.06.2012 Rs.109.00As at end of the period Rs.132.70 Rs.134.90

31.03.2013 31.03.2012

No. of transactions 2,491.00 5,510No. of shares traded (Mn) 1,532,455 23,092,042






SuppliersWe have a policy of working with local suppliers wherever possible and branches source many requirements from suppliers in their districts. We engage with suppliers on a regular basis through meetings and supplier forums where information is exchanged regarding expectations of service levels and prospects for business growth. We set in place procurement mechanisms and procedures to ensure that there is timely payment of invoices received. We engage with suppliers informally as well in supplier events both at branch level and at corporate level to show our appreciation of their invaluable services.

Boralesgamuwa branch supplier event

government and regulatorsWe have relationships with the Central Bank of Sri Lanka, the Department of Inland Revenue, the Securities and Exchange Commission and the Colombo Stock Exchange who are the key regulators and government authorities impacting the activities of the Company. We put in place policies and procedures to ensure compliance with the applicable laws, rules and regulations as a responsible corporate citizen and have no known violations of these during the financial year under review. We have voluntarily adopted the Code on Corporate Governance jointly issued by the Securities and Exchange Commission and the Institute of Chartered Accountants of Sri Lanka comprehensively reported in the Corporate Governance Report on pages 99 to 139. The compliance function of the Company for which the Board Integrated Risk Management Committee has oversight responsibility ensures that regular compliance checks are carried out with regards to key business aspects.

communitiesAs a responsible corporate citizen,we have a role to play both nationally and in the local communities in which we have a presence.

customer access pointsIn line with the Government’s stated priority of poverty alleviation through increased financial inclusion, we have increased our customers touch points particularly in areas outside the western province. Additionally, we have field officers attached to the branches who reach out to the customers who are unable to or find it inconvenient to visit our places of business.

community InvolvementA CSR Committee has been established to drive our Corporate Social Responsibility agenda throughout the organisation. The Committee identified key areas in which the Company will formulate and implement projects with leadership, skills, expertise and effort being provided by the

staff.


SuStaInaBle FInance

competitorsWe respect our competitors and recognise the need to work together particularly in view of the financial services sector reforms that are a priority not just locally but globally. Collaboration is necessary within the industry for policy advocacy to grow the market, create a level playing field and achieve cost efficiencies. As a leading player in the Non Bank Financial Service sector, we are committed to playing a leading role and investing in the research and training that is required to represent the industry, taking a wider perspective that includes the national economic and social impacts. Membership of the following organisations provide the platforms for achieving these goals where our representatives are active participants in contributing to the issues at hand.

association positions held by representatives

Ministry of Transport, Sri Lanka

Secretary

Board of Directors of Strategic Enterprise Management Agency (SEMA)

Member

Board of Investments (BOI)

Former Chairman

Sri Lanka Cricket Interim Committee

Treasurer

Sri Lanka Sustainable Energy Authority

Director

The Bar Association of Sri Lanka

Life Member

Association of Corporate Lawyers, Sri Lanka

Treasurer

• Dansal were organised in Kurunegala and Kandy

• Renovated the clock towers in the towns of Trincomalee and Kagelle • Greening the urban environment in the Panadura town • Donated jackets to the staff in Minneriya National Park• Sponsored public notice boards in Panadura town• Partnered with ‘think green’ for an e-waste management system • CSR tips on the pens and notebooks used within the Company • Separate notice board was set up for CSR news• Energy saving tips to educate staff on saving energy

• School items and a Duplo machine were donated to Thalathuoya Junior School

• School items were donated to an orphanage in Puttlam• Sponsored 49th Colombo Camporee• Sponsored nursery musical eve, Kaduwela• A computer lab was donated to “Noguchi” Children’s Home• Donation of sports equipments for selected school children in

Akuresse and Tangalle

• Donation of cataract lenses for needy patients • A Dialysis machine was donated to the Base hospital, Padaviya• A “walking day” was announced for staff to concentrate more on their

health • Donated hospital equipments to District General Hospital, Chilaw

• Enhancing knowledge of taxi drivers in Pitigala• Blood donation campaigns• Donated office equipment to Cinnamon Garden Police Station • Sponsored Help Age Sri Lanka • Sponsored the Sri Lanka Commando basketball team • Donated school items to flood victims in Polonnaruwa • Renovated a school in Gawarawela Vidyalaya

• Several safety training programs were conducted to the employees






environment

As an island nation, Sri Lanka is vulnerable to climate changes and peoples’ lives, livelihoods and assets are significantly impacted by this on a recurrent basis. This year we have seen both floods and droughts in different parts of the island affecting the food supply and the quality of life of the residents in affected areas. L B Finance has taken several initiatives to improve the awareness of the need to preserve our environment and to take positive actions. Our environment initiatives are categorised in to two broad segments, namely the workplace and the community.

Sustainability in the workplaceSeveral initiatives have been taken to promote sustainability within the organisation to our employees as we believe that they will inspire us to further action enabling us to enhance our initiatives to preserve and protect the environment. We firmly believe that these actions increase the employees’ awareness of the environment issues and how we can positively impact them in the consistent manner that is required to change habits and mindsets. Our efforts in the workplace extend in to their personal lives as well multiplying the positive impact of the efforts in the workplace.

awarenessThese projects seek to change human behaviour by creating awareness of how we can positively impact the environment and inspiring them to change common habits/practices that negatively impact our environment.

messaging on StationeryWe create an environment where the staff is inspired to be responsible towards triple bottom line approach by communicating the messages through a range of initiatives taken by the CSR Committee. One of them was printing CSR tips on the pens and notebooks we use at work.

The pens we use daily at work carry the messages which include “Today’s’ Wastage Is Tomorrow’s Shortage”, “Live Green, Save Green”, “Save Today, Survive Tomorrow”, “ Live Green, Love Green, Think Green”, “Think Before You Print”, and “Every Drop Counts”. The notebooks provided to staff highlight the pillars of our sustainability model which are Health 1st, Environment 1st, Future 1st, Safety 1st, Help 1st and Heritage 1st.

cSr notice BoardAnother commitment towards the sustainability is placing a CSR notice board at the corporate office premises where the staff is updated on new CSR initiatives taken by the Company and new

environment

In the Workplace

awareness preservation

community In the Workplace community


trends and development in sustainability at a global level. The objective of these projects is to inculcate the habit of carrying out sustainability activities in every aspect of work life.

preservationThe projects formulated for this purpose seek to make a positive impact through targeted action to change current practices and habits.

re-use and reduceThe CSR Committee commenced a project to re-use envelopes to inculcate the habit of re-using and reducing consumption within the organisation. Used envelopes are collected in a recycle bin and a special stamp is placed to identify it as a reused envelope. Collected envelopes are used for internal usage for any number of times. As the concept has been successfully integrated in to the work place, the CSR Committee now intends to measure the weightage of paper saved in this manner.

Sustainability in the communityWe believe that we can make a difference in the communities where we have a presence and have formulated an action plan to create awareness of the need to preserve our environment and also to make a positive impact in the preservation of the same.

awarenessSustainability tips on AdvertisementsOur marketing communications reach a wide audience in the country and we believe that responsible messaging can alert at least a fraction of that audience which will assist in changing attitudes which can then inspire positive actions to preserve our environment. As a part of our ongoing commitment to sustainability

practices in every aspect of the business, we focus on responsible marketing. This is implemented through passing the sustainability messages to our stakeholders on our advertisements. These tips cover the triple bottom line approach in which the focus is on the well being of the society, conserving the environment and sustainable economic performance and growth to our stakeholders. The advertisements which are published on news papers, cover pages of magazines and leaflets carry these tips.

Preservation of the EnvironmentA number of community level projects were launched by our enthusiastic staff in the branch network to support preservation of the environment. These included the following projects:

Branch project

Panadura Greening the urban environment with flowering plants in dual carriageways that beautify whilst making the roads safer.

Panadura Tree planting campaigns to purify the air, provide shade and improve soil retention

Polonnaruwa Provided staff at Minneriya National Park with uniforms to enhance their image and facilitate exercising of their authority to preserve a protected environment.

Panadura Donating equipment to maintain green environments within the municipal area facilitating use of play grounds and parks.

awards and accoladesAwarded the certificate of participation for participating at ACCA Sri Lanka Sustainability Reporting Awards 2012 held on 20th February 2013.

Islamic Finance unit “Al Salama” awarded as the “Emerging Islamic Finance Entity of the year” at the Halal world conference held on 17th June 2012.

The Company was awarded the Certificate of Compliance at the Annual Report competition organised by the Chartered Institute of Sri Lanka 2012.

the FutureL B Finance is committed to improving the integration of sustainability strategy in to our business strategy and will focus our attention specifically on including environmental concerns and improvements in the coming year. We will continue to monitor developments in sustainability reporting and integrated reporting to adapt our internal programmes in line with international best practice.

SuStaInaBle FInance






country profileThe Democratic Socialist Republic of Sri Lanka is an island country in the northern Indian Ocean off the southern coast of the Indian subcontinent in South Asia. Sri Lanka has more than 2,500 years of continuous written proud history with amazing surroundings. The total land area is 65,610 sq km and is surprisingly diverged. A length of 433 km and breadth of 226 km includes beautiful tropical beaches, fertile vegetation, ancient monuments and a thousand delights to gratify all tastes.

The population of Sri Lanka is 20.32 million, with 2.31 million people living in the capital city of Colombo. Major districts include Gampaha (2.30 million people), Kurunegala (1.61 million people) and Kandy (1.37 million people). Sri Lanka’s official languages are Sinhala and Tamil, although English is commonly used in government and is spoken competently by majority of the Sri Lankan population. The major ethnic groups are the Sinhalese and Tamils. The major religions in Sri Lanka are Buddhism, Hinduism, Christianity and Islam.

Capital Sri Jayawardhanapura Kotte

Commercial Capital Colombo

Government Democratic Socialist Republic

Currency Sri Lankan Rupees ( LKR)

Time Zone GMT+5:30

Number of Provinces 9

Number of Districts 25

Number of International Airports 2 ( Bandaranaike International Airport and Mattala Rajapaksha International Airport)

Number of Ports 5 (Port of Colombo, Port of Hambantota, Trincomalee Harbour, Port of Point Pedro, Kankesanthurai Harbour)

Sri lanka Key Social Indicators 2012

Unemployment Rate 4%

Labour Force 8.465 million

Literacy Rate 92.2%

Human Development Index 0.715 (Rank 92 among 186 countries)

Life Expectation 75.1 Years

Sri lanka Key economic Indicators 2012

GDP Rs. 7,582 billion

GDP Growth 6.4%

Inflation 7.6% (annual average)

GDP Per Capita Income Rs. 373,001 / USD 2,923

Exchange Rates - year end Rs./USD 127.16Rs./GBP 205.47Rs./Euro 168.13Rs./JPY 1.48


SuStaInaBle FInance

WeStern proVInce

BranchGLC

The Western Province comprises the highest population density in Sri Lanka and consists of three districts, Colombo, Gampaha and Kalutara. Colombo is the host to the nation’s commercial hub and Sri Jayawardenapura Kotte is the legislative capital of the country.

Bandaranaike International Airport and the Colombo Harbour which is the shipping hub of South East Asia are some of the significant places located in this province.

This is considered as one of the culturally diversified provinces in Sri Lanka and popular for commercial activities.

Key SocIo economIc IndIcatorS* our contrIButIon

Population Mn. 5.83

Population Density 1,624

Population by Gender (2009/10)

Male % 47.2

Female % 52.8

Area Sq.km. 3,593

Labour Force Mn. (2011) 2.42

Unemployment % (2011) 3.5

GDP Contribution - Rs.Bn. (2011) 2,905

Provincial Contribution to the GDP % 44.4

Monthly Mean Income per Person Rs. (2009/10)

11,561

No. of Branches of Non-Bank Financial Institutions

316

No. of Distribution Channels 68

No. of Employees 1,189

Male 696

Female 493

No. of Employees per Distribution Channel

17

No. of Customers

Gold Loans 77,278

Lending 36,945

Deposits 27,924

Business Portfolio

Gold Loans Rs. Mn. 6,302

Lending Rs. Mn. 17,626

Deposits Rs. Mn. 31,389

Non-Performing Loans (NPL) % 2.8







central proVInce

Branch

The Central Province is positioned in the mountain ranges of Sri Lanka and consists of the three districts namely, Kandy, Matale and Nuwara Eliya. Kandy is the capital of the Central Province and is the home of the Temple of the Tooth Relic (Sri Dalada Maligawa) which is a distinctive place for the Buddhist community in Sri Lanka and it was declared in 1988, a world heritage site by UNESCO.

This province has a lower temperature than any other province, recorded in the tea cultivating hills of Nuwara Eliya. This province produces much of the famous Ceylon tea to the world.

Population Mn. 2.56

Population Density 461


Male % 46.3

Female % 53.7

Area Sq.km. 5,575



GDP Contribution - Rs. Bn. (2011) 644



8,040


107


No. of Employees 165

Male 104

Female 61


15

No. of Customers

Gold Loans 12,736

Lending 8,425

Deposits 5,991

Business Portfolio

Gold Loans Rs. Mn. 969





SuStaInaBle FInance

Southern proVInce

Branch

The Southern Province coastline is reputed for its extraordinary beaches and therefore considered as a famous tourist attraction area. The Province consists of Galle, Matara and Hambantota districts. The main source of income for the majority of the population in this province is fishing and farming.

Over the last couple of years the Southern Province has undergone several major developments, Hambantota Port being the prominent economic development. Enclosed by the sea and a white stretch of perfect beaches this province is a great example of the exquisitely varying beauty and heritage of the island. The Dutch Fort and the fishing harbour reflect the beauty of a port town.

Population Mn. 2.47



Male % 47.3

Female % 52.7

Area Sq.km. 5,383






8,035


112



Male 88

Female 57


16

No. of Customers

Gold Loans 7,649

Lending 7,884

Deposits 4,827

Business Portfolio











northern proVInce

Branch

The Northern Province tends to be hot and dry and the climate is naturally tropical. Jaffna the main district of Northern Province is connected to the rest of the island by “Elephant pass” a narrow cause way and Sangupiddy Bridge. Elegant Palmyrah trees,shallow lagoons and islands make the province attractive to the tourists. The deeply rooted unique, colorful traditions render Jaffna a delightful place.

Nagadeepaya temple, Nallur Kandaswami Kovil and Madhu Church are the most treasured places in this province.

Population Mn. 1.06



Male % 47.3

Female % 52.7

Area Sq.km. 8,290

Labour Force Mn.(2011) 0.31

Unemployment % (2011) 5




5,515


63



Male 83

Female 46


18

No. of Customers

Gold Loans 6,413

Lending 2,341

Deposits 4,690

Business Portfolio


Lending Rs. Mn. 955

Deposits Rs. Mn. 369




SuStaInaBle FInance

eaStern proVInce

Branch

The province’s coast is dominated by lagoons with a wealth of pristine wide open beaches. This consists of Trincomalee, Batticloa and Ampara districts. the capital of Eastern Province is Trincomalee and lies on east coast of the Island. The Bay of Trincomalee harbor is renowned for its size and security. Beautiful Nilaveli beach, Pasikuda beach and pigeon island are the main tourists’ destinations in this province. This is the most diverse province in Sri Lanka both religiously and ethnically.

Population Mn. 1.55



Male % 48.6

Female % 51.4

Area Sq.km. 9,361






5,663


78


No. of Employees 95

Male 56

Female 39


10

No. of Customers

Gold Loans 6,350

Lending 4,040

Deposits 3,434

Business Portfolio











north WeStern proVInce

Branch

North Western Province is situated along the stretch of Sri Lanka’s coastal belt, creating the province rich in many tourist attraction places. This piece of land contains beautiful sandy beaches and placid lagoons giving the impression of an ideal place for relax. It also consists of exotic wildlife and bird sanctuaries. This province comprises two districts namely Puttlam and Kurunegala and it is famous for the coconut triangle. Tourism, dairy industry, fruit and vegetable exports and coconut cultivation are the main industries seen in this province.

It is considered as treasure house of archaeology having been seat of four medieval kingdoms of Sri Lanka.

Population Mn. 2.37



Male % 48

Female % 52

Area Sq.km. 7,506




Provincial Contribution to the GDP % 10


9,352


99



Male 68

Female 43


19

No. of Customers

Gold Loans 8,984

Lending 6,988

Deposits 2,727

Business Portfolio







SuStaInaBle FInance

north central proVInce

Branch

The biggest Province in Sri Lanka “North Central Province” tells the story of a proud past of a hydraulic civilization. The province consists of two major ancient cities Anuradhapura and Pollonnaruwa. Anuradhapura is one of the ancient capitals of Sri Lanka, famous for its well-preserved ruins of ancient Sri Lankan civilization, enormous man made reservoirs, and advanced architectural designs. It is considered sacred to the Buddhist world and is frequented by religious tourists who visit many ancient Buddhist monuments.

The tremendous Ruwanwali Saya, and the sacred Bodhi Tree “Jaya Sri Maha Bodhiya” are some of the attracted and most visited places in Anuradhapura. The largest man-made reservoir,” Parakrama Samudraya” is too located in this province and it reflects the greatness of our ancient kings.

Population Mn. 1.26



Male % 48

Female % 52

Area Sq.km. 9,741






9,280


69


No. of Employees 47

Male 34

Female 13


12

No. of Customers

Gold Loans 3,992

Lending 4,740

Deposits 1,300

Business Portfolio











uVa proVInce

Branch

Uva Province is famed as another top rated destination for vacationing in the country. It is decorated with historic places, attractive waterfalls, wildlife reserves and pilgrimage sites.

The province consist of two districts namely Badulla and Moneragala. Both these districts conceit on some of the famous tourism spots of the country such as Dunhinda Falls, Rawana Falls, Diyaluma Falls, and national parks. This province is sheltered by the Namunukula Mountain range and surrounded by tea estates, considered a paradise for those who love “green”.

Population Mn. 1.26



Male % 47.4

Female % 52.6

Area Sq.km. 8,335






7,343


52


No. of Employees 97

Male 62

Female 35


16

No. of Customers

Gold Loans 7,730

Lending 4,390

Deposits 1,189

Business Portfolio


Lending Rs. Mn. 986





SuStaInaBle FInance

SaBaragamuWa proVInce

Branch

Sabaragamuwa Province is one of the unique and diversified provinces in Sri Lanka, located in the South West of the Island. It includes multifaceted mountain chains, landscapes, massifs, parallel valleys, waterfalls and natural habitat of both flora and fauna adding to the natural beauty of the province. The province comprises two administrative districts namely, Ratnapura and Kegalle. Ratnapura is known as “the city of gems” and provides the gateway to the famous bio diversified forest “Sinharaja”, Udawalawa tourism zone, and unique diversified Samanala tourism region.

Population Mn. 1.92



Male % 48.1

Female % 51.9

Area Sq.km. 4,921

Labour Force Mn (2011) 0.90





9,132


76


No. of Employees 77

Male 53

Female 24


15

No of Customers

Gold Loans 5,497

Lending 8,909

Deposits 1,766

Business Portfolio





* Sources:Economic and Social Statistics of Sri Lanka 2013.Central Bank Annual Report of Sri Lanka 2012.Sri Lanka Labour Force Survey Annual Report - 2011.







cSr photo gallery

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1. Tree planting project organised by Panadura branch in order to celebrate their 7th anniversary2. Conducted E-waste management campaign at Corporate Office premises3. Signed the MOU with ThinkGreen4. Greening the urban environment by placing flower pots on the center pavement of Panadura town5. CSR notice board placed at the Corporate Office premises in order to update the employees on new CSR initiatives6. Kegalle and Trincomalee branches colour washed the ancient clock towers for the third consecutive year7. Conducted an awareness programme on energy saving measures8. Collecting used envelopes, to be reused internally9. Stationary items were tagged with slogans to make the employees aware of sustainability in the work place10. Paper recycling project11. Sponsored the uniforms of wild life staff in Minneriya National Park


cSr photo gallery

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1. Donated sports equipment to school children in Tangalle2. Refurbished the buildings of Gawarawela Vidyalaya, Demodara3. Sponsored 49th Colombo Camporee, held at “Viharamaha Devi Park”4. Donated a police post to the Kalutara North police station, located at Nagashandiya5. Employees were invited to take the stairs instead of lifts so as to encourage their healthy habits6. Donated a Dialysis machine to Padawiya base hospital, in order to improve the quality of health care in the society7. The staff of Kaduwela branch sponsored the annual musical eve of “Little Bees” preschool8. Poson Dansala in Kurunegala9. Donated a computer lab to Noguchi children’s home, in order to enhance their knowledge in IT10. An awareness program was organised to educate the taxi drivers on road discipline11. Donated cataract lenses for needy patients12. Donated stationary items for the flood victims in Pollonnaruwa13. Sponsorship for Commando basket ball team to boost the morale of our soldiers14. Sponsored office equipment to the criminal division in Cinnamon Gardens police station15. Sponsored hospital equipment to the incentive care unit in Chilaw general hospital

With Respect

The respect that we show our stakeholders is what we have received in return, propelling us to be a business with a positive reputation

With RespectREGULATORY REPORTING099 Corporate Governance140 Annual Report of the Board of Directors on the Affairs of the Company145 Directors Statement on Internal Control over Financial Reporting146 Remuneration Committee Report147 Nomination Committee Report148 Audit Committee Report150 Statement of Directors Responsibilities






chairman's StatementIt is my pleasure to present the corporate governance report of L B Finance PLC. We continually strive to satisfy the legitimate claim of all stakeholders and to fulfill the Company’s economic, environmental and social responsibilities in an accountable and transparent manner. The report confirms the Company’s commitment for compliance and reflects the extent to which it has complied to date with the regulations, rules, guidelines and principles as required under the Finance Companies (Corporate Governance) Direction No 3 of 2008, Listing Rules of the CSE and Code of Best Practice on Corporate Governance jointly issued by SEC and ICASL.

We take every effort to improve our corporate governance philosophy and we strive for honesty, transparency, stability and accountability through policies and practices at every level. We expect all employees of L B Finance to be committed towards this end, we also expect the external stakeholders to act with fairness to ensure a high element of ethical business conduct which will not only enhance business prosperity but will also retain and safeguard the interests of all its stakeholders.

When I was appointed as the Chairman on 23rd April 2013, I was conscious of the fact that these corporate governance measures have to be sustained, improved and the Board should monitor and take responsibilities to comply with the regulations, rules and principles on corporate governance. During the year under review an Independent Non-Executive Director was invited to join the Board in order to sustain the balance and composition of the Board and the Sub Committees. Changes were made in our governance and risk structure in the year under review, in a bid to enhance our perspective of risk, regulation and compliance.

The Board welcomes the engagement with stakeholders to identify areas where we can enhance governance, policies and sound business practices. We actively engage with investors, customers, regulators, suppliers and communities to obtain their feedback in a number of ways. We encourage our stakeholders to participate in shaping the future of the Company in setting new milestones where we all can be proud of.

Thosapala HewageChairman

31st May 2013

corporate goVernance

WE TAKE EVERY EFFORT TO IMPROVE OUR CORPORATE GOVERNANCE PHILOSOPHY AND WE STRIVE FOR HONESTY, TRANSPARENCY, STABILITY AND ACCOUNTABILITY THROUGH POLICIES AND PRACTICES AT EVERY LEVEL



corporate governance overviewCorporate governance is popularly understood as the system by which companies are directed and controlled. The Board of Directors is responsible for the governance of the Company. Your Board has placed considerable emphasis on developing rules, structures and processes to ensure integrity and transparency in all of Company’s dealings and on making the best effort in achieving performance and quality profits. Structure and systems were refined to ensure governance on the lines as defined, aware all the time that we are accountable to the stakeholders and the general public.

This statement describes the application of the corporate governance practices within the Company during the year under review.

As depicted below the linkage mechanism ensures the alignment of the Company’s business strategy and direction through effective engagement and communication with its stakeholders, Board of Directors, Board sub committees and management. This mechanism assures that the Company sustains its potential to deliver its value to the stakeholders. Internally we have the Board of Directors, Board committees, management committees and senior management complimented by internal governance systems and procedures

stakeholder management and decision making process.

The components of the governance structure are designed in a such way that the executive authority is well transferred and delegated through a structure ensuring that the Chairman, Managing Director, Executive Directors , senior management and functional managers are accountable for the Company’s functions. Clear definition of authority limits, responsibilities and accountability are set and agreed upon in advance to achieve greater operating efficiencies, expediency, healthy debate and freedom of decision making.

corporate governance Structure

Code of best practice of corporate governance issued by

ICASL & SEC

Finance Companies Direction, No. 3 of

2008

Companies Act, No.07 of 2007

Listing Rules of Colombo Stock

Exchange

Shareholders

External Auditors

Regulatory Framework

Management Committees

ALCO

CSR

Credit

IT Steering

BOD

MD/EDs’

Corporate Management

Credit

Board Sub-Committees

Internal Audit

Chief Risk Officer

Company Secretary

Remuneration Committee

Audit Committee

Integrated Risk Management Committee

Nomination Committee

Finance Treasury & Planning Marketing IRMU Deposits

HR IT Administration Recoveries Legal

EmployeesResponsibilityAppointment






Board of directorsThe Board is the highest body of L B Finance PLC that carries the responsibilities of directing the Company and of supervision. The responsibilities of the Board includes making an accurate assessment of the Company’s position, making strategic decisions, attending Board meetings and Board sub committees, ensuring good governance and overseeing the risk management of the Company.

compositionThe Board consisted of ten Directors up to 5th January 2013 which reduced to eight as at 5th January 2013 due to the retirement of the Chairman, Mr. A M Weerasinghe and Director - Mr. K D A Perera, in terms of Finance Companies (Corporate Governance) Direction No, 3 of 2008, having completed nine years since their appointment. The Board’s composition increased to nine members on 1st March 2013 and ten members on 23rd April 2013, upon the appointment of Mrs. Anandhiy K Gunawardhana and Mr. Thosapala Hewage, two Independent Non-Executive Directors of whom the latter was appointed the Chairman of the Board on 23rd April 2013. Both these appointments received the prior approval of the Director, Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka in terms of Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No.3 of 2011.

During the year the balance between Non-Executive and Executive Directors varied from 6 : 4, 5 : 5, 3 : 5 and 4 : 5, which became 5 : 5 as at 23rd April 2013, in conformity with the relevant Direction.

The Board consists of Directors with a balance of skills and experience which is appropriate for the business carried out by the Company.

The Board has determined that the five Non-Executive Directors are ‘independent’ as per the criteria set out in the Listing Rules of the Colombo Stock Exchange.The Board has further determined that three of those Directors also qualify as “independent” in terms of the Finance Companies (Corporate Governance) Direction No.3 of 2008, whereas the remaining two Directors, though not qualifying under one of the criteria laid down by the said Direction in paragraph 4(f)(ii), the Board, upon consideration of all the attendant circumstances, has determined that those two Directors too discharge their responsibilities as Independent Directors and in the Board’s opinion the directorships held by those Directors in few other Boards with certain other Directors of the Company do not compromise their independence and objectivity in discharging functions as Independent Directors.

The names of the Directors who served during the year under review are disclosed in the Annual Report of the Board of Directors on the Affairs of the Company on pages 140 and 144.

tenure, retirement and re-election of directorsAt each Annual General Meeting one-third of the Directors for the time being who are subject to retirement, or, if their number is not a multiple of three, the number nearest to (but not greater than) one-third, retire and seek re-election by the shareholders.

The provisions of the Company’s Articles of Association also require Directors appointed by the Board to hold office until the next Annual General Meeting and seek appointment by the shareholders at that meeting.

appointments to the BoardThe Nomination Committee recommends the appointments to the Board as per the Articles of Association of the Company.



Board meetingsThe results of the Company are regularly considered and monitored against the budgets at Board meetings at which a standard agenda is discussed, together with any other matters that require the attention of the Board. The Board meets once a month and whenever necessary special meetings of the Board are held.

During the year ended 31st March 2013, twelve (12) meetings of the Board were held. The attendance at the meetings was as follows.

name of director executive/non-executive/ Independent non-executive

attendance

Mr. Dhammika Perera Executive Deputy Chairman 09/12

Mr. L N de S Wijeyeratne Independent Non-Executive* 09/12

Mr. J A S S Adhihetty Executive 11/12

Mr. Nimal Perera Executive 09/12

Mr. Niroshan Udage Executive 11/12

Mr. B D A Perera Executive 11/12

Mrs. Kirmali Fernando Independent Non-Executive* 11/12

Mrs. ShiraniJ ayasekara Independent Non-Executive* 09/12

Mrs. Anandhiy K Gunawardhana(appointed on 1st March 2013)

Independent Non Executive* 01/01

Mr. A M Weerasinghe(ceased to be a Director on 5th January 2013)

Non-Executive 08/09

Mr. K D A Perera(ceased to be a Director on 5th January 2013)

Non-Executive 08/09

* As per the Listing Rules of the Colombo Stock Exchange

Following the best practices of good corporate governance, the two positions of the Chairman and the Managing Director are held by separate persons which enable balance of power, better accountability and enhance the independence of the Board.

the chairmanMr. L N D de S Wijeyeratne an Independent Non-Executive Director served as the Acting Chairman of the Board of Directors until 21st August 2012. Mr. A M Weerasinghe was appointed Chairman on 21st August 2012 which office he held until his retirement on 5th January 2013 with Mr. Wijeyeratne functioning as the Senior Director. Thereafter, Mr. Wijeyeratne was elected Chairman Pro-tem for the Board meetings held during the period 6th January to 23rd April 2013 until Mr. Thosapala Hewage was appointed the Chairman of the Board of Directors.

the managing directorMr. J A S S Adhihetty has been the Managing Director of the Company since January 2004.

The Managing Director is responsible for the effective running of the Company and the implementation of the policies approved by the Board.

Board Sub-committeesAn Audit Committee, a Remuneration Committee, an Integrated Risk Management Committee and a Nomination Committee function as sub-committees of the Board. The above committees consist of a majority of Independent Non-Executive Directors and their names are given on pages 143, 146 to 149.

To ensure compliance with the regulatory and statutory requirements and the laws and regulations governing finance companies, public listed companies and, generally, any business activities undertaken by the Company, the Chief Financial Officer functioned as the Compliance Officer upto 22nd April 2013, which role was assigned to the Senior Manager – Legal of the Company effective from 23rd April 2013.

The reports of the Remuneration Committee, Audit Committee and Nomination Committee are given on pages 146 to 149.

management committeesThese committees operate under the guidance of the Managing Director and Executive Directors and are dedicated and focused towards designing, implanting and monitoring the best practices in their respective functions. The main objective of forming these committees is






to encourage the respective functions to take responsibility and accountability to the lowest possible level and to ensure that decision making is on a participatory basis.

Management committees include Asset and Liability Management Committee, Credit, CSR and IT Steering Committee and their functions are described on page 45.

the managementThe day-to-day operations of the Company are entrusted to the corporate and senior management under the guidance of the Managing Director. They ensure that risks and opportunities are identified and steps are taken to achieve targets within defined time frames and budgets.

Financial disclosures and transparencyFinancial statements are prepared in accordance with the applicable Accounting Standards comprising of Sri Lanka Financial Reporting Standards and Lanka Accounting Standards, the Companies Act, the Finance Business Act and the Directions and Rules issued thereunder. The Interim Financial Statements are released to the CSE in compliance with the Listing Rules of the Colombo Stock Exchange.

Messrs Ernst & Young act as independent auditors of the Company. The auditors are allowed to act independently and without intervention from the management or the Board of the Company to express an opinion on the financial statements of the Company. All the required information is provided for examination to the auditors.

ethical StandardsThe Company requires that all its employees maintain the highest standards of integrity in the performance of their duties and dealings on behalf of the Company.

The Company focuses on the training and career development of employees for the creation of an empowered and committed group of employees, who will drive the Company to high levels of achievement in keeping with its mission, vision, goals and values

Statutory paymentsAll statutory payments due to the Government, which have fallen due, have been made or where relevant provided for, except for certain assessments against which appeals have been lodged. Retirement gratuities have been provided for in accordance with LKAS 19, Employee Benefits.

compliance with central Bank regulationsAs a registered finance Company and a registered finance leasing establishment, the Company is governed by the Non-Bank Financial Institutions Directions and Rules issued by the Monetary Board of the Central Bank of Sri Lanka.

Accordingly, the Company has to carry out and maintain business activities in compliance with the Directions, Rules, Determinations, Notices and Guidelines issued by the Central Bank of Sri Lanka from time to time.

accountability and disclosureIn the year ended 31st March 2013, the members of the Board of Directors have reviewed in detail the Interim Financial Statements and Annual Financial

Statements in order to satisfy themselves that they present a true and fair view of the Company’s affairs and these practices have been further strengthened as per the Code of Best Practice on Corporate Governance, Listing Rules of the Colombo Stock Exchange and Directions and Rules issued under the Finance Business Act.

A summary of Directors’ responsibilities in respect of financial statements is given on page 150.

Information technology governanceIn the corporate world Information Technology (IT) plays a vital role. Increasing complexities and criticalities in IT decision making demands the Company to adopt an effective IT governance system. IT governance which forms an integral part of the Company’s corporate governance deals primarily with optimising the linkage between strategic direction and information systems management of the Company. IT governance of the Company creates value that fits into the overall corporate governance strategy of the Company, and is not a discipline on its own. IT governance of the Company ensures that the investments in IT generate value, avoids failure and mitigates IT associated risks.

The Company’s IT steering committee is headed by the Executive Director - Asset Management and meets monthly to discuss the following;

• To ensure that IT has sufficient resources to meet Company’s demand

• To asses and report IT related risks and organisational impact

• Provide feedback about compliance of IT carrying out the system reviews according to the CBSL



• Reviews are made to ensure that the objectives are achieved

code of Business conduct and ethicsCode of ethics is needed to make the right ethical decision on a day today basis and at L B Finance it is believed that sustaining an ethical culture in the Company is of critical interest to all the stakeholders.

employee participation in corporate governanceActive participation in corporate governance by employees will help to serve the interest of shareholders through empowering employees to positively contribute towards good corporate governance. The Company recognises that the employees as the biggest asset. To assist and facilitate transparency, it is imperative to institutionalize processes across all functions and hierarchies which are accessible to all.

Moreover the Company provides a safe, secure and conducive environment for employees. It is always ensured that all relevant human resource standards and regulations are followed very stringently. The Company does not condone child or under age labour nor have any bias within the Company. Non-discrimination is vital to the Company’s vision; wherein gender, race, religion, caste or any other discriminatory criteria such as sexual harassments and compulsory labour are not in the Company’s mandate. All of which complement effective corporate governance.

employee Involvement and empowermentTop management and other senior staff are mandated to involve, as appropriate, all levels of staff in formulating goals, strategies and plans.

Decision making rights are defined for each level in order to in still a sense of ownership, reduce bureaucracy and speed up the decision making process.

A bottom up approach is taken in the preparation of annual and long term plans and the Company also ensures employee involvement and empowerment in the process.

employee communicationThe Company has developed various approaches for innovative and effective ways of communication. The top down and bottom up approaches are extensively used. Having monthly meetings at all levels of staff, open door policy, online forums are the channels of communication.

pay for performancePerformance Indicators and key result areas are cascaded from the Company’s vision and strategies to the level of individual employees and employees’ goal achievement is measured against set targets and the Company rewards outstanding achievements.

Investor rights and relationsThe Company is bound to safeguard the rights of all shareholders and secure equal treatment for all shareholders. The Company provides its annual financial statements within the mandatory period to all shareholders and debenture holders and the Interim Financial Statements are released to the CSE in accordance with the Listing Rules of CSE.

All shares carry equal voting rights and the shareholders are informed of the Annual General Meeting before the mandatory period. The Board, senior management and the auditors attend the Annual General Meeting to answer the questions of shareholders.

outlookCorporate governance plays a vital role in business and future emphasis is to further satisfy the Company’s stakeholders whilst sustaining the growth of the Company. Therefore we believe in the following;

Operating structureInternal controlReview, benchmark, feedbackEffective and transparent communication

By Order of the BoardL B Finance PLC

P W Corporate Secretarial (Pvt) LtdSecretaries

31st May 2013






The Direction may be cited as the Finance Companies (Corporate Governance) Direction No. 3 of 2008 and shall apply to every finance Company registered in terms of section 2 of the Finance Business Act No.42 of 2011.

(2) responsibilities of the Board of directors

Section rule Status degree of compliance

2(1) The Board shall strengthen the safety and soundness of the Company by ensuring the implementation of the followings

(a) Approving and overseeing the Company’s objectives and corporate values and ensure that these are communicated throughout the Company.

Complied The Board has approved the strategic objectives and corporate values and the views relating to the above are communicated through monthly Board meetings, Board sub committee meetings and management meetings.

(b) Approving the overall business strategy of the Company, including the overall risk policy and risk management procedures and mechanisms with measurable goals , for at least the next three years.

Complied The strategic plan covering for next 3 years was approved by the Board after discussion with the corporate management.

The Integrated Risk management policy and procedures were introduced to manage all business risks arising from the operations of the Company.

(c) Identify the risk and ensuring implementation of appropriate system to manage the risk prudently

Complied The Board appointed Integrated Risk Management Committee identifies the overall risk of the Company and a review of the risk reporting once in two months and management procedures approved by the Board are in place.

Company has further strengthened the risk management process by formulating a separate unit under the Chief Risk Officer.

(d) Approving a policy of communication with all stake holders, including depositors, creditors, share-holders and borrowers.

Complied The Company has a Board approved communication policy which addresses how they communicate with all stakeholders including depositors, creditors, share-holders and borrowers of the Company

(e) Reviewing the adequacy and the integrity of the finance Company’s internal control system and management information system

Moving towards compliance

The adequacy and the integrity of the Company’s internal control system are reviewed by the Board through Board Audit Committee by way of internal audit reports and system reviews.

A special assignment on assessing the adequacy of integrity in the management information system is in the progress.




(f) Identifying the designating key management personnel, who are in a position to (i) significantly influence policy (ii) Direct activities and (iii) exercise control over business activities, operations and risk management.

Complied According to the Sri Lanka Accounting Standard (LKAS) 24 “Related Party Disclosures’ key management personal are those having authority and responsibility for planning, directing and controlling the activities of the entity. The Board members consider General Manager, Chief Financial Officer, AGM Treasury as the key management personal in addition to the Board of Directors.

(g) Defining the areas of authority and key responsibilities for the board and the key management personnel.

Complied The Company has a Board approved schedule of matters specifically reserved for board defining the areas of authority and key responsibilities of the Board of Directors and the areas of authority and key responsibilities of the corporate management are stated in their job descriptions.

(h) Ensuring that there is appropriate oversight of affairs of the finance Company by key management personnel , that is consistent with the finance Company’s policy.

Complied Affairs of the finance Company are regularly discussed by key management personnel at the Board meetings and reviewed by the Board.

(i) Periodically assessing the effectiveness of its governance practice including (i) the selection , nomination, and election of directors and appointment of key management personnel (ii)the management of conflicts of interest and (iii) the determination of weaknesses and implementation of changes where necessary.

Complied Board has delegated the functions of selection , nomination , and election of directors to the Board Nomination Committee (BNC).

As per section 96 of the Articles of Association on “Declaration of interest” evidence the procedure to manage the conflicts of interests among the Board members. The Board appraises the performance of the Board through a Board performance evaluation form to be filled by each Director. A summary of this will be submitted to the Board by the Company Secretaries.

(j) Ensuring the finance Company has an appropriate succession plan for key management personal.


A succession plan is in place for the Corporate Management team and Board of Directors who are currently defined as “Key Management Personnel” and this will be presented to the Board for approval

(k) Meeting regularly with the key management personnel to review policies, establish lines of communication and monitor progress towards corporate objectives.

Complied The members of the Corporate Management regularly make presentation and take part in discussions on their areas of responsibility at Board Sub Committee and Management Committee meetings.

(l) Understand the regulatory environment. Complied The Board of Directors of the Company monitors the regulatory compliances at the monthly Board meetings.







(m) Exercising due diligence in the hiring and oversight of external auditors

Complied The Audit Committee is responsible for the functions of hiring and oversight of the external auditors. External auditors attend Audit Committee meetings by invitation and there is a continuous dialogue with the external auditors.

2(2) The Board shall appoint the Chairman and the Chief Executive Officer and define and approve the functions and responsibilities of the Chairman and the Chief Executive Officer

Complied The Chairman and the Managing Director of the Company have been appointed by the Board and the functions and responsibilities of the Chairman and the Managing Director are properly defined and approved. The Chairman is responsible for leading the Board and Managing Director is in charge of the overall management of the Company.

2(3) There shall be a procedure determined by the Board to enable directors, upon reasonable request to seek independent professional advice in appropriate circumstances at the finance Company’s expense.

The Board shall resolve to provide separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the finance Company

Complied A Board approved procedure to obtain professional advice is in place and the Board has obtained professional advice in appropriate circumstances.

2(4) Director shall abstain from voting on any Board resolution in relation to which he/she or any of his/her close relatives or a concern in which a Director has substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the Board meeting.

Complied Any interests are disclosed at the Board meetings and the Directors abstained from voting in such a situation and he/she is not counted in the quorum

2(5) The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the Company is firmly under its authority

Complied The Board has a formal schedule of matters specifically reserved for the Board. Pre-set agenda of meeting ensure that the direction and the control of the Company is under Boards control and authority.

2(6) The Board shall, if it considers that the finance Company is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Non-Bank Supervision of Non-Bank Financial Institution of the situation of the Company prior to taking any decision or action

N/A No such situation has arisen during the year.

2(7) The Board shall publish in the Company’s Annual Report, an Annual Corporate Governance Report setting out the compliance with Direction 3 of these Directions

Complied Annual corporate governance report has been published by the Company in its Annual Report 2012/2013 on pages 99 to 139.




2(8) The Board shall adopt a scheme of self-assessment to be undertaken by each Director annually, and maintain records of such assessments.

Complied The Company has adopted a scheme of self assessment to be undertaken by each Director annually and filed with the Company secretary.

3. meetings of the Board


3(1) The Board shall meet regularly and Board meetings shall be held at least twelve times a year at approximately monthly intervals. Obtaining the Board’s consent through the circulation of written or electronic resolutions/papers shall be avoided as far as possible.

Complied The Board meets regularly at monthly intervals and during the year Board held twelve Board meetings.

3(2) The Board shall ensure that arrangements are in place to enable all Directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the finance Company.


All the members were given equal opportunity to include matters and proposals in the agenda.

Company will prepare a procedure to enable all Directors to include matters and proposals in the agenda in a formal manner for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the finance Company.

3(3) The Board procedures shall ensure that notice of at least 7 days is given of a regular Board meeting to provide all Directors an opportunity to attend. For all other Board meetings, reasonable notice shall be given.

Complied Annual calendar of Board meetings were issued at the beginning of the year and the Agenda of the meeting is issued prior to 7 days of the Board meeting .

3(4) A Director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a Director. Participation at the Directors’ meetings through an alternate Director shall, however, be acceptable as attendance.

Complied All Directors have attended at least two third of the meetings held during the year and no director has been absent from three consecutive regular Board meeting during the year 2012/2013.

3(5) Board shall appoint a Company Secretary, whose primary responsibilities shall be to handle the secretariat services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

Complied PW Corporate Secretarial (Pvt) Ltd, a Company registered with the Registrar General of Companies as a qualified secretary under Registration No SEC/(2)2008/216 handles the secretarial services to the Board and shareholders meetings and carryout other functions specified in other laws and regulations.







3(6) If the Chairman has delegated to the Company Secretary the function of preparing the agenda for a Board meeting , the Company Secretary shall be responsible for carrying out such function.

Complied Agenda is prepared by the Company Secretary approved by the Chairman.

3(7) All Directors shall have access to advice and services of the Company Secretary with a view to ensuring that Board procedures and all applicable laws ,directions rules and regulations are followed.

Complied A documented Board approved procedure is in place for all the Directors to access the Company Secretary with a view to ensuring that Board procedures and all applicable laws, directions rules and regulations are followed.

3(8) The Company Secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any Director.

Complied The Company Secretary maintains the minutes and shall be open for inspection at any reasonable time to any Director.

3(9) Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes of a Board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by the Board in its deliberations; (b) the matters considered by the Board; (c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence; (d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations; (e) the Board’s knowledge and understanding of the risks to which the Company is exposed and an overview of the risk management measures adopted; and (f) the decisions and Board resolutions.

Complied The Company Secretary are maintain detailed minutes of Board meetings covering these areas. Minutes are approved by the Chairman and the other members of the Board after making required amendments, if necessary.



4. composition of the Board


4(1) The number of Directors on the Board shall not be less than 5 and not more than 13. A transitional provision will apply if the number of Directors on the Board of the finance Company is either less than 5 or exceed 13 such Companies may continue for a maximum of three years commencing 01.01.2009.

Complied Up to December 2012the Board comprised of 10 directors. During the month of January 2013 it was 8 and from March 2013 the number was increased to 9.

4(2) The total period of service of a Director other than a Director who holds the position of Chief Executive Officer or executive director shall not exceed nine years, and such period in office of a non executive director shall be inclusive of the total period of service served by such Director up to January 1, 2009.

Complied The total period of service of all Non-Executive Directors does not exceed nine years.

4(3) An employee of a finance Company may be appointed, elected or nominated as a Director of the finance Company (hereinafter referred to as an ‘Executive Director’) provided that the number of Executive Directors shall not exceed one-half of the number of Directors of the Board. In such an event, one of the Executive Directors shall be the Chief Executive of the Company.

Moving towards compliance as at 31st March 2013 and subsequently complied on 23rd April 2013

The non compliance occurred from January to March due to the cessation of office of two Directors who reached their maximum period of 9 years’ service. The Company appointed another Independent Non-Executive Independent Director during April 2013 to improve the compliance with this Direction.

4(4) From January 1 ,2012 , the total number of independent non-executive Directors, of the board shall be at least one fourth of the total number of directors.

A Non-Executive Director shall not be considered independent if he/she:

(a) Has shares exceeding 2% of the paid up capital of the finance Company or 10% of the paid up capital of another finance Company.

(b) Currently has or had during the period of two years immediately preceding his/ her appointment as Director, any business transactions with the finance Company as described in Direction hereof, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds of the Finance Company as shown in its last audited balance sheet.

Moving towards compliance as at 31st March 2013 and subsequently complied on 23rd April 2013

The Company appointed another Independent Non-Executive Independent Director during April 2013 to improve the compliance with this Direction.







4(4) Contd.

(c) Has been employed by the Company during the two-year period immediately preceding the appointment as Director;

(d) Has a relative who is a Director or Chief Executive Officer or a member of Key Management Personnel or holds shares exceeding 10% of the paid up capital of the Finance Company or exceeding 12.5% of the paid up capital of another finance Company.

(e) Represents a shareholder , debtor , or such other similar stakeholder of the Finance Company .

(f) Is an employee or a Director or has a share holding of 10% or more of the paid up capital in a Company or business organization.

(i) Which currently has a transaction with the finance Company as defined in Direction 9 , aggregate value outstanding of which at any particular time exceeds 10% of the capital funds as shown in its last audited balance sheet of the finance Company.

(ii) In which any of the other Directors of the finance Company is employed or is a director or holds shares exceeding 10% of the capital funds as shown in its last audited balance sheet of the Finance Company ; or

(iii) In which any of the other Directors of the finance Company has a transaction as defined in Direction 3 (7) of these Directions, exceeding 10% of capital funds as shown in its last audited balance sheet of the Finance Company.

4(5) In the event an alternate Director is appointed to represent an Independent Non – Executive Director, the person so appointed shall also meet the criteria that applies to the Independent Non-Executive Director.

Complied During the financial year 2012/13 no such situation has arisen.




4(6) Non-Executive Directors shall have necessary skills and experience to bring an objective judgment to bear on issues of strategy, performance and resources.

Complied The Directors are eminent persons with knowledge, expertise and experience in different business sectors and their detailed profiles are noted on pages 14 to 17 of the Annual report.

4(7) A meeting of the Board shall not be duly constituted, although the number of Directors required to constitute the quorum at such meeting is present, unless at least one-half of the number of Directors present at such meeting are Non-Executive.

Complied All the Board meetings held during the financial year are duly constituted with more than one half of the number of Non-Executive Directors present at such meeting.

4(8) The Independent Non-Executive Directors shall be expressly identified as such in all corporate communications that disclose the names of Directors of the Finance Company. The Finance Company shall disclose the composition of the Board, by category of Directors, including the names of the Chairman, Executive Directors, Non-Executive Directors and Independent Non- Executive Directors in the Annual Corporate Governance Report.

Complied Profiles of the Board of Directors has disclosed in the Annual Report by including all these details.

4(9) There shall be a formal, considered and transparent procedure for the appointment of new Directors to the Board. There shall also be procedures in place for the orderly succession of appointments to the Board.

Complied The new appointments and re-elections of the Board is based on the recommendations made by the Board Nomination Committee and there is a procedure in place for the succession of appointments to the board.

4(10) All Directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

Complied All Directors appointed to the Board are subject to re- election by the shareholders at the first Annual General Meeting after their appointment.

4(11) If a Director resigns or is removed from office , the board shall announce to the Shareholders and notify the Director of Supervision of Non Bank Financial Institutions of the Central Bank of Sri Lanka ,regarding the Director’s resignation or removal and the reasons for such removal or resignation including but not limited to information relating to the relevant Director’s disagreement with the Company, if any

Complied Cessation office of the Directors have been duly communicated to the Director of Supervision of Non Bank Financial Institutions of the Central Bank of Sri Lanka and other regulatory authorities.






criteria to assess the Fitness and the propriety of directors


5(1) The age of a person who serves as Director shall not exceed 70 years.

Complied All the Directors are bellow the age of 70 years as at 31st March 2013 and the Company Secretary monitor the compliance.

5(2) A person shall not hold office as a Director or any other equivalent position in more than 20 companies/societies/ bodies corporate including Subsidiaries or Associate Companies of the Finance Companies Provided that such 20r companies/entities/ institutions, not more than 10 companies shall be those classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995.


The total number of positions held as a Director or any other position in companies/societies/body corporate including subsidiaries or Associate Companies of the Finance Companies are less than 20 .

One Director holds directorships in more than 10 SBEs and he will comply with the requirement in the future.

the management Functions delegated by the Board


6(1) The Board shall not delegate any matters to a Board Committee, Chief Executive Officer, Executive Directors or Key Management Personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

Complied As per the Articles of Association the Board may delegate any of their powers to the Board appointed committees, ED, key management personal.

All delegations are made in a manner that would not hinder the Board’s ability to discharge it’s functions.

6(2) The Board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the Finance Company.

Complied Delegation arrangements are reviewed based on business requirements.



the chairmen and chief executive officer


7 (1) The roles of Chairman and Chief Executive Officer shall be separate and shall not be performed by the same individual.

Complied There is a clear separation of duties between the roles of the Chairman and the Managing Director.

7(2) The Chairman shall be a Non-Executive Director and preferably an Independent Director as well. In the case where the Chairman is not an Independent Director, the Board shall designate an Independent Non – Executive Director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the Finance Company Annual Report.

Complied During the period 21st August 2012 to 5th January 2013 since the Chairman was not an Independent Director the Board designated an Independent Non-Executive Director as the Senior Director. The Chairman ceased to be a Director on 5th January, 2013 and the Board subsequently appointed an Independent Non-Executive Director as the Pro-tem Chairman of the Board Meetings held up to 23rd April 2013.

7(3) The Board shall disclose in its Corporate Governance Report, which shall be an integral part of its Annual Report, the identity of the Chairman and the Chief Executive Officer and the nature of any relationship [including financial, business family or other material/relevant relationship(s)], if any, between the Chairman and the Chief Executive Officer and the relationships among members of the Board.

Complied The Board is aware that there are no relationships whatsoever, including financial, business, family, any other material relationship between the Chairman and the Managing Director. Similarly, no relationships prevail among the other members of the Board, other than for Directors who are common Directors of certain Companies.

7(4) The Chairman shall: (a) provide leadership to the Board; (b) ensure that the Board works effectively and discharges its responsibilities; and (c) ensure that all key and appropriate issues are discussed by the Board in a timely manner.

Complied Board approved List of Functions and Responsibilities of Chairman include, ‘Providing Leadership to the Board’ as a responsibility of the Chairman.

The Company expanded the format of annual assessment by including an area to measure the effective discharge of Board functions.” All key and appropriate issues are discussed by the Board on a timely basis.

7(5) The Chairman shall be primarily responsible

for drawing up and approving the agenda for each Board meeting, taking into account where appropriate, any matters proposed by the other Directors for inclusion in the agenda. The Chairman may delegate the drawing up of the agenda to the Company Secretary.

Complied The Company Secretary circulates formal agenda prior to the Board Meeting. This agenda is approved by the Chairman of the Board.

7(6) The Chairman shall ensure that all Directors are properly briefed on issues arising at Board meetings and also ensure that Directors receive adequate information in a timely manner.

Complied The Chairman ensures that all the Directors are properly briefed on issues arising at Board Meeting by submission of the agenda and board papers with sufficient time prior to the meeting.







7(7) The Chairman shall encourage all Directors to make a full and active contribution to the Board’s affairs and take the lead to ensure that the Board acts in the best interests of the Finance Company.

Complied All Directors are actively participate in the Board affairs.

7(8) The Chairman shall facilitate the effective contribution of Non-Executive Directors in particular and ensure constructive relations between executive and Non-Executive Directors.

Complied Executive and Non-Executive Directors work together in the best interest of the Company.

7(9) Subject to the transitional provisions contained herein, the Chairman, shall not engage in activities involving direct supervision of Key Management Personnel or any other executive duties whatsoever.

Complied The Chairman is a Non-Executive Director and the Chairman does not directly get involved in the supervision of key management personnel or any other executive duties.

7(10) The Chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board.

Complied The AGM of the Company is the main forum where the Board maintains effective communication with shareholders and that the views of shareholders are communicated to the Board.

7(11) The Chief Executive Officer shall function as the apex executive-in-charge of the day-to-day-management of the Finance Company’s operations and business.

Complied The Managing Director is responsible for the day-to-day operations and business of the Company.

Board appointed committees


8(1) Every Finance Company shall have at least the two Board committees set out in paragraphs 8(2) and 8(3) hereof. Each committee shall report directly to the board. Each committee shall appoint a secretary to arrange its meetings, maintain minutes, records and carry out such other secretarial functions under the supervision of the chairman of the committee. The board shall present a report on the performance, duties and functions of each committee, at a annual general meeting of the Company.

Complied The following Board sub committees have been appointed by the Board and requires each such committee to report to the Board:1. Remuneration Committee

2. Board Integrated Risk Management Committee

3. Board Nomination Committee

4. Board Audit Committee

The Company has presented a report on the performance, duties and functions of each committee in the Annual Report.




Audit Committeethe following rules shall apply in relation to the audit committee

(a) The Chairman of the Committee shall be an Independent Non-Executive Director who possesses qualifications and experience in accountancy) and/or audit.

Complied The Chairman of the Audit Committee is an,Independent Non-Executive Director who is a fellow member of the Institute of Chartered Accountants of Sri Lanka. Qualifications and experience are disclosed in on pages 15 to 17 of the Annual Report.

(b) All members of the Committee shall be Non-Executive Directors

Complied All the members of the audit committee are Independent Non-Executive Directors.

(c) The Committee shall make recommendations on matters in connection with:

(i) The appointment of the External Auditor for audit services to be provided in compliance with the relevant statutes;

(ii) The implementation of the Central Bank guidelines issued to Auditors from time to time;

(iii) The application of the relevant accounting standards; and

(iv) The service period, audit fee and any resignation or dismissal of the Auditor; provided that the engagement of the Audit Partner shall not exceed five years, and that the particular Audit Partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

Complied

Appointment of External Auditors for audit services is made at the AGM and the Board ensures compliance with applicable legal and statutory requirements.

The evaluation is carried out by the Board Audit Committee in consultation with the CFO on matters related to implementation of the Central Bank guidelines.

Committee has discussed and sets out the new accounting standards such as SLFRS 1, LKAS 12,16,18,23 and 32.

The Committee ensures that the requirement of rotation of External Audit Engagement Partner, once in every 5 years, is met. The Audit Committee has the primary responsibility for making recommendations on the appointment, re-appointment or removal of the External Auditor in-line with professional standards and regulatory requirements.

(d) The Committee shall review and monitor the External Auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

Complied The External Auditor, has provided an independence confirmation in compliance with the guidelines for appointment of Auditors of Listed Companies. In order to safeguard the objectivity and independence of the External Auditor, the Audit Committee reviewed the nature and scope taking account of the regulations & guidelines.







(e) The Committee shall develop and implement a policy on the engagement of an External Auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the Committee shall ensure that the provision by an External Auditor of non-audit services does not impair the External Auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non- audit services, the Committee shall consider:

(i) Whether the skills and experience of the audit firm make it a suitable provider of the non-audit services

(ii) Whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the External Auditor; and

(iii) Whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the audit firm, pose any threat to the objectivity and/or independence of the External Auditor


The Company has developed a policy on the engagement of External Auditors for non-audit service and this will be approved by the Board.

Accordingly, following action is taken prior to the assignment of non-audit services to External Auditors by the Company:

(a) If the Management is of the view that the independence is likely to be impaired with the assignment of any non-audit services to External Auditors, no assignment will be made to obtain such services.

(b) Assigning such non-audit services to External Auditors is discussed at Audit Committee Meeting and required approval is obtained to that effect.



(f) The Committee shall, before the audit commences, discuss and finalise with the External Auditors the nature and scope of the audit, including:

(i) An assessment of the Finance Company’s compliance with the relevant Directions in relation to corporate governance and the management’s internal controls over financial reporting;

(ii) The preparation of financial statements for external purposes in accordance with relevant accounting principles and reporting obligations; and

(iii) The co-ordination between firms where more than one audit firm is involved.

Complied The Auditors make a presentation at the Board Audit Committee Meeting with details of the proposed Audit Plan and the Scope. Members of the Board Audit Committee obtain clarifications in respect of the contents of the presentation, if deemed necessary.

(g) The Committee shall review the financial information of the Finance Company, in order to Complied with monitor the integrity of the financial statements of the Finance Company, its Annual Report, accounts and quarterly reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the Finance Company’s Annual Report and accounts and quarterly reports before submission to the Board, the Committee shall focus particularly on: (i) Major judgemental areas; (ii) Any changes in accounting policies and

practices; (iii) Significant adjustments arising from the audit; (iv) The going concern assumption; and (v) The compliance with relevant accounting

standards and other legal requirements.

Complied Quarterly Financial Statements as well as year end Financial Statements are circulated to all members of the Audit Committee. A detailed discussion takes place covering these areas at the Audit Committee meetings regarding such Financial Statements. Once the members of the Audit Committee have obtained required clarifications in respect of all aspects included in the Financial Statements. Such Financial Statements are recommended for approval by the Board of Directors.

(h) The Committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the Auditor may wish to discuss including those matters that may need to be discussed in the absence of Key Management Personnel, if necessary.

Complied The Committee met the External Auditors without the presence of the Executive Management








(i) The Committee shall review the External Auditor’s management letter and the management’s response thereto.

Complied Upon receipt of the year end Management Letter, Auditors are invited to make a presentation at a Audit Committee meeting to discuss significant findings which have arisen during the audit. Thereafter, the Audit Committee decides on remedial action to be taken in respect of such findings and relevant Heads of Department are instructed to take such action.

(j) Committee shall take the following steps with regard to the internal audit function of the Finance Company

i. Review the adequacy of the scope, functions and resources of the Internal Audit Department, and satisfy itself that the department has the necessary authority to carry out its work.

ii. Review the internal audit program and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the Internal Audit Department.

iii. Review any appraisal or assessment of the performance of the head and senior staff members of the Internal Audit Department;

iv. Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function

v. Ensure that the Committee is appraised of resignations of senior staff members of the Internal Audit Department including the Chief Internal Auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;

vi. Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care;


The Audit Committee reviewed the Engagement Letters of Internal Auditors which covers the scope, functions and resources to carry out their works.

In addition to reviewing the audit programme for the relevant areas the Audit Committee requested to present full set of internal audit programme to the Audit Committee from next year onwards.

The Company’s internal audit functions were outsourced and carried out by two independent professional audit firms and the audit reports were discussed at the Audit Committee Meetings and the relevant recommendations /actions were taken.

To strengthen the internal audit function of the Company recently formed an Internal Audit Department.

Internal Auditors (outsourced) and the Head of Internal Audit Department report directly to the Audit Committee. Hence, it is independent and the audits are performed with due care.




(k) The Committee shall consider the major findings of internal investigations and management’s responses thereto;

Complied Whenever a need arises, the Audit Committee assigns special internal investigations on certain matters and obtains responses from the management.

(l) The Chief Finance Officer, the Chief Internal Auditor and a representative of the External Auditors may normally attend meetings. Other Board Members and the Chief Executive Officer may also attend meetings upon the invitation of the Committee. However, at once in six months, the Committee shall meet with the External Auditors without the Executive Directors being present.

Complied The Committee met once with the External Auditors on the Board Audit Committee without the Executive Directors.

The Managing Director, Chief Financial Officer and the Internal Auditors normally attend all the meetings. Where it is deemed necessary, other corporate heads are called for the meeting.

(m) The Committee shall have: (i) explicit authority to investigate into any matter Complied with within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary.

Complied The Audit Committee is guided by a Board approved terms of reference which sets out authority and responsibility of the said Committee.

The Audit Committee is authorized to obtain external professional advice and to invite outsiders with relevant experience to attend if necessary. The Committee also has full access to information in order to investigate into matters relating to any matter within its terms of reference.

(n) The Committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.

Complied The Committee meets regularly and the audit reports were issued to its members in advance.The Committee has met 15 times during the year, 2012/2013 and the attendance at those meetings is set out on page 148.

(o) The Board shall, in the Annual Report, disclose in an informative way(1) Details of the activities of the audit committee,(2)The number of audit committee meetings held in the year and(3)details of attendance of each individual member at such meeting.

Complied Is set out in the Audit Committee Report on page 148.

(p) The Secretary of the Committee (who may be the Company Secretary or the head of the internal audit function) shall record and keep detailed

minutes of the committee meetings.

Complied The Company Secretary acts as the secretary of the Audit Committee and records and maintains all minutes of the meetings.







(q) The Committee shall review arrangements by which employees of the Finance Company may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the Committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the Companies relations with the External Auditor.


The Company has introduced a “Whistle Blower Policy” which will be further developed during year 2013/14 with the approval of the Board.

Integrated risk management committee

(3)(a) The Committee shall consist of at least three Non-Executive Directors, Chief Executive Officer and Key Management Personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The Committee shall work with Key Management Personnel very closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the Committee.

Complied Composition of the IRMC are two Independent Non-executive Directors. Three executive Directors including Managing Director, Directors – Asset Finance and Asset Management, Chief Financial Officer and Head of Treasury from 1st April 2013, CRO was included as a member of IRMC.

(3)(b) The Committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the Finance Company on a monthly basis through appropriate risk indicators and management information. In the case of Subsidiary Companies and Associate Companies, risk management shall be done, both on the finance Company basis and group basis.


The Company has developed a “Monthly Risk Reporting and Managing Procedure” to assess the risks on a monthly basis. With effect from 1st March 2013 Company setup a separate unit to provide an independent risk oversight function headed by the Company's CRO.

The Company does not have any subsidiary or associate companies.

This process will be strengthen to cover all other products of the Company.

(3)(c) The Committee shall review the adequacy and effectiveness of all management level Committees such as the Credit Committee and the Asset-Liability Committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the Committee.


The committee reviews the adequacy and effectiveness of the Asset and Liability Committee and credit committee.The set quantitative and qualitative risk limits have to be established to strengthen this area.




(3)(d) The Committee shall take prompt corrective action to mitigate the effects of Complied with specific risks in the case such risks are at levels beyond the prudent levels decided by the Committee on the basis of the Finance Company’s policies and regulatory and supervisory requirements.


The risk indicators introduced has been reviewed against the benchmark as well as the tolerance levels.

This process has to be strengthen to establish quantitative and qualitative risk limit to cover all other products and to monitor risk indicators which have gone beyond the limits.

(3)(e) The Committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans.

Complied The Committee has met four times to assess the risks of the Company.

3(f) The Committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the Committee, and/or as directed by the Department of Supervision of of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.

Complied Committee refers such matters, if any, to the HR Department for necessary action. The applicable procedure which is in practice will be strengthened as specified in this Direction.

3(g) The Committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions.

Complied The Committee had kept the Board informed of their risk assessment of the Company by forwarding a risk report.

3(h) The Committee shall establish a compliance function to assess the Finance Company’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from Key Management Personnel shall carry out the compliance function and report to the Committee periodically.


The Company’s compliance with laws and regulations were monitored and the Company is in the process of recruiting a dedicated independent compliance officer to strengthen the process further.






9. related party transaction


9(2) The Board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the Finance Company with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction: (a) Any of the Finance Company’s subsidiary

companies;

(b) Any of the Finance Company’s associate companies;

(c) Any of the Directors of the Finance Company;

(d) Any of the Finance Company’s Key Management Personnel;

(e) A close relation of any of the Finance Company’s Directors or Key Management Personnel

(f) A shareholder owns shares exceeding 10% of the paid up capital of the Finance Company;

(g) A concern in which a director of the finance Company or relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance Company , has substantial interest.


The Related Party Transaction Policy is in place which describes the related parties, types of related party transactions and the favourable treatment granted to the said parties and stipulates that Board members should avoid any conflicts of interest that may arise from any transactions with the Company.

Monitoring and reporting of data pertaining to such transactions through the branch network is to be strengthened to cover all products and transactions of the Company.

Transactions carried out with Related Parties in the normal course of business are disclosed in the Financial Statements on ‘Related Party Disclosures’ under note no 41.

In order to further strengthen the Company’s accountability and transparency with regard to transactions with related parties the Company has extended the classification of “key management personnel” to Corporate Management of the Company as well from 2012 onwards.

9(3) The transactions with a related party that are covered in this Direction shall be the following:

a) Granting accommodation,b) Creating liabilities to the finance Company in the

form of deposits, borrowings and investments,c) providing financial or non-financial services to the

finance Company or obtaining those services from the finance Company,

d) creating or maintaining reporting lines and information flows between the finance Company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party.


A Board approved process is in place to ensure compliance.

The Company is in the process of strengthening the monitoring mechanism in this regard during the year 2013/14.




9(4) The Board shall ensure that the finance Company does not engage in transactions with a related party in a manner that would grant such party “more favourable treatment” than that is accorded to other similar constituents of the finance Company. For the purpose of this paragraph, “more favourable treatment” shall mean:

a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the finance Company’s regulatory capital, as determined by the Board.

The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the finance Company’s share capital and debt instruments with a remaining maturity of 5 years or more.

b) Charging of a lower rate of interest than the finance Company’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty;

c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extends beyond the terms granted in the normal course of business with unrelated parties;

d) Providing or obtaining services to or from a related-party without a proper evaluation procedure;

e) Maintaining reporting lines and information flows between the finance Company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for the performance of legitimate duties and functions.


Board approved Related Party Transactions policy contains provisions to ensure compliance.

However the streamlined monthly process will be implemented to monitor related party activities.

The Company will take steps to identify, monitor and report the transactions to ensure that there is no favorable treatments offered to related parties.






10. disclosures


10(1) The Board shall ensure that: (a) annual audited financial statements and periodical financial statements are prepared and published in accordance with the formats prescribed by the regulatory and supervisory authorities and applicable accounting standards, and that (b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English.

Complied Relevant Financial Statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that such statements are published in the newspapers.

10(2) The Board shall ensure that at least the following disclosures are made in the Annual Report:

a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

b) A report by the Board on the finance Company’s internal control mechanism that confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements.

c) The external auditor’s certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after March 31, 2010.

d) Details of directors, including names, transactions with the finance Company.

e) Fees/remuneration paid by the finance Company to the directors in aggregate, in the Annual Reports published after January 1, 2010.

Complied

Compliance with applicable accounting standards and regulatory requirements has been reported under the “Statement of Directors’ Responsibility for Financial Reporting” on page 150.

Directors’ Statement on internal control system over financial reporting is given on page 145.

The Company obtained a certification from the External Auditors on the effectiveness of the internal control mechanism.

This has been disclosed under the “Annual Report of the Board of Directors on the affairs of the Company”.

The fees and remuneration paid has been disclosed under short term employment benefits in paid in note 41.1.1 to the Financial Statement.




10(2) f) Total net accommodation as defined in paragraph 9(4) outstanding in respect of each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage of the finance Company’s capital funds.

g) The aggregate values of remuneration paid by the finance Company to its key management personnel and the aggregate values of the transactions of the finance Company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the finance Company.

h) A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any non-compliances.

i) A statement of the regulatory and supervisory concerns on lapses in the finance Company’s risk management, or non compliance with the Act, and rules and directions that have been communicated by the Director of the Department of Supervision of Non-Bank Financial Institutions, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the finance Company to address such concerns.

j) The external auditor’s certification of the compliance with the Act and rules and directions issued by the Monetary Board in the annual corporate governance reports published after January 1, 2011.

Complied Total net accommodations granted to each category of related parties are given in note 41 to the FinancialStatements.

Disclosed under the Related party Transaction in note 41 to the Financial Statement.

Transaction, arrangements and agreements involving with Entities which are controlled, and/or jointly controlled by the KMP’s and their CFMs or shareholders.;Loans and receivables 0.048%Lease rentals receivable and stock out on hire 0.009%

Transactions with fellow subsidiaries;Lease rentals receivable and stock out on hire 0.206%

This has been disclosed under the “Annual Report of the Board of Directors on the affairs of the Company”.

There were no significant lapses in Company’s Risk Management or non compliance with this Direction that have been pointed out by the Director of Non Bank Financial Institution Supervision and requested by Monetary Board to be disclosed to the public.

The Company has obtained a certificate from External Auditors over the compliance of corporate governance directions and the Company is in the process of strengthening the procedure.






Code of best practice on corporate governance issued jointly by the Securities and Exchange Commission of Sri Lanka (SEC) and the Institute of Chartered Accountants of Sri Lanka in (ICASL) 2008

IntroductionBelow mentioned the level of conformance with the aforementioned code which comprises of two (2) fundamental principles and six (6) sub headings.

Level of conformance with code tabulated below under six principles;

corporate governance

directors

the company Shareholders

directors’ remuneration

relations with Shareholders

accountability and audit

Institutional Investors

other Investors



a. directorsa.1 the BoardThe Company should be headed by an effective Board, which should direct, lead and control the Company.The Board comprises of professionals with having required professional competence, skills and experience to lead and control the Company. The Board gives leadership in setting the strategic direction and implement sound control environment for the successful functioning of the Company.

corporate governance principal

Sec & IcaSl code reference

complianceStatus

degree of compliance

Board meetings – The Board should meet at least once in every quarter

A.1.1 Complied The Board usually meets on monthly intervals and met twelve (12) times during the year. The attendance at Board meetings held in 2012/13 is set out here.

attendance to the meetings

0

2

1 2 3 4 5 6 7 8 9 10

4

6

8

10

12

Nos

AttendanceNon Attendance

1.Mr. K D D Perera2. Mr. L N de S Wijeyeratne3. Mr. J A S S Adhihetty 4. Mr. Nimal Perera5. Mr. Niroshan Udage6. Mr. B D A Perera7. Mrs. Kimarli Fernando 8. Mrs. Shirani Jayasekara9. Mrs. Anandhiy K Gunawardhana **10. Mr. A M Weerasinghe*11. Mr. K D A Perera*

*Mr. A M Weerasinghe and Mr. K D A Perera ceased to be directors on 5th of January 2013 having completed 9 years since appointment.**Mrs. Anandhhiy K Gunawardhana was appointed w. e. f. 1st March 2013.Mr. Thosapala Hewage was appointed as an Independent Non-Executive and Chairman of Board w.e.f. 23rd April 2013.








complianceStatus


Board responsibilities

a. Formulation and implementation of sound business strategy

b. CEO, Executive Directors and senior management team possess the skills and experience

c. Implementing security and integrity of information, risk management and internal controls and ensuring compliance with laws and regulations

d. All stake holders interest are considered in decision making and ensure appropriate accounting policies are adopted by the Company

A.1.2 Complied The Board engages in providing direction in formulating a sound business strategy and closely monitors the implementation of the strategy effectively. A Strategic Plan has been developed covering next 3 years.

Skills and experience of the Managing Director, Executive Directors and Corporate Management are given in pages 14 to 19.

Board has reviewed effectiveness of internal control and compliance with laws and regulations on a continuous basis through the Audit Committee and IRMC. Board has recruited a CRO (Chief Risk Officer) to oversee the risk management aspects of the Company.

The financial information which were used in decision making and published was reliable and the Board is satisfied with the integrity of the financial information and risk management of the Company.

Board collectively and Directors individually must act in accordance with laws and accessibility for independence professional advices

A.1.3 Complied The Board collectively and Directors individually, recognize their duty to comply with laws of the country.

The Board of Directors ensures that procedures and processes are in place to ensure that the Company complies with all applicable laws and regulations.

All directors should have access to the services and advice of the company secretary.

A.1.4 Complied All Directors have access to the representative of company secretary, who is an Attorney-at- Law by profession.

Her services are available to all directors and she advices the Board on corporate governance matters, Board procedures and applicable rules and regulations.

Independent judgment of directors

A.1.5 Complied All Directors are responsible for bringing independent judgment on issues of strategy, performance, resources and standard of business conduct. Non-Executive Directors are responsible for providing independent judgment for the proposals made by the Managing Director and Executive Directors.





complianceStatus


Every Director should dedicate adequate time and effort to the matters of the Board and the Company

A.1.6 Complied Every Director dedicated adequate time and effort to the meetings of the Board and sub committee meetings to ensure that the duties and responsibilities are satisfactorily discharged. The details of the meetings held and their attendance are in page no

Every Director should receive appropriate training

A.1.7 Complied Every Director was given appropriate induction when first appointed to the Board in regard to the affairs of the company and laws and regulations applicable to the Company.

a.2 chairman and chief executive officerThere should be a clear division of responsibilities at the head of the Company, which will ensure balance of power and authority, so that no one individual has unfettered powers of decision.

The Chairman as well as Managing Director have a clear distinction of responsibilities and balance in power and authority. Chairman is responsible for running the Board and Managing Director is responsible for running of business functions.



complianceStatus


If CEO and Chairman is one person justification in the annual report

A.2.1 Not Applicable

Since MD and chairman’s roles are segregated no need of such a disclosure in the annual report

a.3 chairman’s roleThe Chairman’s role in preserving well corporate governance is crucial. The Company required authority, power and resources have been provided to perform his duty.



complianceStatus


Chairman’s role A.3.1 Complied The Chairman conducts Board proceedings in proper manner and ensures that effective participation of both Executive and Non-Executive Directors is secured and the balance of power between Executive and Non-Executive Directors is maintained.

Further the agenda for Board meetings were approved by the Chairman.

a.4 Financial acumenThe Board should ensure the availability within it of those with sufficient financial acumen and knowledge to offer guidance on matters of finance.



complianceStatus


Financial Acumen A.4 Complied The profile of the Board of Directors are given on page 15.






a.5 Board BalanceIt is preferable for the Board to have a balance of Executive and Non-Executive Directors such that no individual or small group of can dominate the Board’s decision taking.



complianceStatus


Board should include at least two Non-Executive Directors or one third of total directors whichever is higher

A.5.1 Complied Company has five (5) Non-Executive Directors at the Board which consist of ten (10) members.

Two or one third of Non-Executive Directors whichever is higher should be independent

A.5.2 Complied During the year under review three Non-Executive Directors are independent and at present all Non-Executive Directors are independent.

Evaluation of independence of Non-Executive Directors

A.5.3 Complied Non-Executive Directors independence evaluated on annual basis. The Board reviewed the independence of each Non-Executive director in 2012/13

Signed declaration of independence by the Non-Executive Directors

A.5.4 Complied All Non-Executive Directors provided the signed declaration of independence for 2012/13 as per the schedule H of the code.

Determination of the independence and Non-Independence of each Non-Executive Directors annually

A.5.5 Complied The Board has determined that the submission of declaration/s by the Non Executive Directors, as to their independence. Circumstances have not arisen for the determination of independence by the Board, Beyond the criteria set out in the Code. The following Directors are deemed to be Independent Directors;

Mr. L N de S WijeyeratneMrs. Kimarli Fernando Mrs. Shirani JayasekaraMrs. Anandhiy K Gunawardhana w. e. f. 1st March 2013Mr. Thosapala Hewage appointed to the Boar d w.e.f. 23rd April 2013

Senior Independent Director (SID)

A.5.6 Not applicable

Since Chairman and the Managing Director are two individuals the need does not arise. When the Chairman is non independent during the time Mr. L N de S Wijeyeratne functioned as Senior Independent Director

Confidential discussion with other director’s by the SID


Meetings held by the Chairman with Non-Executive Directors

A.5.8 Needs improvement

The Chairman did not hold meetings with Non-Executive Directors; this will be implemented in the current year.

Recording of concerns of Directors in Board minutes where they cannot be unanimously resolved


No any matters were recorded in the Board minutes where the Directors could not unanimously resolve the matter.



a.6 Supply of InformationThe Board should be provided with timely information in a form and of quality appropriate to enable it to discharge its duties.



complianceStatus


Management should provide timely information to the Board

A.6.1 –A.6.2 Complied Timely and accurate information is provided by the management to the Board. Reasonable notice of special emergency meetings is also given to the Directors with the purpose.

Management also make them available on call to respond to queries raised at Board meetings and provides additional information as and when required by the Board members.

a.7 appointments to the BoardThere should be a formal and transparent procedure for the appointment of new Directors to the Board.



complianceStatus


Nomination committee A.7.1 Complied Nomination committee makes recommendations to the Board on all new appointments and reelection to the Board. The Committee was set up pursuant to the Code of Best Practice on Corporate Governance.The Committee members are;

Mr. L N de S Wijeyeratne (Chariman)Mrs. Kimarli FernandoMr. J A S S Adhihetty

Assessment of Board composition by the Nomination Committee

A.7.2 Complied Nomination committee reviews the new appointments and reelections to the Board with strategic direction of the Company to attract and retain Board members with relevant experience and qualifications.

Disclosure requirements when appointing of new Directors to the Board

A.7.3 Complied Details of new Directors are disclosed to the shareholders at the time of their appointment by way of public announcements as well as in the Annual Report. Prior approval for appointment of new Directors is obtained from the Director of Bank Supervision of CBSL and notification is sent to Colombo Stock Exchange. All new appointments as well as continuing Directorships are reviewed by the Nomination Committee. The Directors are required to report any substantial changes in their professional responsibilities and business associations to the Nomination Committee, which will examine the facts and circumstances and make recommendations to the Board.






a.8. re- electionAll Directors should be required to submit themselves for reelection at regular intervals and at least once in every three years.



complianceStatus


Re-election of Directors A.8.1 –A.8.2 Complied At each Annual General Meeting one-third of the Directors for the time being who are subject to retirement, or, if their number is not a multiple of three, the number nearest to (but not greater than) one-third, retire and seek re-election by the shareholders.

The provisions of the company’s Articles of Association also require Directors appointed by the Board to hold office until the next Annual General Meeting and seek appointment by the shareholders at that meeting.

Mrs. Kimarli Fernando was re elected at the AGM held in 2012.

a.9. appraisal of Board performanceBoard should periodically appraise their own performance in order to ensure that Board responsibilities are satisfactorily discharged.



complianceStatus


Appraisal of Board performance

A.9.1 Complied Board performance evaluation is appraised by each Board member as per the Schedule B of the Code. Mrs. Anandhiy K Guanawardhana has not appraised the evaluation since she was appointed to the Board w. e. f 1st March 2013.

Annual self-evaluation by the Board members and of its committees

A.9.2 Complied As indicated in the A.9.1

Disclosure in the Annual Report about the Board’s performance evaluation methodology

A.9.3 Complied As indicated in the A.9.1

a.10 disclosure of Information In respect of directorsShareholders should be kept advised of relevant details in respect of Directors.



complianceStatus


Annual Report disclosure in respect of Directors (Name, Qualifications etc.)

A.10.1 Complied Profiles of the Board of Directors are given on page 14.



a.11 appraisal of chief executive officer (ceo)The Board should require at least annually to assess the performance of the CEO.



complianceStatus


Targets for CEO at the commencement of each fiscal year

A.11.1 Complied Managing Director’s performance targets are aligned with business strategies of the Company. Targets are set at the beginning of every year by the Board which is in line with the short, medium and long term objectives of the Company.

Evaluation of the performance at the end of fiscal year

A.11.2 Complied At the end of each financial year the Board evaluates the set targets and the actual performance.

B. directors’ remunerationB.1 remuneration procedureThe company has a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Directors should be involved in deciding his/her own remuneration.



complianceStatus


Setting up of Remuneration Committee

B.1.1 Complied The functions of the Committee include determination of compensation and benefits of the Managing Director and Executive Directors while ensuring has no Director is involved in setting his/her own remuneration.

Composition of Remuneration committee

B.1.2 Complied Composition of Remuneration committee is in line with Listing Rules. As per the Schedule C, Remuneration Committee should comprise of at least two Non-Executive Directors. The committee members are;

Mr L N de S Wijeyeratne (Chairman)Mrs. Kimarli FernandoBoth of whom are Independent Non Executive Directors.

Disclosure in the annual report about the Remuneration committee members

B.1.3 Complied Remuneration committee report is given on page 146.

Remuneration of Non-Executive Directors

B.1.4 Complied The Non-Executive Directors receive a fee for being a Director of the Board and additional fee whenever they serve on Board sub Committees.

Consultation of the Chairman/CEO/MD and other Executive Directors and access to the professional advice

B.1.5 Complied Committee consults Managing Director when deciding the remuneration and also has access to professional advice when deemed necessary.






B.2 level and make up of remunerationLevel of remuneration of both Executive and Non Executive Directors should be sufficient to attract and retain the Director’s needed to run the Company successfully. A proportion of Executive Director’s remuneration should be structured to link rewards to corporate and individual performance.



complianceStatus


• Level and make up of remuneration of Executive Directors including performance element in pay structure

• Remuneration packages in line with industry practices

• Executive share option

• Non Executive Directors remuneration

B.2.1- B.2.9 Complied Remuneration of Executive Directors consist of performance based payment and Remuneration Committee review whether they are in line with industry practices. The Company has not granted any share option plan to its Directors. Non Executive Directors remuneration is based on a fee.

B.3 disclosure of remunerationAnnual Report of the Company should contain a statement of remuneration policy and details of remuneration of the Board as whole.



complianceStatus


Disclosure in the Annual Report about the Remuneration Committee members and statement of remuneration policy

B.3.1 Complied Remuneration Committee report is given on page 146.

c. relations with Shareholdersc.1 constructive use of the annual general meeting (agm) and conduct of general meetings.Board should use the AGM to communicate with shareholders and should encourage their participation.



complianceStatus


Use of proxy votes C.1.1 Complied The Company has recorded all proxy votes for each resolution prior to the general meeting.

Separate resolutions for separate issues

C.1.2 Complied Separate resolutions are placed before the shareholders for the business transactions at the Annual General Meetings.





complianceStatus


Arrangement made by the Chairman of the Board that all the Chairmen of subcommittees available at the AGM

C.1.3 Complied All Subcommittee Chairmen were available at the AGM

Adequate notice for the AGM to the shareholders

C.1.4 Complied Adequate notice is given to shareholders for the AGM

Procedures of voting at general meetings

C.1.5 Complied Voting procedures at general meetings are circulated to the shareholders.

c.2 major transactionsDirectors should disclose all proposed corporate transactions which would materially alter the net asset base of the company.



complianceStatus


Major transactions C.2.1 Complied The Company did not enter in to any major transactions during the year.

d. accountability and auditd.1 Financial reportingThe Board should present a balanced and an understandable assessment of the company’s financial position and prospects.



complianceStatus


Board should present interim and other price sensitive information to the public and reports to regulators

D.1.1 Complied The Company has reported a true and fair view of its financial position and performance for the year ended on 31st March 2013 and at the end of each quarter of the financial year.

Director’s Report in the Annual Report

D.1.2 Complied Board of Directors affairs of the company is given on page 140.

Annual Report disclosure stating Board’s and Auditors responsibility

D.1.3 Complied Statement of Directors Responsibilities is given on page 150.

Management discussions and analysis

D.1.4 Complied Management discussion and analysis is given on pages 26 to 35.

Director’s assumption on the going concern of the business

D.1.5 Complied Board of Directors affairs of the company is given on page 140.

Serious loss of capital D.1.6 Complied No any such circumstances occurred, and it’s likelihood of occurrence is also remote.






d.2 Internal controlThe Board should maintain a sound system of internal control to safeguard shareholders investments and Company assets.



complianceStatus


Evaluation of the internal controls by the Board

D.2.1 Complied The adequacy and the integrity of the Company’s internal control system are reviewed by the Board Audit Committee through internal audit reports and system reviews.

Internal Audit function D.2.2 Complied The Company’s internal audit functions were outsourced and carried out by two independent professional audit firms and the audit reports were discussed at the Audit Committee meetings and based on those findings appropriate recommendations/actions were made/taken. To strengthen the internal audit function the Company recently set up an in-house internal audit department.

d.3 audit committeeThe Board should establish formal and transparent arrangements for considering how they should select and apply accounting policies, financial reporting and internal control principals and maintaining an appropriate relationship with the Company’s Auditors.



complianceStatus


Composition of the Audit Committee

D.3.1 Complied The Audit Committee comprises the following committee members

Mr. L N de S Wijeyeratne (Chairman)Mrs. Shirani JayasekaraMrs. Anandhiy K Gunawardhana

Reviewing the scope and results of the audit and its effectiveness and independence and objectivity of the Auditors

D.3.2 Complied The Audit Committee periodically reviews the scope and results of the audit and its effectiveness. Further independence and the objectivity of the Auditors also reviewed periodically. The committee would consider the independence when providing non audit engagements to the External Auditor. Its primary responsibilities are to make recommendations on the appointment, reappointment and removal of the Auditors.

Terms of reference of the audit committee

D.3.3 Complied The Audit Committee is guided by the Terms of Reference approved by the Board which outlines authority and responsibility.

Disclosures made in the Annual Report about Audit Committee

D.3.4 Complied Audit Committee report is given on page 148.



d.4 code of Business conduct and ethicsCompany must adopt a Code of Business Conduct and Ethics for Directors, and members of the Senior Management team. Any non compliance with the said code should be promptly disclosed.



complianceStatus


Code of business conduct and ethics

D.4.1 Needs improvement

The Company is in the process of developing a Code of Business Conduct and Ethics.

Chairman’s confirmations for any violation of Code of Conduct and Ethics

D.4.2

d.5 corporate governance disclosuresThe Board should include this in the Annual Report setting out the manner and extent to it complied.



complianceStatus


Disclosure of Corporate Governance compliance

D.5.1 Complied This requirement is met through presentation of this report

2. ShareholderSe. Institutional Investorse.1 Shareholder VotingInstitutional shareholders are required to make considered use of their votes and encouraged to ensure their voting intentions are translated into practice.



complianceStatus


Regular dialogue to be maintained with shareholders and Chairman to communicate shareholders views to the Board

E.1.1 Complied Annual General Meeting is a forum to have an effective dialogue with shareholders.

e.2 evaluation of governance disclosureInstitutional investors are encouraged to give due weight to all relevant factors in Board structure and composition.






F. other InvestorsF.1 Investing/divesting decision



complianceStatus


Individual shareholders investment decisions

F.1 Complied Individual shareholders investing directly in the Company are encouraged seeking independent advice in investing or divesting decisions.

F.2 Shareholder Voting



complianceStatus


Individual shareholder voting

F.2 Complied Individual shareholders are encouraged to participate at Annual General Meeting and to exercise their voting rights.


annual report oF the Board oF dIrectorS on the aFFaIrS oF the company

The Directors of L B Finance PLC have pleasure in presenting their annual report together with the audited financial statements of the Company for the year ended 31st March 2013.

generalIncorporation and re-registrationL B Finance PLC is a public limited liability Company which was incorporated under the Companies Ordinance No.51 of 1938 as a private limited liability Company on 30th May 1971, converted to a public limited liability Company on 29th September 1982, listed on the Colombo Stock Exchange in January 1998 and re-registered as per the Companies Act, No.07 of 2007 on 6th June 2008 with PQ 156 as the new number assigned to the Company.

L B Finance PLC is a finance Company in terms of the Finance Business Act No.42 of 2011 and is a registered finance leasing establishment in terms of the Finance Leasing Act No.56 of 2000.

nature of BusinessThe Company’s principal activities during the year were acceptance of deposits, maintenance of savings accounts, granting lease and hire purchase facilities, micro finance facilities, gold loans, vehicle loans, mortgage loans, factoring, margin trading, Islamic finance facilities and value added services.

The Company has an interest in the leisure sector through its investment in Fortress Resorts PLC.

A review of the business of the Company and its performance during the year with comments on financial results, future strategies and prospects are contained in the Managing Director’s Report on pages 9 to 13, which form an integral part of this report.

This Report together with the financial statements, reflect the state of affairs of the Company.

Financial StatementsThe complete financial statements of the Company prepared in accordance with revised Sri Lanka Accounting Standards comprising Sri Lanka Financial Reporting Standards (SLFRS) and Lanka Accounting Standards (LKAS) set by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 07 of 2007 inclusive of specific disclosures, duly signed by two Directors on behalf of the Board and the auditors are given on pages 152 to 209.

auditors’ reportThe report of the auditors on the financial statements of the Company is given on page 151.

accounting policiesThe financial statements of the Company have been prepared in accordance with the revised Sri Lanka Accounting Standards and the policies adopted thereof are given on pages 156 to 167. Figures pertaining to the previous periods have been re-stated where necessary to conform to the presentation for the year under review.

Future developmentsAn overview of the future developments of the Company is given in the Chairman’s Review given on pages 7 to 8, Managing Director’s Review given on pages 9 to 13 and the Management Discussion and Analysis given on pages 21 to 35.

turnoverThe income of the Company for the financial year 2012/13 was Rs. 11.16 billion given on page 152.

directorsdetails of directorsThe names of the Directors who held office as at the end of the accounting period are given below and their brief profiles appear on pages14 to 17.

Executive DirectorsMr. Dhammika Perera - Executive Deputy ChairmanMr. J A S S Adhihetty - Managing DirectorMr. Nimal Perera - Executive DirectorMr. Niroshan Udage - Executive DirectorMr. B D St A Perera - Executive Director

Non Executive Directors*Mr. L N de S Wijeyeratne - Senior DirectorMr. A M Weerasinghe - Director [Ceased to be a Director w.e.f. 5.1.2013]Mr. K D A Perera - Director [Ceased to be a Director w.e.f. 5.1.2013]*Mrs. Kimarli Fernando - Director*Mrs. Shirani Jayasekara - Director*Mrs. Anandhiy Krisnajina Gunawardhana - Director [appointed on 1.3.2013]

*Independent Non Executive Directors as per the Listing Rules of the Colombo Stock Exchange






Mr. L N de S Wijeyeratne retires by rotation at the Annual General Meeting in terms of Articles 85 and 86 of the Articles of Association and being eligible is recommended by the Directors for re-election.

During the year under review

• Consequent to Mr. L N de S Wijeyeratne, who was then the Acting Chairman of the Company expressing his desire to relinquish his said office, Mr. A M Weerasinghe, a Non-Executive Director was appointed the Chairman of the Board of Directors with effect from 21st August 2012.

• Mr. A M Weerasinghe and Mr. K D A Perera, respectively the Chairman and a Non-Executive Director ceased to be Directors with effect from 5th January 2013 in terms of Finance Companies (Corporate Governance) Direction No. 3 of 2008 having completed 9 years since appointment.

• Mrs. Anandhiy Krisnajina Gunawardhana was appointed as an Independent Non-Executive Director with effect from 1st March 2013.

• Mr. Thosapala Hewage was appointed as an Independent Non-Executive Director and the Chairman of the Board of Directors with effect from 23rd April 2013

Messrs Dhammika Perera and K D A Perera (who served as a Director up to 5th January 2013) are siblings.

Interests registerThe Company maintains an interests register in terms of the Companies Act No. 7 of 2007, which is deemed to form part and parcel of this annual report and available for inspection upon request.

All related party transactions which encompasses the transactions of Directors who were directly or indirectly interested in a contract or a related party transaction with the Company during the accounting period are recorded in the interests register in due compliance with the applicable rules and regulations of the relevant regulatory authorities.

The relevant interests of Directors in the shares of the Company as at 31st March 2013 as recorded in the interests register are given in this report under Directors’ shareholding.

related parties’ transactions with the companyTransactions of related parties (as defined in LKAS 24 - Related Parties Disclosure) with the Company are set out in note 41 to the financial statements.

directors’ remunerationThe Directors’ remuneration is disclosed under key management personnel compensation in note 41.1 to the financial statements on page 201.

relevant Interests of directors’ in the SharesThe relevant interests of Directors in the shares of the Company as at 31st March 2013 and 31st March 2012 are as follows.

Shareholdingas at

31/3/2013

Shareholdingas at

31/03/2012

Mr. L N De S Wijeyeratne - -

Mr. Dhammika Perera - -

Mr. J A S S Adhihetty 53,060 53,060

Mr. Nimal Perera 633,992 660 898

Mr. Niroshan Udage 4,200 4,200

Mr. B D A Perera - -

Mrs. Kimarli Fernando 1,600 1,600

Mrs. Shirani Jayasekara - -

Mrs. Anandhiy K Gunawardhana (appointed on 1st March 2013)

- -


Mr. Dhammika Perera is the major shareholder of Vallibel One PLC, which holds 35,321,200 shares constituting 51% of the shares representing the stated capital of the Company.

Vallibel One PLC is also the holding Company of Royal Ceramics Lanka PLC which holds 17,995,893 shares of L B Finance PLC constituting 25.98% of the shares representing the stated capital of the Company.

dividends and reservesdividendsThe Directors have recommended a first and final dividend of Rs. 6.50 per share for the year under review subject to obtaining a certificate of solvency from the auditors and to be approved by the shareholders at the forthcoming Annual General Meeting. As required by Section 56 of the Companies Act, the Directors have certified that they are satisfied that the Company will, immediately after the said distribution is made, satisfy the solvency test in accordance with the Companies Act. In compliance with Finance Companies Guideline No.01 of 2013, the Company has obtained the approval of the Director, Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka for the proposed dividend.

The said dividend will, subject to approval by the shareholders, be payable on the 7th market day from the date of the Annual General Meeting.

reservesThe reserves of the Company with the movements during the year are given in note 35 to the financial statements on page 195.

property, plant and equipmentDetails of property, plant and equipment are given in note 25 to the financial statements.

market Value of propertiesland holdingsThe Company’s land holdings referred to in note 25 of the accounts comprise a land of an extent of 7.06 perches with a building situated in Kandy, which is carried at it’s book value of Rs.11.5 million (the current market value being Rs. 28 million) a land in extent 50 perches situated in Balagolla which was acquired during the year 2009/10 for Rs.7.5 million (current market value being Rs. 9 million) and the Land and Building at No. 20 Dharmapala Mawatha, Colombo 3, consisting of the land in extent 01 Rood and 12.82 Perches with a building of a total floor area of 65,000 sq ft acquired in 2011 for a consideration of Rs 788,840,000 (current market value being Rs 860 million).

Share Information and Substantial ShareholdingsStated capitalThe stated capital of the Company as at 31st March was Rs.838,282,159/- represented by 69,257,142 fully paid ordinary shares which remains unchanged.

ShareholdersThere were 1,688 shareholders registered as at 31st March 2013 (1768 shareholders as at 31st March 2012. The details of distribution are given on pages 81 to 82 of this report.

major Shareholders distribution Schedule and other InformationInformation on the distribution of shareholding, analysis of shareholders, market values per share, twenty largest shareholders of the Company and percentage of shares held by the public as per the Listing Rules of the Colombo Stock Exchange are given on page 81 under share information.

auditorsMessrs Ernst & Young, Chartered Accountants served as the auditors during the year under review and also provided permitted non audit / consultancy services. As far as the Directors are aware, the auditors do not have any other relationship or interest in contracts with the Company.

A total amount of Rs.3,410,474/- is payable by the Company to the auditors for the year under review comprising Rs.2,050,000/- as audit fees and Rs.1,360,474/- for non audit services.

The auditors have expressed their willingness to continue in office. The Audit Committee at a meeting held on 28th May 2013 recommended that they be re-appointed as auditors. A resolution to re-appoint the auditors and to authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting.

donationsThe Company did not make any donations during the year under review.







environmental protectionThe Company has not engaged in any activity that is harmful or hazardous to the environment. Measures taken by the Company on environmental protection are given on the Sustainability section in the annual report.

Statutory paymentsThe Directors confirm that to the best of their knowledge, all taxes, duties and levies payable by the Company, all contributions, levies and taxes payable on behalf of, and in respect of employees of the Company and all other known statutory dues as were due and payable by the Company as at the Balance Sheet date have been paid or, where relevant provided for, except for certain assessments where appeals have been lodged.

events after the Balance Sheet dateExcept for the matters disclosed in Note to the financial statement on page there are no material events as at the date of the Auditor’s Report which require adjustment to or disclosure in the financial statements.

going concernThe Board of Directors has reviewed the Company’s corporate / business plans and is satisfied that the Company has adequate resources to continue its operations in the foreseeable future. Accordingly, the financial statements of the Company are prepared based on the going concern concept.

risk managementAn ongoing process is in place to identify and manage the risks that are associated with the business and operations of the Company. The Directors review this

process through the Audit Committee and the Integrated Risk Management Committee.

Specific steps taken by the Company to manage the risks are detailed in the section on Risk Management on pages 43 to 58.

corporate governanceThe Board of Directors are responsible for the governance of the Company. The Board has placed considerable emphasis on developing rules structures and processes to ensure integrity and transparency in all the dealings of the Company and its best effort in achieving performance and quality profits, adopting good governance in managing the affairs of the Company. The Board in the discharge of its responsibilities aforesaid had been guided by the Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka and the Listing Rules of the Colombo Stock Exchange and Finance Companies (Corporate Governance) Direction No. 03 of 2008. Finance Companies (Corporate Governance – Amendment) Direction No 04 of 2008 and Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction 03 of 2011.

The Board of Directors confirm that the Company is compliant with section 7.10 of the Listing Rules of the CSE and the said Directions issued by the Monetary Board of the Central Bank of Sri Lanka save and except in respect of the matters referred to in the Annual Corporate Governance Report on pages 99 to 139.

An Audit Committee, Remuneration Committee, an Integrated Risk Management Committee, and a Nominations Committee function as Board sub committees, with Directors who possess the requisite qualifications and experience. In addition to Directors, certain key management personnel also serve on the Integrated Risk Management Committee. The composition of the said committees is as follows.

audit committeeMr. L N de S Wijeyeratne (Chairman)Mrs. Shirani JayasekaraMr A M Weerasinghe (upto 5th January 2013)Mrs. Anandhiy K Gunawardhana (appointed with effect from 1st March 2013)

remuneration committeeMr. Thosapala Hewage (Chairman) (appointed with effect from 23rd April 2013)Mr. L N de S WijeyeratneMrs. Kimarli Fernnado

Integrated risk management committeeMrs. Shirani Jayasekara (Chairperson)Mrs. Kimarli FernandoMr. J A S S AdhihettyExecutive Director – Asset FinanceExecutive Director – Asset ManagementHead of FinanceHead of TreasuryChief Risk Officer

nomination committeeMr. L N de S Wijeyeratne (Chairman)Mrs. Kimarli FernandoMr J A S S Adhihetty (appointed with effect from 19th February 2013)


The corporate governance of the Company is reflected in its strong belief in protecting and enhancing stakeholder value in a sustainable manner, supported by a sound system of policies and practices. Prudent internal controls ensure professionalism, integrity and commitment of the Board of Directors, Management and employees.

The corporate governance statement on pages 99 to 139 explains the measures adopted by the Company during the year.

human resourcesThe Company’s employment policy is totally non-discriminatory which respects individuals and provides carrier opportunities irrespective of the gender, race or religion.

As at 31st March 2013, 2,055 persons were in employment (1,679 persons as at 31st March 2012).

compliance with laws and regulationsThe Company has established a permanent and effective compliance function. A compliance officer appointed by the Board independently monitors adherence with all applicable laws, regulations and statutory requirements and reports to the Board and the Integrated Risk Management Committee. Monthly and quarterly compliance reports are submitted confirming compliance with laws and regulations as applicable to the Company.

The compliance officer also ensures that compliance reports are submitted to the Central Bank of Sri Lanka confirming Company’s compliance with the directions, rules, determinations, notices and guidelines in terms of the Finance Business Act No.42 of 2011.

contingent liabilitiesExcept as disclosed in note 38 to the financial statements, there were no material contingent liabilities as at the Balance Sheet date.

annual general meetingThe Notice of the Fortieth (40th) Annual General Meeting appears on page 230.

acknowledgement of the content of the reportAs required by section 168(1)(k) of the Companies Act, this report is signed on behalf of the Board of the Company by two Directors and the secretaries of the Company. In pursuance of the authority granted by the Board by a Resolution passed on 31st May 2013 having acknowledged the contents of this annual report.

Signed on behalf of the Board by

Thosapala Hewage Sumith Adhihetty P W Corporate Secretarial (Pvt) LtdChairman Managing Director Secretaries

31st May 2013







L N de S Wijeyeratne Sumith AdhihettyIndependent Non-Executive Director Managing Director

31st May 2013

dIrectorS Statement on Internal control oVer FInancIal reportIng

responsibilityIn line with the Finance Companies Act Direction No. 03 of 2008, section 10(2)(b) , the Board of Directors present this report on internal control over financial reporting.

The Board of Directors (“Board”) is responsible for the adequacy and effectiveness of the internal control mechanism in place at the L B Finance PLC’s, (“the Company”).

The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company and this process includes the system of internal control over financial reporting. The process is regularly reviewed by the Board.

The Board is of the view that the system of internal controls over financial reporting in place is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes is in accordance with relevant accounting principles and regulatory requirements.

The management assists the Board in the implementation of the Board’s policies and procedures pertaining to internal control over financial reporting.

The management has started the process of documenting the internal controls over financial statements and the process identified so far has not revealed any significant weaknesses over such controls for financial reporting.

In assessing the internal control system over financial reporting, identified officers of the Company collated all

procedures and controls that are connected with significant accounts and disclosures of the financial statements of the Company. These in turn are being observed and checked by the internal audit department of the Company for suitability of design and effectiveness on an on-going basis. As the current year was the first year of adopting new Sri Lanka Accounting Standards comprising LKAS and SLFRS, processes to comply with new requirements of recognition, measurement, classification and disclosure are being introduced, and as at balance sheet date were not fully completed.

confirmationBased on the above processes, the Board confirms that the financial reporting system of the Company has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes and has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

external auditors certificationThe external auditors have submitted a certification on the process adapted by the Directors on the system of internal controls over financial reporting.

By order of the Board


remuneratIon commIttee report

the compositionThe Remuneration Committee consisted of two Independent Non-Executive Directors and a Non-Executive Director up to 1st September 2012 and two Independent Non-Executive Directors from 1st September 2012 to 23rd April 2013. From 23rd April 2013, all three members of the Remuneration Committee are Independent Non-Executive Directors.

The following Directors serve / served on the Committee

Mr. Thosapala Hewage, Independent Non-Executive Director and Chairman of the Board [Chairman of the Committee from 23rd April 2013]

Mr. Nimal Perera, Non-Executive Director [Chairman of the Committee up to 1st September 2012, ceased to be a member with effect from 1st September 2012]

Mr. L N de S Wijeyeratne, Independent Non-Executive Director [Chairman from 1st September 2013 up to 23rd April 2013]

Mrs. Kimarli Fernando, Independent Non-Executive Director

meetingsThe Committee meets as often as necessary to make recommendations on compensation structures and bonuses, increments, and also on matters pertaining to recruitment of key management personnel to ensure that the management and staff at all levels are adequately rewarded for their performance and commitment to the Company’s goals on a competitive basis.

The Managing Director and the Executive Directors attend meetings of the Committee by invitation and provide relevant information and their views to the Committee for its deliberations, except when the Executive Directors’ own remuneration packages and other matters relating to them are discussed.

FunctionsThe functions of the Committee include making recommendations to the Board on the compensation and benefits of the Managing Director, Executive Directors and key Management personnel.

A primary objective of the remuneration policy of the Company is to attract and retain a highly qualified and experienced workforce and reward their performance commensurate with each employee’s level of experience and contribution, bearing in mind the business performance and long term shareholder return.

directors’ remunerationThe total of Directors’ remuneration paid during the year under review is set out in note 41 to the Financial Statements.

Thosapala HewageChairmanRemuneration Committee

31st May 2013






nomInatIon commIttee report

compositionThe Nomination Committee comprises of two Non-Executive Directors and one Executive Director. Composition of the Committee during the year was as follows :Mr L N de S Wijeyeratne ChairmanMrs Kimarli FernandoMr J A S S Adhihetty(appointed as a member with effect from 19th February 2013)

Brief profiles of the members of the Committee are given on pages 15 to 17.

The Company Secretary functions as the Secretary to the Committee.

meetingsDuring the year two meetings were held to review consider and recommend the appointment of new Directors. Proceedings of Committee meetings are regularly reported to the Board of Directors.

FunctionsThe functions of the Nomination Committee are :

To regularly review the structure, size, composition and competencies of the Board, the requirement of additional / new expertise and the succession arrangements for retiring directors and make recommendations to the Board with regard to any changes;

To consider the making of any appointments to the Board and to provide advice and recommendations to the Board on such appointments;

To ensure that Directors are fit and proper persons to hold office as per the criteria set out in the Direction issued by the Central Bank of Sri Lanka and relevant Statutes;

To make recommendations on other related matters referred it to by the Board of Directors.

L N de S WijeyeratneChairman

31st May 2013


audIt commIttee report

compositionThe Audit Committee comprises of three Non-Executive Directors and the composition of the committee during the year was as follows.

Mr. L N de S Wijeyeratne - Chairman – Independent/ Non-Executive DirectorMrs.Shirani Jayasekara - Independent/ Non-Executive DirectorMr. A M Weerasinghe - Non- Executive Director (Ceased with effect from 5th January 2013)Mrs. Anandhiy K Gunawardhana-Independent/ Non-Executive Director (Appointed with effect from 1st Match 2013)

The Chairman, Mr. L N de S Wijeyeratne, is a Fellow of the Institute of Chartered Accountants of Sri Lanka, with more than 35 years of post-qualification experience in finance and general management. Mrs. Shirani Jayasekara has over 31 years’ experience combining finance and IT, audit and risk management and she is a Fellow of the Institute of Chartered Accountants of Sri Lanka and a Fellow of the Chartered Institute of Management Accountants UK. Mr. Weerasinghe, the other member of the committee has extensive experience in finance and other related fields. Mrs. Anandhiy K Gunawardhana is an Attorney-at-Law and a partner of Julius and Creasy, Attorneys-at-Law and Notaries Public. Her areas of specialisation are capital markets, corporate and commercial law, insurance law, mergers, acquisitions and taxation.

meetingsThe Committee met on fifteen (15)occasions during the year under review and the attendance of the members at such meetings was.

name of director executive/non-executive Independent/non-Independent

attendance

Mr. L N de S Wijeyeratne Independent/ Non-Executive Director 14/15

Mrs. Shirani Jayasekara Independent/ Non-Executive Director 14/15

Mr. A M Weerasinghe Non- Executive Director 6/11

Mrs. Anandhiy K Gunawardhana Independent/ Non-Executive Director 1/1

The Managing Director, the Executive Directors and the Chief Financial Officer (CFO) attended the meetings by invitation. The members of the management team, the internal audit consultants and the external auditors were invited to participate at the meetings as and when required. P W Corporate Secretarial (Pvt) Ltd acted as Secretaries to the Audit Committee. The proceedings of the Audit Committee were reported to the Board of Directors on a regular basis.

FunctionsThe functions of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities in the financial reporting process and audit of the financial statements by monitoring the; integrity and reliability of the financial statements. The committee overseas the effectiveness of the system of internal controls and risk

management, independence and performance of the external auditors while checking on the compliance with relevant laws, and regulations with a view to safeguarding the interests of all stakeholders of the Company.

transition to new/ revised Sri lanka accounting StandardsIt was mandatory to the Company with effect from 1st January 2012 to comply with the requirements of the new/ revised Sri Lanka Accounting Standards (SLFRS)/ (LKAS) which are based on the International Accounting Standards (IAS)and International Financial Reporting Standards (IFRS). Transition to new accounting standards and its impact on the Company’s financial statements were reviewed by the Audit Committee in consultation with the external auditors Messrs Ernst & Young.

Financial reporting SystemThe Committee reviewed the financial reporting system adopted by the Company with particular reference to the following

• The preparation, presentation and adequacy of the disclosures in the Company’s annual and interim financial statements in accordance with Sri Lanka Financial Reporting Standards and Lanka Accounting Standards.

• The rationale and basis for the significant estimates and judgments underlying the financial statements.

• The systems and procedures in place to ensure that all transactions are accurately recorded in books of accounts.






• The effectiveness in the financial reporting systems including the management accounts to ensure the reliability of information provided to the Board and other stakeholders of the Company.

Internal auditThe internal audit function is outsourced to Messrs KPMG Ford Rhodes Thornton & Company and BDO Partners. The internal auditors are responsible to review and report on the efficacy of the internal control system and compliance with statutory and other regulations and the Company’s accounting and operational policies. Control weaknesses highlighted in the internal audit reports are critically examined by the Committee and follow up action taken by the management on the audit recommendations are also reviewed. Internal audit representatives are present at Audit Committee meetings during the discussion of their respective reports with a view to strengthening the internal audit process the Company recently recruited a head of internal audit.

external auditDuring the year the committee met with the Messrs Ernst & Young, external auditors to discuss the auditors’ management letter pertaining to the previous year’s audit and the management’s response thereto. Follow up action was taken to ensure that the recommendations contained in the management letter were implemented by the management. Discussions were also held in regard to the nature, scope and approach of the audit for 2012/13 prior to commencement of the audit.

The committee reviewed the non-audit services provided by the auditors to ensure that the provision of these services does not impair their independence.

The Audit Committee has recommended to the Board of Directors that Messrs Ernst & Young be reappointed as Auditors for the financial year ending 31st March 2014, subject to the approval of the shareholders at the Annual General Meeting.

L N de S WijeyeratneChairman, Audit Committee

31st May 2013


Statement oF dIrectorS reSponSIBIlItIeS

The Directors are required by the Companies Act No. 7 of 2007 to prepare financial statements for each financial year, which give a true and fair view of the statement of affairs of the Company as at the end of the financial year and the income and expenditure of the Company for the financial year.

The Directors are also responsible to ensure that the financial statements comply with any regulations made under the Companies Act which specifies the form and content of financial statements and any other requirements which apply to the Company’s financial statements under any other law.

The Directors consider that the financial statements presented in this Annual Report have been prepared using appropriate accounting policies, consistently applied and supported by reasonable and prudent judgments and estimates and in compliance with the Sri Lanka Accounting Standards, Companies Act No. 7 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and Finance Business Act No. 42 of 2011 and the Directions issued thereunder.

The Directors are responsible for ensuring that the Company keeps sufficient accounting records, which disclose the financial position of the Company with reasonable accuracy and enable them to ensure that the financial statements have been prepared and presented as

aforesaid. They are also responsible for taking measures to safeguard the assets of the Company and in that context to have proper regard to the establishment of appropriate systems of internal control with a view to prevention and detection of fraud and other irregularities.

The Directors continue to adopt the going concern basis in preparing the financial statements. The Directors, after making inquiries and review of the Company’s Business Plan for the financial year 2013/2014, including cash flows and borrowing facilities, consider that the Company has adequate resources to continue in operation.


P W Corporate Secretarial (Pvt) LtdSecretaries

31st May 2013

With Transparency

In a world where information is convoluted, we provide clear facts so that informed decisions can be made, every step of the way

With TransparencyFINANCIAL REPORTS151 Independent Auditor’s Report 152 Statement of Comprehensive Income153 Statement of Financial Position 154 Statement of Changes in Equity 155 Cash Flow Statement156 Notes to the Financial Statements






INDEPENDENT AUDITOR’S REPORT

SPF/WDPL/DM

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF LB FINANCE PLC Report on the Financial StatementsWe have audited the accompanying financial statements of LB Finance PLC (“Company”), which comprise the statement of financial position as at 31 March 2013, and the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of OpinionOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

OpinionIn our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31 March 2013 and the financial

statements give a true and fair view of the Company’s financial position as at 31 March 2013 and its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Report on Other Legal and Regulatory RequirementsThese financial statements also comply with the requirements of Sections 151(2) of the Companies Act No. 07 of 2007.

3rd June 2013Colombo


STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 March 2013 2013 2012 Notes Rs. Rs.

Income 6 11,166,449,843 7,937,072,121

Interest Income 10,325,026,910 7,297,591,134Interest Expenses (5,945,706,732) (3,551,986,422)Net Interest Income 6.4 4,379,320,178 3,745,604,712

Fee and Commission Income 729,609,598 562,247,460Net Fee and Commission Income 7 729,609,598 562,247,460

Net Trading Income 8 962,850 (6,974,081)Other Operating Income 9 110,850,485 84,207,608Total Operating Income 5,220,743,111 4,385,085,699

Impairment (Charges) / Reversal for loans and other losses 10 (400,306,708) (116,023,413)Net Operating Income 4,820,436,403 4,269,062,286

Operating ExpensesPersonnel Expenses 11 (1,026,041,057) (862,315,951)Depreciation of Property & Equipment (197,827,957) (174,845,041)Amortisation of Intangible Assets (6,255,685) (5,276,217)Other Operating Expenses 12 (887,503,371) (638,560,382)

Operating Profit before Value Added Tax on Financial Services 2,702,808,334 2,588,064,695Value Added Tax on Financial Services (176,248,776) (149,952,230)

Profit before Taxation 2,526,559,558 2,438,112,464Income Tax Expense 13 (823,894,516) (724,118,372)Profit for the Year 1,702,665,042 1,713,994,093

Other Comprehensive Income / (Expenses)Available for Sale Financial AssetsSri Lanka Government securities 3,768,422 -Equity Securities (22,651,393) (78,258,805)Reclassification Adjustments for gain/(Loss) 24,611,455 20,497,870 5,728,483 (57,760,935)

Income Tax (Charge) / Credit Relating to Components of Other Comprehensive Income 13 (1,603,975) -

Other Comprehensive Income for the Year, Net of Tax 4,124,508 (57,760,935)

Total Comprehensive Income for the Year, Net of Tax 1,706,789,550 1,656,233,158

Basic Earnings Per Share (Rs) 14 24.58 24.75

Accounting Policies & Notes from pages 156 to 209 form an integral part of these Financial Statements.






STATEMENT OF FINANCIAL POSITION

As at 01 April As at 31 March 2013 2013 2012 2011 Notes Rs. Rs. Rs.

AssetsCash and Cash Equivalents 17 4,019,673,357 1,954,236,790 1,634,749,502Financial Investments - Held for Trading 18 7,323,047 6,740,091 13,885,536Loans and Receivables 19 16,452,987,398 12,771,107,882 7,509,621,549Lease Rentals Receivable & Stock out on Hire 20 28,271,346,675 23,686,391,711 16,090,343,618Financial Investments - Available for Sale 21 473,739,318 128,067,545 331,967,590Other Financial Assets 22 1,487,399,284 1,019,833,542 767,842,192Other Non Financial Assets 23 1,205,229,841 1,066,621,897 1,232,682,336Intangible Assets 24 23,669,453 19,339,794 9,681,837Property, Plant & Equipment 25 2,100,938,825 1,868,286,218 432,358,758Deferred Tax Assets 26 180,551,381 117,779,183 -Total Assets 54,222,858,579 42,638,404,653 28,023,132,917

LiabilitiesDue to Banks 27 6,366,217,339 8,910,254,584 3,781,004,800Due to Customers 28 38,742,699,819 27,172,161,417 20,262,041,497Debt Issued and Other Borrowed Funds 29 2,244,209,686 1,541,554,566 493,347,979Other Financial Liabilities 30 638,010,603 - -Other Non Financial Liabilities 31 694,933,195 757,274,892 588,694,831Post Employment Benefit Liability 32 60,230,318 44,231,036 33,869,659Current Tax Liabilities 147,956,328 244,830,708 300,292,756Deferred Tax Liabilities 26 - - 19,677,034Total Liabilities 48,894,257,289 38,670,307,203 25,478,928,557

Shareholders' FundsStated Capital 33 838,282,159 838,282,159 838,282,159Retained Earnings 34 2,852,402,008 2,075,561,407 1,089,864,093Reserves 35 1,637,917,123 1,054,253,884 616,058,108Total Shareholders' Funds 5,328,601,290 3,968,097,450 2,544,204,360

Total Liabilities and Shareholders' Funds 54,222,858,579 42,638,404,653 28,023,132,917

Commitments and Contingencies 38 1,246,070,500 628,600,077 1,267,202,862

I certify that these Financial Statements are in compliance with the requirements of the Companies Act No. 07 of 2007.

Chief Financial Officer

The Board of Directors is responsible for the preparation & and presentation of these Financial Statements.Signed for and on behalf of the Board of Directors by,

Chairman Managing Director


28th May 2013Colombo


STATEMENT OF CHANGES IN EQUITY

Investment Available Year ended 31 March 2013 Stated Retained Statutory Fund for Sale Capital Earnings Reserve Reserve Reserve Total Rs. Rs. Rs. Rs. Rs. Rs.

Balance as at 1 April 2011 838,282,159 1,089,864,093 527,502,392 30,854,696 57,701,020 2,544,204,360

Net Profit for the Year - 1,713,994,093 - - - 1,713,994,093Other Comprehensive Income Net of Tax - - - - (57,760,935) (57,760,935)Transfer to Statutory Reserve - (325,016,021) 325,016,021 - - -Transfer to Investment Fund Reserve - (170,940,690) - 170,940,690 - -Appropriation of Bad Debts - 10,059,929 - - - 10,059,929Final Dividend for 2010/11 - (242,399,997) - - - (242,399,997)

Balance as at 31 March 2012 838,282,159 2,075,561,407 852,518,413 201,795,386 (59,915) 3,968,097,450

Net Profit for the Year - 1,702,665,042 - - - 1,702,665,042Other Comprehensive Income Net of Tax - - - - 4,124,508 4,124,508Transfer to Statutory Reserve - (340,533,008) 340,533,008 - - -Transfer to Investment Fund Reserve - (239,005,723) - 239,005,723 - -Final Dividend for 2011/12 - (346,285,710) - - - (346,285,710)

Balance as at 31 March 2013 838,282,159 2,852,402,008 1,193,051,421 440,801,109 4,064,593 5,328,601,290







CASH FLOW STATEMENT

Year Ended 31 March 2013 2013 2012 Notes Rs. Rs.

Cash Flows From / (Used in) Operating ActivitiesProfit before Income Tax Expense 2,532,288,041 2,380,351,530

Adjustments for Depreciation of Property, Plant and Equipment 25 197,827,957 174,845,040 Amortisation of Intangible Assets 24 6,255,685 5,276,217 Impairment Provision 10 400,306,708 116,023,413 Interest cost on Finance Lease 4,354,679 5,132,479 Loss/(Profit) from Sale of Investments - (4,660,232) Diminution/(Appreciation) in Value of Investments 18,300,015 85,404,250 Loss/(Profit) on Disposal of Property, Plant and Equipment 9 (8,453,622) (10,278,657) Provision/(reversal) for Defined Benefit Plans 33 18,323,622 11,260,778 Dividend Received (2,458,894) (2,250,075) Notional Tax Credit on Interest on Government Securities 6.4 (29,535,499) (11,270,585) Withholding Tax attributed to Fixed Deposit & Professional Fees (77,488,698) (6,766,394)Operating Profit before Working Capital Changes 3,059,719,994 2,743,067,764

(Increase)/Decrease in Loans and Receivables (3,681,481,807) (5,261,486,334) (Increase)/Decrease in Lease Rentals Receivable & Stock out on Hire (4,985,659,380) (7,702,011,577) (Increase)/Decrease in Other Financial Assets (467,565,741) (251,991,350) (Increase)/Decrease in Other Non Financial Assets (190,224,423) (78,371,259) Increase/(Decrease) in Amounts Due to Customers 11,573,774,929 6,906,883,393 Increase/(Decrease) in Other Financial Liabilities 638,010,603 - Increase/(Decrease) in Other Non Financial Liabilities 73,511,566 408,044,419Cash Generated from Operations 6,020,085,741 (3,235,864,944)

Retirement Benefit Liabilities Paid (2,324,340) (899,402) Taxes Paid (950,066,185) (882,506,371)Net Cash From/(Used in) Operating Activities 5,067,695,216 (4,119,270,717)

Cash Flows from / (Used in) Investing Activities Acquisition of Property, Plant & Equipment (432,863,356) (1,595,904,644) Acquisition of Intangible Assets (10,585,344) (14,934,174) Proceeds from Sales of Property, Plant & Equipment 10,836,414 10,278,656 Sale/(Purchase) of Financial Investments- Available- for- Sale (368,323,096) 130,336,907 Dividend Received 2,458,894 2,250,075Net Cash Flows from/(Used in) Investing Activities (798,476,488) (1,467,973,180)

Cash Flows from / (Used in) Financing Activities Payment under Finance Lease Liabilities 28.2(a) (12,007,748) (10,823,000) Net Cash Flow from Securitised Borrowings, Syndicated Loans and Other Bank Facilities (1,926,336,373) 4,367,861,571 Net Cash Flow from Debt Issued and Other Borrowings 686,540,795 1,046,818,378 Dividends Paid (346,285,710) (242,399,997)Net Cash Flows from/(Used in) Financing Activities (1,598,089,036) 5,161,456,952

Net Increase in Cash and Cash Equivalents 2,671,129,690 (425,786,945)

Cash and Cash Equivalents at the beginning of the Year 470,050,512 895,837,457Cash and Cash Equivalents at the end of the Year 3,141,180,202 470,050,512

Operational Cash Flows from Interest Interest Paid 10,283,007,723 7,192,018,530 Interest Received 5,543,630,922 3,096,770,786



1. CORPORATE INFORMATION1.1 GeneralLB Finance PLC (The ‘Company’) is a public limited liability Company incorporated and domiciled in Sri Lanka. The registered office of the Company is located at 275/75 Prof. Stanley Wijesundera Mawatha, Colombo 7 and the principal place of business is situated at the same place.

1.2 Principal Activities and Nature of OperationsDuring the year, the principal activities of the Company were Acceptance of Deposits, Granting Lease facilities, Hire Purchase, Mortgage Loans, Gold Loans and other credit facilities, Real Estate Development and related services and Factoring etc.

1.3 Parent Enterprise and Ultimate Parent EnterpriseThe Company’s parent undertaking is Vallibel One PLC. The Company’s ultimate controlling party is Mr. K.D.D. Perera.

1.4 Date of Authorisation for IssueThe Financial Statements of L B Finance PLC for the year ended 31 March 2013 was authorised for issue in accordance with a resolution of the board of directors on 28 May 2013.

1.5 Directors' Responsibility StatementThe Board of Directors takes the responsibility for the preparation and presentation of these Financial Statements as per the provisions of the Companies Act No.07 of 2007 and the Sri Lanka Accounting Standards comprising LKASs and SLFRSs (hereafter “SLFRS”).

NOTES TO THE FINANCIAL STATEMENTS

2. BASIS OF PREPARATION2.1 Statement of complianceThe Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity and Cash Flow Statement, together with Accounting Policies and Notes, (‘Financial Statements’), as at 31st March 2013 and for the year then ended, have been prepared in accordance with Sri Lanka Accounting Standards comprising of Sri Lanka Financial Reporting Standards & Lanka Accounting Standards (hereafter referred as “SLFRS”), laid down by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 07 of 2007 and amendments thereto.

For all periods up to and including the year ended 31 March 2012, the Company prepared their financial statements in accordance with the Sri Lanka Accounting Standards which were effective prior to January 1, 2012. These financial statements for the year ended 31 March 2013 are the first set of statements the Company has prepared in accordance with SLFRS.

These SLFRSs are in effective from January 1, 2012 and comparatives (year 2012 and 2011) too are reclassified and re-measured. Hence the date of transition to SLFRS is April 1, 2012.

2.2 Basis of measurementThe financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position, all of which are measured at fair value.

• Financial Investments available for sale• Financial Investments held for trading

2.3 Functional and presentation currencyThe financial statements are presented in Sri Lankan Rupees, except when otherwise is indicated. No adjustments have been made for inflationary factors.

2.4 Comparative InformationThe accounting policies have been consistently applied by the Company with those of the previous financial year in accordance with LKAS 01 Presentation of Financial Statements, except those which had to be changed as a result of application of the new SLFRS. Further comparative information is reclassified wherever necessary to conform to the current presentation.

2.5 Presentation of financial statementsThe Company presents its statement of financial position broadly in order of liquidity. An analysis regarding 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 note 37.

2.6 Materiality & AggregationIn compliance with LKAS 01 on Presentation of Financial Statements, each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or functions 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 Comprehensive Income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies.

3 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONSThe preparation of financial statements requires the application of certain critical accounting and assumptions relative to the future. Further, it requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

JudgementsIn the process of applying the Company's accounting policies, management has exercised judgement and estimates in determining the amounts recognised in the financial statements.

Estimates and AssumptionsThe key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period, are described below. The Company based assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however,

may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur.

The most significant uses of judgements and estimates are as follows:

i . Taxation The Company is subject to income taxes and other taxes including VAT on financial services. Significant judgement was required to determine the total provision for current, deferred and other taxes pending the issue of tax guidelines on the treatment of the adoption of SLFRS in the financial statements and the taxable profit for the purpose of imposition of taxes. Uncertainties exist, with respect to the interpretation of the applicability of tax laws, at the time of the preparation of these financial statements.

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

ii. Impairment Losses on Loans and Receivables (Leases, Hire Purchase and Other Loans)The Company reviews their individually significant loans and receivables at each reporting date to assess whether an impairment loss should be recorded in the statement of comprehensive income. In particular, management’s judgment is required in the estimation of the amount and timing of future cash flows when

determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the impairment allowance.

Loans and Receivables that have been assessed individually and found to be not impaired and all individually insignificant loans and receivables are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence, but the effects of which are not yet evident. The collective assessment takes in to account data from the loan portfolio (such as levels of arrears, credit utilisation, loan-to-collateral ratios, etc.), and judgements on the effect of concentrations of risks and economic data (including levels of unemployment, inflation, interest rates,).

iii. Impairment of Available for Sale InvestmentsThe Company reviews its assets classified as available for sale investments at each reporting date to assess whether they are impaired. This requires similar judgment as applied on the individual assessment of loans and receivables.

The Company also records impairment charges on available for sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. In making this judgment, the Company evaluates, among other factors, historical share price movements, duration and extent up to which the fair value of an investment is less than its cost.


iv. Deferred Tax AssetsDeferred tax assets are recognised in respect of tax losses to the extent it is probable that future taxable profits will be available against which such tax losses can be set off. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with the future tax-planning strategies.

v. Useful life-time of the Property, Plant and EquipmentThe Company review the residual values, useful lives and methods of depreciation of assets at each reporting date. Judgement of the management estimate these values, rates, methods and hence they are subject to uncertainty.

vi. Defined Benefit PlansThe cost of defined benefit plans are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates etc. Due to the complexity of the valuation, the underlying assumptions and their long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. 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 extrapolated 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 expected future inflation rates and expected future salary increase rate of the Company.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe significant accounting policies applied by the Company in preparation of its financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in theses financial statements and in preparing the opening SLFRS statement of financial position at April 1, 2011 for the purpose of transition to SLFRS, unless otherwise is indicated.

4.1 Cash and Cash EquivalentsCash and Cash Equivalents are defined as cash in hand, balances with banks and Investments with short maturities i.e. three months or less from the date of acquisition.

For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdrafts. Investments with short maturities i.e. three months or less from the date of acquisition are also treated as cash equivalents.

4.2 Financial Assets4.2.1 Financial Assets - Initial Recognition and Subsequent MeasurementFinancial assets within the scope of LKAS 39 are classified as, Financial investments held for trading, Loans and Receivables, Lease Rentals Receivable & Stock out on Hire, Financial Assets available-for-sale and Other Financial Assets.

i Date of recognitionAll financial assets are initially recognised on the trade date, i.e., the date that the Company becomes a party to the contractual provisions of the instrument. This includes ’regular way trades’: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.

ii Initial Measurement of Financial AssetsThe classification of financial assets at initial recognition depends on their purpose and characteristics and the management’s intention in acquiring them. All financial assets are measured initially at their fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.

iii Financial assets at fair value through profit or lossA financial asset is classified as fair value through profit or loss if it is held for trading or is designated at fair value through profit of loss.

• Financial assets or financial liabilities held for trading

Financial assets held for trading are recorded in the statement of financial position at fair value. Changes in fair value are recognised in ‘Net trading income’. Interest and dividend income or expense is recorded in ‘Net trading income’ according to the terms of the contract, or when the right to the payment has been established.

• Financial assets designated at fair value through profit or loss (FVTPL).







Financial assets may be designated by management at fair value through profit or loss in the following circumstances:• Designation eliminates or

significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on them on a different basis or

• The assets are part of a group of financial assets, financial liabilities or both, which are managed and their performance evaluated on a fair value basis

Financial assets at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recorded in ‘Net gain or loss on financial instrument designated at fair value through profit or loss. Interest earned or incurred is accrued in ‘Interest income’ using the effective interest rate (EIR), while dividend income is recorded in ‘Other operating income’ when the right to the payment has been established.

iv. Held- to- Maturity Financial AssetsHeld to maturity financial investments are financial assets with fixed or determinable payments and fixed maturities, which the Company has the intention and ability to hold to maturity. Subsequent to initial recognition, held to maturity financial investments are measured at amortised cost using the Effective Interest Rate (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in ‘Interest income’ in the Statement of Comprehensive Income. The losses arising from impairment of such investments are recognised in the Statement of Comprehensive Income as ‘Impairment (Charges) / Reversal for loans and other losses”.

If the Company were to sell or reclassify more than an insignificant amount of held to maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available for sale. Furthermore, the Company would be prohibited from classifying any financial asset as held to maturity during the following two years.

v. Financial Assets Classified as Loans, Lease Rental Receivables, Stock out on Hire and Other Financial AssetsThis includes the financial assets with fixed or determinable payments that are not quoted in an active market.

After initial measurement subsequently measured at amortised cost using the EIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest income’ in the statement of comprehensive income. The losses arising from impairment are recognised in the statement of comprehensive income in ‘Impairment (charges) / reversals on loans & other losses”.

vi. Available for Sale Financial InvestmentsAvailable for sale investments include equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in the market conditions. The Company has not designated any loans or receivables as available for sale. After initial measurement, available for sale financial

investments are subsequently measured at fair value. Unrealised gains and losses are recognised directly in equity in the ‘Available for sale reserve. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the Statement of Comprehensive Income in ‘Other operating income’. Where the Company hold more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. Interest earned whilst holding available for sale financial investments is reported as interest income using the EIR. Dividends earned whilst holding available for sale financial investments are recognised in statement of comprehensive income as ‘Other operating income when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the statement of comprehensive income in ‘other operating income’ and removed from the ‘Available for sale reserve.

4.2.2 ‘Day 1’ Profit or LossWhen 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 Company immediately recognises the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in ‘Net trading income’.

4.2.3 Reclassification of Financial AssetsThe Company may reclassify financial assets (other than those designated at FVTPL) upon initial recognition, in certain circumstances:• Out of the ‘held for trading’ category

and into the ‘available for sale’, ‘loans and receivables’, or ’held to maturity’ categories.


• Out of the ‘available for sale’ category and into the ’loans and receivables’, ‘held for trading category’ or ‘held- to-maturity’.

Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortised cost. For a financial asset reclassified out of the ’available for sale’ category, any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to the Statement of Comprehensive Income.

Out of the ‘held for trading’ category and into the ‘loans and receivables’ category if it meets the definition of loans and receivables and the Company has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Company subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Reclassification is at the election of management, and is determined on an instrument by instrument basis.

4.2.4 Derecognition of Financial AssetsA financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:

• The rights to receive cash flows from the asset have expired

• The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement; and either:

• The Company has transferred substantially all the risks and rewards of the asset or

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

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass–through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

4.2.5 Impairment of Financial AssetsThe Company assesses at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective

evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an ‘incurred loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

i. Loans and Receivables and Lease and Stock out on HireLosses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Impairment allowances are calculated on individual loans and for groups of loans, this is done collectively. Impairment losses are recorded as charges to the statement of comprehensive income. The carrying amount of impaired loans on the reporting date is reduced through the use of impairment allowance accounts. Losses expected from future events are not recognised.

Individually Assessed Loans and Receivables and Lease and Stock out on HireFor all loans that are considered individually significant, the Company assesses on a case-by-case basis at each reporting date whether there is any objective evidence that a loan is impaired. The criteria used to determine that there is such objective evidence includes:

• Known cash flow difficulties experienced by the borrower;

• Past due contractual payments of either principal or interest;

• Breach of loan covenants or conditions;• The probability that the borrower will

enter bankruptcy or other financial realisation; and

• A significant downgrading in credit rating by an external credit rating agency.







For those loans where objective evidence of impairment exists, impairment losses are determined considering the following factors:• Company’s aggregate exposure to the

customer;• The viability of the customer’s business

model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations;

• The amount and timing of expected receipts and recoveries;

• The complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident;

• The realisable value of security and likelihood of successful repossession; and

• The likely deduction of any costs involved in recovery of amounts outstanding;

Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate and comparing the resultant present value with the loan’s current carrying amount. The impairment allowances on individually significant accounts are reviewed more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and the timing and amount of actual and anticipated receipts. Individually assessed impairment allowances are only released when there is reasonable and objective evidence of a reduction in the established loss estimate.

Collectively Assessed Loans and Receivables and Lease & Stock out on HireImpairment is assessed on a collective basis in two circumstances:

• to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment; and

• for homogeneous groups of loans that are not considered individually significant.

Incurred but not yet Identified ImpairmentIndividually assessed loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss. This reflects impairment losses that the Company has incurred as a result of events occurring before the reporting date, which the Company is not able to identify on an individual loan basis, and that can be reliably estimated. These losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans within the group, those loans are removed from the group and assessed on an individual basis for impairment.

The collective impairment allowance is determined after taking into account:

• Historical loss experience in portfolios of similar credit risk; and

• Management’s experienced judgment as to whether current economic and credit conditions are such that the actual level of inherent losses at the reporting date is likely to be greater or less than that suggested by historical experience.

Homogeneous groups of Loans and Receivables and Lease & Stock out on HireStatistical methods are used to determine impairment losses on a collective basis for homogeneous groups of loans. Losses in these groups of loans are recorded on an

individual basis when individual loans are written off, at which point they are removed from the group.

Following method is used to calculate historical loss experience on a collective basis:

• Net flow Rate method

Under this methodology the movement in the outstanding balance of customers in to bad categories over the periods are used to estimate the amount of loans that will eventually be written off as a result of the events occurring before the balance sheet date which the Group is not able to identify on an individual loan basis, and that can be reliably estimated.

Under above methodology, loans are grouped into ranges according to the number of days in arrears and statistical analysis is used to estimate the likelihood that loans in each range will progress through the various stages of delinquency, and ultimately prove irrecoverable.

Current economic conditions and portfolio risk factors are also evaluated when calculating the appropriate level of allowance required to cover inherent loss.

These additional macro and portfolio risk factors may include:

• Recent loan portfolio growth and product mix,

• Unemployment rates, Gross Domestic Production (GDP) growth, inflation

• Exchange rates, interest rates• Changes in government laws and

regulations



Write-off of Loans and AdvancesLoans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security.

Reversals of ImpairmentIf the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment allowance account accordingly. The write-back is recognised in the income statement.

ii. Available for Sale Financial InvestmentsFor available for sale financial investments, the Company assesses at each reporting date whether there is objective evidence that an investment is impaired. In the case of debt instruments classified as available for sale, the Company assesses individually whether there is objective evidence of impairment.

However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the statement of comprehensive income. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of ‘Interest income’. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the Statement of

Comprehensive Income, the impairment loss is reversed through the Statement of Comprehensive Income.

In the case of equity investments classified as available for sale, objective evidence would also include a ‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the Statement of Comprehensive Income is removed from equity and recognised in the Statement of Comprehensive Income. Impairment losses on equity investments are not reversed through the Statement of Comprehensive Income; increases in the fair value after impairment are recognised in other comprehensive income.

iii. Held-to-maturity Financial AssetsAn impairment loss in respect of held-to-maturity financial assets measured at amortised cost is calculated as the difference between its carrying amount and the present value of estimated future cash flows discounted at the asset’s original EIR and is recognised in profit or loss. Interest on impaired assets continue to be recognised through the unwinding of discount. When a subsequent event caused the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the Statement of Comprehensive Income.

4.2.6 Collateral ValuationThe Company seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, gold, real estate, receivables, other non-financial assets. The fair value of collateral is generally assessed,

at a minimum, at inception and based on the guidelines issued by the Central Bank of Sri Lanka.

Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent valuers and other independent sources.

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

4.2.8 Repurchase AgreementSecurities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within ‘Other Financial Assets’ reflecting the transaction’s economic substance as a loan by the Company. The difference between the purchase and resale prices is recorded in ‘Net interest income’ and is accrued over the life of the agreement using the EIR.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within ‘Financial liabilities held for trading’ and measured at fair value with any gains or losses included in ‘Net trading income’.

4.3 Non – Financial Assets4.3.1 Property, Plant and EquipmentProperty, Plant & Equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the






entity and the cost of the asset can be measured reliably in accordance with LKAS 16 on Property, Plant & Equipment. Initially property, plant and equipment are measured at cost.

Recognition and MeasurementInitial RecognitionProperty, Plant and Equipment is stated at cost, excluding the costs of day–to–day servicing, less accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of the equipment when that cost is incurred, if the recognition criteria are met.

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

DepreciationDepreciation is calculated using the straight–line method to write down the cost of property and equipment to their residual values over their estimated useful lives & fully depreciation is charge for the month of purchase of such property, plant and equipment & no depreciation is charge in the month of disposal. Land is not depreciated. The period of depreciations based on the estimated useful lives are as follows:

Category of Asset Period

Building 50 years

Furniture and Fittings 6.67 years

Equipment 5 years

Motor Vehicles and Accessories 4-8 years

Computer Hardware 5 years

Air Condition 5 years

Telephone System 5 years

Fire Protection Equipment 5 years

Leasehold Improvement 6.67 years

Fixtures & Fittings 3 years

The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at the end of the reporting period.

De-recognitionProperty, Plant and Equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in ‘Other operating income' in the Statement of Comprehensive Income in the year the asset is derecognised.

4.3.2 Intangible AssetsThe Company’s intangible assets include the value of computer software. An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Company.

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

Useful Life of Intangible AssetsThe useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and they are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the Statement of Comprehensive Income in the expense category consistent with the function of the intangible asset.

AmortizationAmortisation is calculated using the straight–line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows:



The Class of Intangible Assets

Useful Life

Amortisation Method

Computer software

5 Years Straight line method

4.3.3 Impairment of Non-Financial AssetsThe Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre–tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

For assets, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its

constant rate of interest on the remaining balance of the liability.

Operating LeaseAll other leases are classified as operating leases. When acting as lessor, the Company includes the assets subject to operating leases in ‘Property, Plant and Equipment’ and accounts for them accordingly. Impairment losses are recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is thereby impaired.

When the Company is the lessee, leased assets are not recognised on the balance sheet. Rentals payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the leases and are included in ‘Other operating expenses’ and ‘other operating income’, respectively.

4.5 Financial LiabilitiesInitial Recognition and MeasurementFinancial liabilities within the scope of LKAS 39 are classified as Due to customers (Deposits), Due to Banks,Debt issued and other borrowed funds and Other Financial Liabilities as appropriate. The Company determines the classification of its financial liabilities at initial recognition.

The Company classifies financial liabilities as other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities.

The Company recognises financial liabilities in the Statement of financial position when the Company becomes a party to the contractual provisions of the financial liability.

recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the Statement of Comprehensive Income.

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

Finance LeaseAgreements which transfer to counter parties substantially all the risks and rewards incidental to the ownership of assets, but not necessarily legal title, are classified as finance leases. When the Company is a lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are included in ‘Lease rentals receivables and stock out on hire. The finance 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.

When the Company is a lessee under finance leases, the leased assets are capitalised and included in ‘Property, Plant and Equipment’ and the corresponding liability to the lessor is included in ‘Due to Banks’. A finance lease and its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. Finance charges payable are recognised in ‘Net interest income’ over the period of the lease based on the interest rate implicit in the lease so as to give a






Other Financial LiabilitiesOther financial liabilities including Due to customers (Deposits), Due to Banks,Debt issued and other borrowed funds and Other Financial Liabilities are initially measured at fair value less transaction cost that are directly attributable to the acquisition and subsequently measured at amortised cost using the EIR method.

Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR.

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

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

4.7 Retirement Benefit Obligations(i) GratuityAll the employees of the Company are eligible for gratuity under the Payment of Gratuity Act No. 12 of 1983.

Employees those who have resigned or whose services are terminated other than by retirement are eligible to receive the terminal gratuity under the Payment of Gratuity Act No. 12 of 1983 at the rate of one half of the Gross Salary applicable to the last month of the financial year in which the employment is terminated or resigned, for each year of completed service, for those who have served in excess of 5 years.

The valuation was carried out as at 31st March 2013 by M/s. Piyal S. Goonetilleke & Associates, a qualified actuary.

Recognition of Actuarial Losses / GainsActuarial gains and losses are recognised as income or expenses when the net cumulative unrecognised actuarial gains and losses at the end of the previous reporting period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at the date.

The gains/losses are recognised over the expected average remaining working lives of the employees participating in the plan.

Recognition of Past Service Cost (Applicable only when a plan has been changed)Past Service Cost are recognised as an expense on a straight line basis over the average period until the benefits become vested. If the benefits have already been vested, immediately following the instruction of, or changes to the plan, past service costs are recognised immediately.

Funding ArrangementsThe Gratuity liability is not externally funded.

(ii) Defined Contribution PlanThe Company also operates a defined contribution plan. The contribution payable to a defined contribution plan is in proportion to the services rendered to the Company by the employees and is recorded as an expense under ‘Personnel expenses’. Unpaid contributions are recorded as a liability.

The Company contributes to the following Schemes:

• Employees’ Provident Fund The Company and employees

contribute 15% and 10% respectively of the employee’s monthly gross salary (excluding overtime) to the Provident Fund.

• Employees’ Trust Fund The Company contributes 3% of the

employee’s monthly gross salary excluding overtime to the Employees’ Trust Fund maintained by the Employees Trust Fund Board.

4.8 TaxationIncome Tax expense comprises of current and deferred tax. Income tax expense is recognised in the statement of comprehensive Income.

4.8.1 Current TaxCurrent tax assets and liabilities consist of amounts expected to be recovered from or paid to the Commissioner General of Inland Revenue in respect of the current year and any adjustment to tax payable in respect of prior years. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the reporting date.



4.8.2 Deferred taxDeferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose.

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

The carrying amount of a deferred tax asset is reviewed at each reporting date and reduced to the extent it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax asset are reassessed at each reporting date and are recognise to the extent that is probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rate that are expected to apply in the year when the assets are realised or the liabilities are settled, based on tax rates and tax laws that have been enacted or subsequently enacted at the reporting date.

4.8.3 VAT on Financial ServicesVAT on Financial Services is calculated in accordance with VAT Act No. 14 of 2002 and subsequent amendment thereto.

4.9 Recognition of Income and ExpensesRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before

revenue is recognised.

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

The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Company revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as ’Interest income’ for financial assets and ’Interest expense’ for financial liabilities. However, for a reclassified financial asset for which the Company subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

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

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

a) Fee income earned from services that are provided over a certain period of timeFees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

b) Fee income from providing transaction servicesFees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the purchase or sale of business is recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

4.9.3 Dividend IncomeDividend income is recognised when the right to receive the payment is established.

4.9.4 Net Trading IncomeNet trading income includes all gains and losses from changes in fair value and related dividends for financial assets and financial liabilities ‘held for trading’ other than interest income.

4.10 Dividends on Ordinary SharesDividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Company’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Company. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date.






4.11 Cash Flow StatementThe Cash flow statement is prepared using the indirect method, as stipulated in LKAS 7- “Statement of Cash Flows”. Cash and cash equivalents comprise cash in hand, cash at bank, bank overdrafts and Investments with short maturities i.e. three months or less from the date of acquisition are also treated as cash equivalents..

4.12 Standards Issued but not yet EffectiveThe following SLFRS have been issued by the Institute of Chartered Accountants of Sri Lanka that have an effective date in the future. Those SLFRS will have an effect on the accounting policies currently adopted by the Company and may have an impact on the future financial statements.

(i) SLFRS 9 -Financial Instruments: Classification and MeasurementSLFRS 9, as issued reflects the first phase of work on replacement of LKAS 39 and applies to classification and measurement of financial assets and liabilities.

(ii) SLFRS 13 -Fair Value MeasurementSLFRS 13 establishes a single source of guidance under SLFRS for all fair value measurements. SLFRS 13 provides guidance on all fair value measurements under SLFRS.

SLFRS 9 and SLFRS 13 will be effective for financial periods beginning on or after 01 January 2015 and 2014 respectively.

In addition to the above, following standards have also been issued and will be effective from 01 January 2014.

SLFRS 10 -Consolidated Financial StatementsSLFRS 11 – Joint ArrangementsSLFRS 12 -Disclosure of Interests in Other Entities

The Company will adopt these standards when they become effective. Pending a detailed review, the financial impact is not reasonably estimable as at the date of publication of these financials.

5. FIRST- TIME ADOPTION OF LKASS AND SLFRSSThese financial statements, for the year ended 31 March 2013, are the first the Company has prepared in accordance with SLFRSs applicable for periods ending on or after 1 January 2012. In preparing these financial statements, the company’s opening statement of financial position was prepared as at 1 April 2011, the Company’s date of transition to SLFRSs. This note explains the principal adjustments made by the Company in restating its previously presented statement of financial position as at 1 April 2011 and for the year ended 31 March 2012.

As stated in Note 2.1, these are the Company’s first financial statements prepared in accordance with SLFRS.The accounting policies set out in Note 3 have been applied in preparing the Financial Statements for the year ended March 31, 2013, the comparative information presented as at and for the year ended March 31, 2012 and in the preparation of an opening SLFRS based Statement of Financial Position at April 1, 2011 (the date of transition).

ExemptionsSLFRS 1 First- time adoption of Sri Lanka Accounting Standards allows first time adopters certain exemptions from the retrospective application of certain SLFRS.

The Company has applied the following exemption.

(i) The Company has elected to disclose the following amounts prospectively from the date of transition.

(ii) The experience adjustments arising on the plan liabilities and the plan assets.



5.

FIR

ST-

TIM

E A

DO

PTIO

N O

F LK

AS

AN

D S

LFR

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1 R

econ

cilia

tion

of E

quity

as

at 0

1 A

pril

2011

(Beg

inni

ng o

f the

day

bal

ance

s)

Prev

ious

Cla

ssifi

catio

n

SLAS

Re

clas

sific

atio

ns

Rem

easu

rem

ents

SL

FRS/

LKAS

N

ew C

lass

ifica

tion

N

ote

Rs.

Rs.

Rs.

Rs.

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ts

Cash

and

am

ount

s du

e fro

m b

anks

347,

445,

557

1,28

7,30

3,94

5 -

1,63

4,74

9,50

2 Ca

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nd B

ank

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nces

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s &

oth

er b

ills

elig

ible

for

re

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coun

ting

with

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tral

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k

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2,15

7,95

7 (1

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) -

13,8

85,5

36

Fina

ncia

l Inv

estm

ents

- H

eld

for T

radi

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acem

ents

with

oth

er b

anks

302,

583,

827

(302

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-Lo

ans

and

Adva

nces

A

1,87

6,25

3,90

3 5,

666,

977,

116

(33,

609,

471)

7,

509,

621,

549

Loan

s an

d Re

ceiva

bles

Gold

Loa

ns

5,

666,

977,

116

(5,6

66,9

77,1

16)

- -

Leas

e re

ntal

s re

ceiva

ble

& S

tock

out

on

hire

A,

B

16,3

32,0

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03

- (2

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43,6

18

Leas

e Re

ntal

s Re

ceiva

ble

& S

tock

out

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32

7,05

3,35

3 4,

914,

237

331,

967,

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Fina

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l Inv

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- Av

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ble

for S

ale

Real

Est

ate

Stoc

k

237,

520,

182

(237

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r Veh

icle

Sto

ck

51

9,70

5,85

1 (5

19,7

05,8

51)

- -

Othe

r Deb

tors

, Dep

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and

Pre

paym

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235,

225

(675

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) -

-

D

769,

387,

451

(1,5

45,2

58)

767,

842,

192

Othe

r Fin

anci

al A

sset

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B

1,19

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4,53

2 32

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1,

232,

682,

335

Othe

r Non

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anci

al A

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sIn

vest

men

t Por

tfolio

28,5

93,6

29

(28,

593,

629)

-

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g Po

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lio

21

1,81

8,14

4 (2

11,8

18,1

44)

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9,68

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- 9,

681,

837

Inta

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ty, P

lant

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quip

men

t

432,

358,

758

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432,

358,

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Prop

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, Pla

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ed T

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- De

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sets

Tota

l Ass

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(239

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) 28

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Liab

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s

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4,80

0 -

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0 Du

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19,6

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24

642,

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- 20

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Du

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25,8

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bt Is

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58

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69,6

59

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33,8

69,6

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Post

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men

t Ben

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396,

412,

761

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6)

300,

292,

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(73,

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19

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48,6

20,9

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(1

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92,3

69)

25,4

78,9

28,5

57

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l Lia

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83

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9 -

- 83

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1,14

3,87

2 4,

914,

237

616,

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108

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5,43

5,90

8 (6

11,1

43,8

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(74,

427,

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1,

089,

864,

094

Reta

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Ear

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hare

hold

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Fun

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2,

613,

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3,70

6)

2,54

4,20

4,36

1 To

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28,2

62,3

38,9

92

(2

39,2

06,0

75)

28,0

23,1

32,9

17

Tota

l Lia

bilit

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and

Shar

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ders

’ Fun

ds






5.

FIR

ST-

TIM

E A

DO

PTIO

N O

F LK

AS

AN

D S

LFR

SS (C

ON

TD.)

5.2

Rec

onci

liatio

n of

Equ

ity a

s at

31

Mar

ch 2

012

Prev

ious

Cla

ssifi

catio

n

SLAS

Re

clas

sific

atio

ns

Rem

easu

rem

ents

SL

FRS/

LKAS

N

ew C

lass

ifica

tion

N

ote

Rs.

Rs.

Rs.

Rs.

Asse

tsCa

sh a

nd a

mou

nts

due

from

ban

ks

66

9,50

6,36

2 1,

284,

730,

428

- 1,

954,

236,

790

Cash

and

Ban

k Ba

lanc

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easu

ry B

ills

& o

ther

bill

s el

igib

le fo

r

re-d

isco

untin

g w

ith C

entr

al B

ank

1,

266,

964,

280

(1,2

60,2

24,1

89)

- 6,

740,

091

Fina

ncia

l Inv

estm

ents

- H

eld

for T

radi

ngPl

acem

ents

with

oth

er b

anks

963,

593,

487

(963

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,487

) -

-Lo

ans

and

Adva

nces

A

4,40

1,17

5,20

1 8,

490,

950,

281

(121

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) 12

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Lo

ans

and

Rece

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esGo

ld L

oans

8,49

0,95

0,28

1 (8

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) -

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ase

rent

als

rece

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e &

Sto

ck o

ut o

n hi

re

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23

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-

(148

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) 23

,686

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Le

ase

Rent

als

Rece

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Sto

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C

115,

816,

424

12,2

51,1

20

128,

067,

545

Fina

ncia

l Inv

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ents

- Av

aila

ble

for S

ale

Real

Est

ate

Stoc

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143,

212,

184

(143

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) -

-Ad

vanc

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Sto

ck

12

7,21

2,56

7 (1

27,2

12,5

67)

- -

Othe

r Deb

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, Dep

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and

Pre

paym

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831,

463,

632

(831

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) -

-

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1,02

1,43

9,08

0 (1

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) 1,

019,

833,

542

Othe

r Fin

anci

al A

sset

s

B

1,02

6,27

6,64

2 40

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1,

066,

621,

897

Othe

r Non

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al A

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vest

men

t Por

tfolio

3,47

9,50

4 (3

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g Po

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lio

11

9,07

7,01

1 (1

19,0

77,0

11)

- -

Inta

ngib

le a

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s

19,3

39,7

94

- -

19,3

39,7

94

Inta

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le A

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ty, P

lant

& E

quip

men

t

1,86

8,28

6,21

8 -

- 1,

868,

286,

218

Prop

erty

, Pla

nt a

nd E

quip

men

tDe

ferr

ed T

axat

ion

E 34

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-

82,8

14,9

21

117,

779,

183

Defe

rred

tax

asse

tsTo

tal A

sset

s

42,7

73,9

61,3

61

(1

35,5

56,7

08)

42,6

38,4

04,6

53

Tota

l Ass

ets

Liab

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s

8,91

0,25

4,58

4 -

8,91

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4,58

4 Du

e to

Ban

ksDe

posi

ts fr

om n

on-b

ank

cust

omer

s

26,2

57,6

99,3

46

914,

462,

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- 27

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Du

e to

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tom

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975,

715,

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34,1

61,2

87)

- 1,

541,

554,

566

Debt

Issu

ed a

nd O

ther

Bor

row

ed F

unds

Accr

ued

char

ges

2,

152,

830,

261

(2,1

52,8

30,2

61)

- -

-

- -

Othe

r Fin

anci

al L

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litie

s

757,

274,

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7,27

4,89

2 Ot

her N

on F

inan

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Debe

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es

99

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0 (9

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00)

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Retir

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t Ben

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44

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-

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t Lia

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2,02

6,76

2 -

(97,

196,

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24

4,83

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7 Cu

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t Tax

Lia

bilit

ies

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rred

Tax

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n

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- -

Defe

rred

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Tota

l Lia

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38

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(97,

196,

055)

38

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,203

To

tal L

iabi

litie

s

Shar

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ders

’ Fun

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ated

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ital

83

8,28

2,15

9 -

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8,28

2,15

9 St

ated

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764

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51,1

20

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3,88

4 Re

serv

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168,

175,

944

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64)

(50,

611,

773)

2,

075,

561,

407

Reta

ined

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ning

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tal S

hare

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ds

4,

006,

458,

103

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3,96

8,09

7,45

0 To

tal S

hare

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tal L

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litie

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d Sh

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olde

rs’ F

unds

42,7

73,9

61,3

61

(1

35,5

56,7

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42,6

38,4

04,6

53

Tota

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5.

FIR

ST-

TIM

E A

DO

PTIO

N O

F LK

AS

AN

D S

LFR

SS (C

ON

TD.)

5.3

Rec

onci

liatio

n of

Com

preh

ensi

ve In

com

e fo

r th

e ye

ar e

nded

31

Mar

ch 2

012

Prev

ious

Cla

ssifi

catio

n

SLAS

Re

clas

sific

atio

ns

Rem

easu

rem

ents

SL

FRS/

LKAS

N

ew C

lass

ifica

tion

N

ote

Rs.

Rs.

Rs.

Rs.

Inco

me

7,

850,

403,

776

7,93

7,07

2,12

1 In

com

e

Inte

rest

Inco

me

G 7,

238,

798,

694

2,11

3,33

0 56

,679

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7,

297,

591,

134

Inte

rest

Inco

me

Inte

rest

Exp

ense

3,55

1,98

6,42

2

3,

551,

986,

422

Inte

rest

Exp

ense

Net

Inte

rest

Inco

me

3,

686,

812,

272

3,74

5,60

4,71

2 N

et In

tere

st In

com

e

562,

247,

460

56

2,24

7,46

0 Fe

e an

d Co

mm

issi

on In

com

e

562,

247,

460

Net

Fee

and

Com

mis

sion

Inco

me

(6

,974

,081

)

(6,9

74,0

81)

Net

Tra

ding

Inco

me

Othe

r Ope

ratin

g In

com

e H

57

4,38

3,16

9 (5

55,2

73,3

79)

65,0

97,8

19

84,2

07,6

09

Othe

r Ope

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g In

com

e

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5,08

5,69

9 To

tal O

pera

ting

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me

I

78

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37

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11

6,02

3,41

3 Im

pairm

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Char

ges)

/

Reve

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for l

oans

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oth

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sses

4,

269,

062,

286

Net

Ope

ratin

g In

com

e

Less

: Op

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5. FIRST- TIME ADOPTION OF LKAS AND SLFRSS (CONTD.)A Adjustment on Loan ImpairmentThe previously recognised loan loss provision amounting to Rs. 190.10 Mn and Interest in suspense of Rs. 561.62 Mn were reversed and impairment provision of Rs. 741.42 Mn was recognised as at April 1, 2011, (the date of transition) after making necessary adjustments to retained earnings.

As at 31 March 2012 the impairment provision was Rs.827.76 Mn was recognised against the loan loss provision of 610.45 Mn which was previously recognised based on previous SLAS. The movement between the impairment balances of two years was recognised in the Statement of Comprehensive Income as an impairment charge.

B Staff Loans Measured at Fair ValueUnder previous SLAS, staff loans were recorded at cost less repayments, net of loan loss provision, if any. Under SLFRS , the Company measured staff loans granted below the market interest rate at their fair value, calculated based on the market interest rate of similar products. The fair value of such loans as at April 1, 2011 was Rs. 83.78 Mn and their previous SLAS carrying amount was Rs. 116.43 The difference between the fair value and previous SLAS carrying amount has been deducted from Lease rentals receivable and Stock out on hire and recognised as pre-paid staff cost in Other Non Financial Assets.

As at 31 March 2012 the fair value of staff loan was Rs. 92.86 Mn and their previous SLAS carrying amount was Rs. 133.17 Mn . The difference between the fair value and SLAS carrying amount has been deducted from Lease rentals receivable & Stock out on hire and recognised as pre-paid staff cost in Other Non Financial Assets.

C Financial Investments- Available- for- SaleUnder previous SLAS, the Company recognised its investment portfolios which was not hold for active trading activities at cost. Under SLFRS, the Company has designated such investments as available-for-sale investments and measured at fair value. Such investments includes equity investment and investment in treasury bonds against Investment Fund Account.

At the date of transition to SLFRS, the fair value of these assets was Rs. 331.96 Mn and their previous SLAS carrying amount was Rs. 327.05 Mn. The difference of Rs. 4.91 Mn between the fair value of the instruments and previous SLAS carrying amount has been recognised as a separate component of equity, in the available-for-sale reserve.

As at March 31, 2012 the fair value of the investment was Rs. 128.06 Mn and previous SLAS carrying amount was Rs. 115.82 Mn. The difference between the fair value and previous SLAS carrying amount of Rs. 12.25 Mn has been recognised in the available-for-sale reserve and to gether with the movement in respect of such items.

D Fair Value of Other Financial AssetsUnder previous SLAS, investment in fixed deposits were shown at their original deposit value and interest was accrued on straight-line basis. Under SLFRS, interest was previous recognised on EIR method and stated at amortised cost. At the date of transition, the difference between the interest already provided under SLAS and requirement under SLFRS was Rs. 1.54 Mn. It was adjusted to the retained earnings and netted off against the investment in fixed deposits.

As at March 31, 2012, the difference between the interest accrual under EIR method and straight-line basis was Rs. 1.61 Mn. Accordingly, the net movement was charged to Statement of Comprehensive Income.

E Current Tax LiabilitiesBased on the SLFRS transition impact, an over payment of Rs. 96.1 Mn was recognised. In 2012, further over payment of Rs. 1.07 Mn was recognised against the provisions made based on previous SLAS financial Statements.



5. FIRST- TIME ADOPTION OF LKAS AND SLFRSS (CONTD.)F Deferred TaxationThe deferred tax asset previously identified under SLAS accounts were reversed and relevant assets were recognised where necessary. The net impact was Rs. 73.5 Mn as at the date of transition and it was charged to the Retained earnings. As at March 31, 2012 the net movement was Rs. 9.2 Mn and adjusted to income tax expense and deferred tax asset.

G Interest IncomeNet increase in income amounting to Rs. 58.79 Mn was made after netting off the staff loan fair value adjustment, EIR adjustment on Loans, Lease, Hire Purchase and Other Advances and impact on interest unwinding.

H Other Operating IncomeAn additional income of Rs. 65.09 Mn was recognised as a result of EIR adjustment and reclassification adjustment for gain or loss on Financial Investments - Available for Sale.

I Impairment (Charges) / Reversal for Loans and Other LossesThe effect of the reversal made in previous SLAS financial statements was removed since such provision was not made in SLFRS based Financial statements.

J Personnel ExpensesA charge on staff loan fair value adjustment, amortisation of pre-paid staff cost of Rs. 7.7 Mn was adjusted to Personnel Expenses.

K Related Party TransactionsFrom the year 2012, in addition to the Board of Directors of the Company, all the members of the staff who report direct to the Board of Directors were included to the key Management Personnel.

2013 2012 Rs. Rs.

6. INCOMEInterest Income 10,325,026,910 7,297,591,134Net Fee and Commission Income 729,609,598 562,247,460Net Trading Income 962,850 (6,974,081)Other Operating Income 110,850,484 84,207,608Total Income 11,166,449,843 7,937,072,121

6.1 Interest IncomeLoans and Receivables 3,303,173,614 2,100,233,897Lease Rentals Receivable & Stock out on Hire 6,531,736,083 5,007,496,299Financial Investments - Available for Sale 50,887,479 -Other Financial Assets 434,606,279 185,133,616Interest Income Accrued on Impaired Financial Assets 4,623,455 4,727,322Total Interest Income 10,325,026,910 7,297,591,134

6.2 Net Interest income from Sri Lanka Government SecuritiesInterest Income 295,338,879 113,607,268Net Interest Income 295,338,879 113,607,268






2013 2012 Rs. Rs.

6.3 Interest ExpensesDue to Banks 872,222,410 706,713,967Due to Customers 4,775,933,230 2,698,362,659Debt Issued and Other Borrowed Funds 297,551,092 146,909,796Total Interest Expenses 5,945,706,732 3,551,986,422

6.4 Net Interest Income 4,379,320,178 3,745,604,712

Notional Tax Credit for Withholding Tax on Government Securities on Secondary Market TransactionsThe Inland Revenue Act No.10 of 2006 and the amendments there to, provided that a company which derives interest income from the secondary market transactions in Government Securities ( on or after April 1, 2002 ) would be entitled to a notional tax credit ( being one ninth of the net interest income ) provided such interest income forms part of the statutory income of the Company for that year of assessment.

Accordingly the net interest income earned from the secondary market transactions in Government Securities for the year, has been grossed up in these Financial Statement and the resulting notional Tax credit amounted to Rs.29,535,499/- (2012 - Rs.11,270,585/-).

7. NET FEE AND COMMISSION INCOMECredit Related Fees and Commissions 422,039,333 273,178,444Service Charge 307,570,265 289,069,016Net Fee and Commission Income 729,609,598 562,247,460

Net Fee and Commission Income 729,609,598 562,247,460

8. NET TRADING INCOMEDividend Income from Financial Investments - Held for Trading 379,894 171,364Appreciation/(Depreciation) in Market Value of Financial Investments - Held for Trading 582,956 (7,145,445) 962,850 (6,974,081)

9. OTHER OPERATING INCOMEDividend Income from Financial Investments - Available for Sale 2,079,000 2,079,000Reclassification Adjustments for Gain/(Loss) - Available for Sale Financial Assets (24,611,455) (20,497,870)Profit/(Loss) on Disposal of Investments - 4,660,232Profit/(Loss) on Disposal of Property, Plant & Equipment 8,453,622 10,278,656Real Estate Income (net of cost ) 10,614,679 30,130,894Hiring Income 107,807,622 42,563,613Recoveries on Bad Debts - 14,438,450Other Sundry Income 6,507,017 554,633Total Other Operating Income 110,850,485 84,207,608



2013 2012 Rs. Rs.

10. IMPAIRMENT (CHARGES)/ REVERSAL FOR LOANS AND OTHER LOSSESLoans and Receivables 243,449,233 107,341,388Lease Rentals Receivable & Stock out on Hire 161,937,893 317,472Other Losses (5,080,418) 8,364,553 400,306,708 116,023,413

11. PERSONNEL EXPENSESSalaries and Other Related Expenses 784,820,320 649,005,112Employer’s contribution to Employee's Provident Fund 71,101,616 58,346,937Employer’s Contribution to Employee's Trust Fund 13,970,364 11,705,434Gratuity Charge/ (Reversals) for the Year 18,323,622 11,260,778Other Staff Related Expenses 126,532,229 124,295,608Amortisation of Staff Loan Day 01 Difference 11,292,906 7,702,082 1,026,041,057 862,315,951

12. OTHER OPERATING EXPENSESDirectors’ Emoluments 9,973,423 6,240,225Auditors Remuneration 2,050,000 1,876,572Non Audit fees to auditors 1,360,474 1,347,643Professional and Legal Expenses 37,149,654 29,620,409Deposit Insurance Premium 44,561,376 29,198,369General Insurance Expenses 55,204,259 43,340,735Office Administration and Establishment Expenses 389,839,047 290,794,232Advertising and Business Promotional Expenses 247,182,111 202,703,426Other Expenses 100,183,027 33,438,771 887,503,371 638,560,382

13. TAXATION13.1 The major components of income tax expense for the years ended 31st March are as follows.Statement of Comprehensive IncomeCurrent Income TaxIncome Tax for the year 899,383,506 855,740,944Under/ (Over) Provision of Current Taxes in respect of Previous Years/ SLFRS Adjustments (12,243,078) 5,833,645

Deferred TaxDeferred Taxation Charge/ (Reversal) (Refer Note 26) (61,641,937) (137,456,217) 825,498,491 724,118,372






13.2 Reconciliation of Accounting Profit and Taxable Income

A reconciliation between the tax expense and the accounting profit multiplied by Government of Sri Lanka’s tax rate for the Years ended 31 March are as follows.

2013 2012 Rs. Rs.

Accounting Profit Before Income Taxation 2,526,559,558 2,438,112,464

Income Tax Expense at the Statutory Income Tax Rate of 28% 707,436,676 682,671,490

Tax effect of Non Deductible Expenses 187,221,751 181,389,564Tax effect of Other Allowable Credits (3,115,241) (4,119,885)Tax Effect of Exempt Income (974,696) -Tax Effect of Tax Losses ClaimedAdjustments of Taxes in Respect of Prior Years (3,428,062) 1,633,421Charge/(Reversal) for Deferred Tax (61,641,937) (137,456,217) 825,498,491 724,118,373

Effective Tax Rate 32.67% 29.70%

14. BASIC EARNINGS PER ORDINARY SHARE14.1 Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders by weighted average

number of ordinary shares outstanding during the year, as per LKAS 33- Earnings Per Share.

14.2 The following reflect the income & shares details used in the Basic Earning per Share computation.

2013 2012 Rs. Rs.

Amounts Used as the Numerators:Profit attributable to Ordinary Shareholders for Basic Earnings Per Share 1,702,665,042 1,713,994,093

Number of Ordinary Shares Used as Denominators for Basic Earnings per shareWeighted Average Number of Ordinary Shares in issue 69,257,142 69,257,142

Basic Earnings per ordinary share (Rs.) 24.58 24.75

15. DIVIDEND PAID & PROPOSED15.1 Declared and Paid During the YearDividends on Ordinary Shares:First and Final Dividend for 2012 - Rs.5.00 per Share (2011 - Rs. 3.50 per Share) 346,285,710 242,399,997



2013 2012 Rs. Rs.

15.2 Proposed for approval at Annual General Meeting(not recognised as a liability as at 31 March)Dividends on Ordinary Shares:First and Final Dividend for 2013 - Rs. 6.50 per Share (2012 - Rs. 5.00 per Share) 450,171,423 346,285,710

16. ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS16.1 As at 31 March 2013

HFT at HTM at L&R at AFS at Fair Amortised Amortised Fair Value Cost Cost Value Total Rs. Rs. Rs. Rs. Rs.

AssetsCash and Bank Balances - - 4,019,673,357 - 4,019,673,357Financial Investments - Held for Trading 7,323,047 - - - 7,323,047Loans and Receivables - - 16,452,987,398 - 16,452,987,398Lease Rentals Receivable & Stock out on Hire - - 28,271,346,675 - 28,271,346,675Financial Investments - Available for Sale - - - 473,739,318 473,739,318Other Financial Assets - - 1,487,399,284 - 1,487,399,284Total Financial Assets 7,323,047 - 50,231,406,713 473,739,318 50,712,469,079

Other Financial Liabilities at Amortised Cost Rs.

LiabilitiesDue to Banks - - 6,366,217,339 - 6,366,217,339Due to Customers - - 38,742,699,819 - 38,742,699,819Debt Issued and Other Borrowed Funds - - 2,244,209,686 - 2,244,209,686Other Financial Liabilities - - 638,010,603 - 638,010,603Total Financial Liabilities - - 47,991,137,447 - 47,991,137,447

HFT - Held for TradingHTM - Held-to-MaturityL & R - Loans and ReceivablesAFS - Available for Sale






16.2 As at 31 March 2012 HFT at HTM at L&R at AFS at Fair Amortised Amortised Fair Value Cost Cost Value Total Rs. Rs. Rs. Rs. Rs.

AssetsCash and Bank Balances - - 1,954,236,790 - 1,954,236,790Financial Investments - Held for Trading 6,740,091 - - - 6,740,091Loans and Receivables - - 12,771,107,882 - 12,771,107,882Lease Rentals Receivable & Stock out on Hire - - 23,686,391,711 - 23,686,391,711Financial Investments - Available for Sale - - - 128,067,545 128,067,545Other Financial Assets - - 1,019,833,542 - 1,019,833,542Total Financial Assets 6,740,091 - 39,431,569,925 128,067,545 39,566,377,560


LiabilitiesDue to Banks - - 8,910,254,584 - 8,910,254,584Due to Customers - - 27,172,161,417 - 27,172,161,417Debt Issued and Other Borrowed Funds - - 1,541,554,566 - 1,541,554,566Other Financial Liabilities - - - - -Total Financial Liabilities - - 37,623,970,567 - 37,623,970,567




16.3 As at 31 March 2011 HFT at HTM at L&R at AFS at Fair Amortised Amortised Fair Value Cost Cost Value Total Rs. Rs. Rs. Rs. Rs.

AssetsCash and Bank Balances - - 1,634,749,502 - 1,634,749,502Financial Investments - Held for Trading 13,885,536 - - - 13,885,536Loans and Receivables - - 7,509,621,549 - 7,509,621,549Lease Rentals Receivable & Stock out on Hire - - 16,090,343,618 - 16,090,343,618Financial Investments - Available for Sale - - - 331,967,590 331,967,590Other Financial Assets - - 767,842,192 - 767,842,192Total Financial Assets 13,885,536 - 26,002,556,860 331,967,590 26,348,409,986


LiabilitiesDue to Banks - - 3,781,004,800 - 3,781,004,800Due to Customers - - 20,262,041,497 - 20,262,041,497Debt Issued and Other Borrowed Funds - - 493,347,979 - 493,347,979Other Financial Liabilities - - - - -Total Financial Liabilities - - 24,536,394,276 - 24,536,394,276


2013 2012 2011 Rs. Rs. Rs.

17. CASH AND CASH EQUIVALENTSCash & Bank Balances 1,171,637,040 669,506,362 347,445,557Money at Call and Short Notice 2,848,036,317 1,284,730,428 1,287,303,945 4,019,673,357 1,954,236,790 1,634,749,502

18. FINANCIAL INVESTMENTS - HELD FOR TRADINGQuoted Equities (Note 18.1) 7,323,047 6,740,091 13,885,536 7,323,047 6,740,091 13,885,536






Market Market Market Number of Cost Value Number of Cost Value Number of Cost Value Shares as at as at Shares as at as at Shares as at as at 2013 2013 2013 2012 2012 2012 2011 2011 2011 Rs. Rs. Rs. Rs. Rs. Rs.

18.1 Quoted EquitiesBank Finance and InsuranceSeylan Bank PLC (Non Voting) 90,700 1,685,000 3,219,850 90,700 1,685,000 2,630,300 90,700 1,685,000 3,564,510 1,685,000 3,219,850 1,685,000 2,630,300 1,685,000 3,564,510

Beverages, Food and TobaccoBairaha Farms PLC 17,600 424,979 2,634,720 17,600 424,979 2,288,000 17,600 424,979 7,057,600 424,979 2,634,720 424,979 2,288,000 424,979 7,057,600

ManufacturingLanka Walltiles PLC 19,740 789,882 1,103,466 19,740 789,882 1,381,800 19,740 789,882 2,796,500 789,882 1,103,466 789,882 1,381,800 789,882 2,796,500

TradingHayleys PLC 1,222 207,240 365,011 1,222 207,240 439,991 1,222 207,240 466,926 207,240 365,011 207,240 439,991 207,240 466,926

Total 3,107,100 7,323,047 3,107,100 6,740,091 3,107,100 13,885,536

2013 2012 2011 Rs. Rs. Rs.

19. LOANS AND RECEIVABLESGold Loans 10,982,423,232 8,545,145,490 5,716,684,848Vehicle Loans 3,357,903,597 1,918,756,189 1,005,139,020Term Loans 1,627,646,900 1,098,703,637 768,471,004Quick Loans 7,995,149 3,702,314 525,000Power Drafts 230,533,980 181,779,650 27,544,834Margin Trading 97,892,126 128,284,232 -Factoring Receivable 617,401,832 1,107,924,663 115,217,728Real State Loans 5,300,209 5,118,971 6,345,247 16,927,097,025 12,989,415,146 7,639,927,681

Less : Allowance for Impairment Losses (Note 19.1) 474,109,627 218,307,264 122,078,045Less : Appropriations - - 8,228,088Net Loans and Receivables 16,452,987,398 12,771,107,882 7,509,621,549



2013 2012 Rs. Rs.

19.1 Allowance for Impairment Losses19.1.(a) As at 01 April 218,307,264 130,306,133Charge / (Reversal) for the year 255,802,363 88,001,131Interest accrued on impaired loans & advances - -As at 31 March 474,109,627 218,307,264

2013 2012 2011 Rs. Rs. Rs.

19.1.(b) Individual Impairment 65,577,422 57,885,271 19,395,649Collective Impairment 408,532,206 160,421,993 110,910,484Total 474,109,627 218,307,264 130,306,133

Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance 225,077,131 68,889,404 45,512,168

19.1.(c) Gold Loans 310,681,024 90,418,952 42,773,394Vehicle Loans 26,930,434 7,065,425 39,086,171Term Loans 48,773,424 46,526,125 48,446,568Power Drafts 4,194,951 - -Factoring Receivable 83,529,793 74,296,761 -Total 474,109,627 218,307,264 130,306,133

19.2 Term Loans include loans granted to Company Officers, the movement of which is as follows :As at the beginning of the year 3,889,534 2,923,791 3,019,248Add : Loans granted during the year 8,600,244 7,931,400 6,557,242Less : Repayments during the year (8,010,104) (6,965,657) (6,652,698)As at the end of the year 4,479,674 3,889,534 2,923,791

20. LEASE RENTALS RECEIVABLE & STOCK OUT ON HIREGross rentals receivables- Lease Rentals 30,165,603,190 23,878,469,956 13,503,671,879- Amounts Receivable from Hirers 9,038,627,441 8,447,640,536 8,862,527,551 39,204,230,631 32,326,110,492 22,366,199,430Less: Unearned Income 10,146,191,420 8,008,108,635 5,643,752,813Net rentals receivables 29,058,039,211 24,318,001,857 16,722,446,617

Less : Rentals Received in Advance 16,607,586 22,154,743 20,986,896Less : Allowance for Impairment Losses (Note 20.1) 770,084,951 609,455,403 609,284,719Less : Appropriations - - 1,831,384Total Net Rentals Receivable (Note 20.2(a), 20.2(b) & 20.2(c)) 28,271,346,675 23,686,391,711 16,090,343,618






2013 2012 Rs. Rs.

20.1 Allowance for Impairment LossesAs at 01 April 609,455,403 611,116,103Charge / (Reversal) for the Year 156,006,093 (1,660,700)Interest Accrued on Impaired Leases & Hirers Receivables 4,623,455 -As at 31 March 770,084,951 609,455,403

2013 2012 2011 Rs. Rs. Rs.

Individual Impairment 84,885,930 72,026,875 37,656,457Collective Impairment 685,199,021 537,428,529 573,459,646 770,084,951 609,455,403 611,116,103

Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance 202,844,958 89,942,599 59,447,216

Lease Hire Purchase Within 1 - 5 Over 5 Within 1 - 5 Over 5 one year years years Total one year years years Total Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

20.2 (a) As at 31 March 2013Gross Rentals Receivables 13,114,813,822 17,047,837,016 2,952,352 30,165,603,190 4,104,475,638 4,904,613,278 29,538,525 9,038,627,441Less: Unearned Income 4,277,031,455 3,637,466,801 183,129 7,914,681,386 1,181,012,958 1,047,710,554 2,786,522 2,231,510,034Net Rentals Receivables 8,837,782,367 13,410,370,215 2,769,223 22,250,921,805 2,923,462,680 3,856,902,724 26,752,003 6,807,117,407

Less : Rentals Received in Advance 16,607,586 -Less : Allowance for Impairment Losses 536,109,326 233,975,625Less : Appropriations - -Total Net Rentals Receivable 21,698,204,893 6,573,141,782

20.2 (b) As at 31 March 2012Gross Rentals Receivables 9,618,629,368 14,254,260,431 5,580,157 23,878,469,956 3,761,274,358 4,662,818,830 23,547,347 8,447,640,535Less: Unearned Income 3,219,647,197 2,899,603,237 450,499 6,119,700,932 1,027,852,693 858,662,456 1,892,551 1,888,407,700Net Rentals Receivables 6,398,982,171 11,354,657,195 5,129,658 17,758,769,024 2,733,421,665 3,804,156,374 21,654,796 6,559,232,835

Less : Rentals Received in Advance 22,154,743 -Less : Allowance for Impairment Losses 378,032,391 231,423,012Less : Appropriations - -Total Net Rentals Receivable 17,358,581,889 6,327,809,823

20.2 (c) As at 31 March 2011Gross Rentals Receivables 5,688,308,999 7,810,265,744 5,097,136 13,503,671,879 3,958,112,478 4,879,467,974 24,947,095 8,862,527,547Less: Unearned Income 1,868,901,256 1,659,033,442 541,478 3,528,476,176 1,156,066,589 956,951,120 2,258,924 2,115,276,634Net Rentals Receivables 3,819,407,743 6,151,232,302 4,555,658 9,975,195,703 2,802,045,889 3,922,516,854 22,688,171 6,747,250,913

Less : Rentals Received in Advance 20,986,896 -Less : Allowance for Impairment Losses 339,628,986 269,655,734Less : Appropriations 1,831,384 -Total Net Rentals Receivable 9,612,748,437 6,477,595,180



2013 2012 2011 Rs. Rs. Rs.

20.3 Lease & Hire Purchase facilities granted to Company Officers, the movement of which is as follows :As at the beginning of the year 102,816,366 106,748,612 73,588,454Add : Loans granted during the year 79,662,412 72,436,907 74,644,523Less : Repayments during the year (36,050,424) (76,369,153) (41,484,365)As at the end of the Year 146,428,354 102,816,366 106,748,612

2013 2012 2011 Rs. Rs. Rs.

21. FINANCIAL INVESTMENTS - AVAILABLE FOR SALEGovernment Securities (Note 21.1) 368,323,096 - 100,562,552Quoted Equities (Note 21.2) 105,111,522 127,762,845 205,971,318Unquoted Equities (Note 21.3) 304,700 304,700 25,433,720 473,739,318 128,067,545 331,967,590

21.1 Government SecuritiesAs per the ‘Guidelines to Registered Finance Companies and Specialised Leasing Companies on the Operations of the Investment Fund Account proposed in the 2011 Budget’ issued by the Central Bank of Sri Lanka, the funds available in Investment Fund Account (IFA) can be invested in long-term Government securities and/or bonds with maturities not less than seven years and can be invested in Government Treasury Bills for a maximum period of three months from the date of transfer to the fund until loans are granted.


21.2 Quoted EquitiesManufacturingBlue Diamond Jewellery PLC 74 848 222 74 848 33.40 74 848 222Central Industries PLC 4,092 149,805 255,750 4,092 149,805 1,172,112 4,092 149,805 393,241Ceylon Grain Elevators PLC 44 5,214 2,187 44 5,214 118 44 5,214 7,396Dankotuwa Porcelain PLC 14,450 867,938 199,410 14,450 867,938 3,403,481 14,450 867,938 865,555Royal Ceramics PLC 31,320 843,225 3,116,340 31,320 843,225 3,723,948 31,320 843,225 4,917,240Samson International PLC 5,363 929,800 440,839 5,363 929,800 2,588,559 5,363 929,800 536,300 2,796,830 4,014,747 2,796,830 10,888,252 2,796,830 6,719,955

Hotels and TravelsFortress Resorts PLC 4,051,100 81,989,955 60,766,500 4,051,100 81,989,955 69,678,920 4,051,100 81,989,955 101,682,609Aitken Spence Hotel Holdings PLC 308 5,672 36,837 308 5,672 6,640 308 5,672 30,184Hotel Sigiriya PLC 700 30,333 55,300 700 30,333 35,084 700 30,333 53,270Palm Garden Hotels PLC 36 3,467 3,438 72 3,467 482 72 3,467 9,266 82,029,427 60,862,075 82,029,427 69,721,126 82,029,427 101,775,329







21.2 Quoted Equities Contd.Stores and SuppliesHunter PLC 10 2,767 3,084 10 2,767 35 10 2,767 14,900 2,767 3,084 2,767 35 2,767 14,900

Bank Finance and InsuranceCommercial Bank Of Cey. PLC 262 14,901 29,606 10 14,901 1,488 10 5 10,632Merchant Bank PLC 61 6,027 982 61 6,027 109 61 6,027 2,818Seylan Bank PLC 2,500 155,396 163,000 2,500 155,396 418,125 2,500 155,396 188,000Union Bank of Colombo PLC 7,900 280,880 134,300 7,900 280,880 1,092,175 7,900 280,880 282,820Softlogic Finance PLC 1,540,000 63,155,870 39,270,000 1,540,000 63,155,870 42,658,000 1,540,000 63,155,870 96,249,999 63,613,074 39,597,888 63,613,074 44,169,897 63,598,178 96,734,269

Beverages, Food and TobaccoKeells Food Products PLC 500 21,420 35,000 500 21,420 25,000 500 21,420 75,000Lanka Milk Foods PLC 5,500 249,732 595,650 5,500 249,732 2,958,450 5,500 249,732 642,950Soy Foods (F&W) PLC 22 880 3,078 22 880 85 22 880 8,914 272,032 633,728 272,032 2,983,535 272,032 726,864Total 148,714,130 105,111,522 148,714,130 127,762,845 148,699,235 205,971,318

Directors Directors Directors Number of Cost Valuation Number of Cost Valuation Number of Cost Valuation Shares as at as at Shares as at as at Shares as at as at 2013 2013 2013 2012 2012 2012 2011 2011 2011 Rs. Rs. Rs. Rs. Rs. Rs.

21.3 Unquoted EquitiesSamual Sons & Company Ltd 16,000 492,750 - 16,000 492,750 - 16,000 492,750 -Credit Information Bureau 1,047 104,700 104,700 1,047 104,700 104,700 1,047 104,700 104,700Finance House Association 20,000 200,000 200,000 20,000 200,000 200,000 20,000 200,000 200,000Free Lanka Capital Holdings (Pvt) Ltd - - - - - 5,320,000 25,129,020 25,129,020 797,450 304,700 797,450 304,700 25,926,470 25,433,720Total 797,450 304,700 797,450 304,700 25,926,470 25,433,720



2013 2012 2011 Rs. Rs. Rs.

22. OTHER FINANCIAL ASSETSREPO Investments - - 200,552,055Investment in Commercial Papers - - 50,440,877Investment in FDs 1,487,399,284 1,012,466,652 310,564,541Others - 7,366,890 206,284,720 1,487,399,284 1,019,833,542 767,842,192

2013 2012 2011 Rs. Rs. Rs.

23. OTHER NON FINANCIAL ASSETSReceivable From Inland Revenue Department 364,864,338 400,669,010 165,019,424Real Estate Stock 147,770,471 143,212,184 237,520,182Advance for Vehicle Stock 9,727,359 127,212,567 519,705,851Sundry Debtors 635,669,527 355,182,881 277,739,074Pre-paid Staff Cost 47,198,146 40,345,255 32,697,803 1,205,229,841 1,066,621,897 1,232,682,336

Computer Software 2013 2012 2011 Rs. Rs. Rs.

24. INTANGIBLE ASSETSCostCost as at 01 April 57,773,712 42,839,538 36,777,823Additions and Improvements 10,585,344 14,934,174 6,061,715Cost as at 31 March 68,359,056 57,773,712 42,839,538

Amortisation & ImpairmentAmortisation as at 01 April 38,433,918 33,157,701 29,444,976Charge for the Year 6,255,685 5,276,217 3,712,725Accumulated Amortisation as at 31 March 44,689,603 38,433,918 33,157,701

Net Book Value as at 31 March 23,669,453 19,339,794 9,681,837

24.1 Intangible Assets include computer software of the Company.






Balance Additions Transfers Disposals Balance As at As at 31.03.2012 31.03.2013 Rs. Rs. Rs. Rs. Rs.

25. PROPERTY, PLANT AND EQUIPMENT25.1 Gross Carrying AmountsCostFreehold AssetsLand 404,721,946 11,554,750 - - 416,276,695Building 607,792,581 13,825,401 - - 621,617,982Furniture & Fittings 126,046,847 9,632,792 - - 135,679,639Equipment 183,440,217 38,185,565 - 279,000 221,346,782Motor Vehicles & Accessories 285,283,228 227,563,727 1,826,087 11,510,313 499,510,556Computer Hardware 157,748,276 63,844,331 - - 221,592,607Air Conditioning 83,674,051 15,307,533 - 70,000 98,911,583Telephone System 67,772,181 4,016,599 - - 71,788,780Fire Protection Equipment 12,899,745 146,581 - - 13,046,326Leasehold Improvements 287,181,935 83,437,702 - - 370,619,637Fixtures and Fittings 17,415,710 3,320,391 - - 20,736,101 2,233,976,717 470,835,371 1,826,087 11,859,313 2,691,126,689Assets on Finance LeaseMotor Vehicle 50,924,141 - (1,826,087) 4,589,285 48,160,942Total Value of Depreciable Assets 2,284,900,857 470,835,371 - 16,448,598 2,739,287,631

Balance Charge Transfers Disposals Balance As at for the As at 31.03.2012 Period 31.03.2013 Rs. Rs. Rs. Rs. Rs.

25.2 DepreciationFreehold AssetsBuilding 12,551,970 2,348,050 - - 14,900,020Furniture & Fittings 30,482,119 18,711,018 - - 49,193,137Equipment 70,679,280 36,072,417 - 190,851 106,560,847Motor Vehicles & Accessories 95,536,045 18,087,640 1,826,087 11,510,313 100,287,285Computer Hardware 85,342,450 30,524,188 - - 115,866,638Air Conditioning 21,835,814 15,973,717 - 70,000 37,739,532Telephone System 19,219,461 13,287,020 - - 32,506,481Fire Protection Equipment 1,172,652 2,524,168 - - 3,696,820Leasehold Improvements 96,114,595 44,972,414 - - 141,087,009Fixtures and Fittings 8,035,435 4,237,162 - - 12,272,597 440,969,822 186,737,795 1,826,087 11,771,163 614,110,367Assets on Finance LeaseMotor Vehicle 18,275,257 11,090,161 (1,826,087) 2,294,643 29,031,241 459,245,079 197,827,957 - 14,065,806 643,141,608



Balance Additions Transfers Disposals Balance As at As at 01.04.2011 31.03.2012 Rs. Rs. Rs. Rs. Rs.

25.3 Gross Carrying AmountsCostFreehold AssetsLand 16,169,993 388,551,953 - - 404,721,946Building 2,884,761 604,907,820 - - 607,792,581Furniture & Fittings 48,414,018 77,632,829 - - 126,046,847Equipment 100,193,997 83,246,220 - - 183,440,217Motor Vehicles & Accessories 93,678,138 200,582,737 - 8,977,648 285,283,228Computer Hardware 115,227,678 42,520,597 - - 157,748,276Air Conditioning 27,990,528 55,683,522 - - 83,674,051Telephone System 26,173,768 41,598,413 - - 67,772,181Fire Protection Equipment 870,609 12,029,136 - - 12,899,745Leasehold Improvements 177,834,919 109,347,015 - - 287,181,935Fixtures and Fittings 7,954,866 9,460,845 - - 17,415,710 617,393,277 1,625,561,088 - 8,977,648 2,233,976,717Assets on Finance LeaseMotor Vehicle 36,056,284 14,867,857 - - 50,924,141Total Value of Depreciable Assets 653,449,560 1,640,428,945 - 8,977,648 2,284,900,857

Balance Charge Transfers Disposals Balance As at for the As at 01.04.2011 Period 31.03.2012 Rs. Rs. Rs. Rs. Rs.

25.4 DepreciationFreehold AssetsBuilding - 12,551,970 - - 12,551,970Furniture & Fittings 20,429,408 10,052,711 - - 30,482,119Equipment 47,498,813 23,180,468 - - 70,679,280Motor Vehicles & Accessories 55,655,860 48,857,833 - 8,977,648 95,536,045Computer Hardware 64,433,421 20,909,029 - - 85,342,450Air Conditioning 14,975,190 6,860,625 - - 21,835,814Telephone System 13,445,391 5,774,070 - - 19,219,461Fire Protection Equipment 616,800 555,852 - - 1,172,652Leasehold Improvements 63,894,486 32,220,108 - - 96,114,595Fixtures and Fittings 5,954,855 2,080,580 - - 8,035,435 286,904,223 163,043,246 - 8,977,648 440,969,822Assets on Finance LeaseMotor Vehicle 6,473,463 11,801,794 - - 18,275,257Total Depreciation 293,377,686 174,845,041 - 8,977,648 459,245,079






2013 2012 Rs. Rs.

25.5 Capital Work in ProgressOpening Balance 42,630,440 72,286,884Incurred During the Year 136,005,581 1,319,723,420Reclassified/Transferred (173,843,220) (1,349,379,864)Disposal/Written off - -Closing Balance 4,792,801 42,630,440

2013 2012 2011 Rs. Rs. Rs.

25.6 Net Book ValuesAt CostLand 416,276,695 404,721,946 16,169,993Building 606,717,962 595,240,611 2,884,761Furniture & Fittings 86,486,502 95,564,728 27,984,610Equipment 114,785,935 112,760,937 52,695,184Motor Vehicles & Accessories 399,223,270 189,747,183 38,022,279Computer Hardware 105,725,969 72,405,826 50,794,258Air Conditioning 61,172,051 61,838,236 13,015,339Telephone System 39,282,299 48,552,720 12,728,377Fire Protection Equipment 9,349,505 11,727,093 253,809Leasehold Improvements 229,532,628 191,067,340 113,940,433Fixtures and Fittings 8,463,504 9,380,275 2,000,011

On Finance LeasesMotor Vehicle 19,129,702 32,648,883 29,582,821

Capital Work in Progress (Note 25.5) 4,792,801 42,630,440 72,286,884Total Carrying Amount of Property, Plant & Equipment 2,100,938,825 1,868,286,218 432,358,758

25.7 During the financial year, the Company acquired Property, Plant & Equipment to the aggregate value of Rs.432,997,733 (2012 - Rs.1,610,772,501) . Cash payments amounting to Rs. 432,863,356 ( 2012 - Rs.1,595,904,644 ) was paid during the year for purchases of Property , Plant & Equipment .

25.8 There were no significant temporarily idling assets as at 31st March 2013.

25.9 Included in Property, Plant & Equipment are assets subject to operating lease where the company is a lessor. At 31 March 2013, the net caring value amount of those assets was Rs. 334.82 Mn (2012 Rs. 186.33 Mn), on which the accumulated depreciation as at 31 March 2013 was Rs. 62.02 (2012 - Rs. 18.66 Mn).



Statement of Statement of Financial Position Comprehensive Income 2013 2012 2011 2013 2012 Rs. Rs. Rs. Rs. Rs.

26. DEFERRED TAXATIONDeferred Tax Assets, Liabilities and Income Tax relates to the followingsDeferred Tax LiabilityAccelerated Depreciation for Tax Purposes (78,915,657) (22,579,572) 102,732,902 (56,336,085) (125,312,474)Adjustment due to Change in Accounting Base and Tax Base (83,640,974) (82,814,921) (73,572,363) (826,053) (9,242,558) (162,556,631) (105,394,493) 29,160,539 (57,162,138) (134,555,032)

Deferred Tax AssetsDefined Benefit Plans (17,994,750) (12,384,690) (9,483,505) (4,479,799) (2,901,185) (17,994,750) (12,384,690) (9,483,505) (4,479,799) (2,901,185)

Deferred income tax charge/(reversal) (61,641,937) (137,456,217)

Net Deferred Tax Liability/ (Asset) (180,551,381) (117,779,183) 19,677,034

2013 2012 2011 Rs. Rs. Rs.

27. DUE TO BANKSBank Overdrafts 878,493,155 1,484,186,279 722,798,066Securitised Borrowings, Syndicated Loans and Other Bank Facilities (Note 27.1 (a), 27.1 (b)) 5,464,980,511 7,391,316,885 3,027,500,170Finance Lease (27.2 (a), 27.2 (b), 27.3) 22,743,673 34,751,420 30,706,564 6,366,217,339 8,910,254,584 3,781,004,800






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As at New Leases Repayments As at 31.03.2012 Obtained 31.03.2013 Rs. Rs. Rs. Rs.

27.2 (a) Finance LeaseFinance Leases 34,751,420 - 12,007,747 22,743,673 34,751,420 - 12,007,747 22,743,673

Gross Liability 40,759,583 25,308,637Finance Charges Allocated for Future Periods (5,857,670) (2,564,964)Down Payment (150,493) -Net Finance Lease Liability 34,751,420 22,743,673

As at New Leases Repayments As at 01.04.2011 Obtained 31.03.2012 Rs. Rs. Rs. Rs.

27.2 (b) Finance LeaseFinance Leases 30,706,564 14,867,857 10,823,000 34,751,420 30,706,564 14,867,857 10,823,000 34,751,420

Gross Liability 37,558,902 40,759,583Finance Charges Allocated for Future Periods (6,701,845) (5,857,670)Down Payment (150,493) (150,493)Net Finance Lease Liability 30,706,564 34,751,420

2013 2012 2011 Rs. Rs. Rs.

27.3 Finance LeaseGross Liability 25,308,637 40,759,583 37,558,901Less: Finance Charges Allocated for Future Periods (2,564,964) (5,857,670) (6,701,845)Less: Down Payment - (150,493) (150,493)Net Liability 22,743,673 34,751,420 30,706,564

Repayable with in One YearGross Liability 13,859,531 15,450,946 11,890,976Less: Finance Charges Allocated for Future Periods (1,943,889) (3,292,706) (3,240,597)Less: Down payment - (150,493) -Net Liability 11,915,642 12,007,747 8,650,378

Repayable after One Year before Five YearsGross Liability 11,449,106 25,308,637 25,667,926Less: Finance Charges Allocated for Future Periods (621,075) (2,564,964) (3,461,247)Less: Down Payment - - (150,493)Net Liability 10,828,031 22,743,673 22,056,185



2013 2012 2011 Rs. Rs. Rs.

28. DUE TO CUSTOMERSFixed Deposits 38,106,688,119 26,665,791,271 19,910,200,155Certificates of Deposit 372,839,548 448,287,954 351,841,343Savings Deposits 263,172,153 58,082,192 - 38,742,699,819 27,172,161,417 20,262,041,497

29. DEBT ISSUED AND OTHER BORROWED FUNDSCommercial Papers 1,181,487,272 498,377,727 -Unsecured Debentures (Note No 29.1 ) 1,030,445,701 1,014,331,376 467,943,167Other Borrowings - Ceylon Income Fund 32,276,712 28,845,462 25,404,812 2,244,209,686 1,541,554,566 493,347,979

29.1 Unsecured DebenturesThe face value of Rs.995,000,000 Unsecured Redeemable Subordinated listed Debentures were issued at following rates and will mature on 20 September 2013, 04 December 2016 & 01 March 2017.

Category Interest Payable Amortized Cost (Rs) Face Value (Rs.) Interest Rate Maturity Date

Type ' A ' Monthly 152,146,068 149,480,000 21% p.a 20-Sep-13

Type ' B ' Annually 314,120,444 296,570,000 24% p.a 20-Sep-13

Type ' C ' Variable quarterly 2,591,603 2,500,000 Simple Average of the weighted average three months gross Treasury Bill rate published by the Central Bank of Sri Lanka at the primary auctions during the month immediately preceding the end of the Quarter plus 3.5% p.a

20-Sep-13

Type ' D ' Variable annually 1,511,353 1,450,000 Simple Average of the weighted average one year gross Treasury Bill rate published by the Central Bank of Sri Lanka at the primary auctions during the month immediately preceding the end of the Quarter plus 3.5% p.a

20-Sep-13

RUSRD II Annually 223,733,268 215,000,000 12.68% p.a 04-Dec-16

RUSRD I Bi Annually 103,940,253 100,000,000 12.30% p a 04-Dec-16

RUSRD I Bi Annually 232,402,712 230,000,000 12.30% p a 01-Mar-17

Total 1,030,445,701 995,000,000

2013 2012 2011 Rs. Rs. Rs.

30. OTHER FINANCIAL LIABILITIESTrade Payables 638,010,603 - - 638,010,603 - -






2013 2012 2011 Rs. Rs. Rs.

31 OTHER NON FINANCIAL LIABILITIESAccrued Expenses 58,801,415 66,849,176 41,525,420Others 636,131,780 690,425,716 547,169,411 694,933,195 757,274,892 588,694,831

32. POST EMPLOYMENT BENEFIT OBLIGATIONSRetirement Benefit Obligations - GratuityBalance at the beginning of the Year 44,231,036 33,869,659 27261881Amount Charged/(Reversed) for the Year 18,323,623 11,260,778 6,760,729Payments made during the Year (2,324,341) (899,401) (152,951)Balance at the end of the Year 60,230,318 44,231,036 33,869,659

32.1 Expenses on Defined Benefit PlanCurrent Service Cost for the Year 10,186,560 7,355,726 3,577,269Interest cost for the Year 8,137,063 3,905,052 3,183,460 18,323,623 11,260,778 6,760,729

2013 2012 2011

32.2 AssumptionsDiscount Rate 12.25% 11.00% 11.00%Salary Scale 10.00% 10.00% 10.00%

Staff Turnover 20 to 40 years 25.00% 25.00% 25.00% 45 years 1.00% 1.00% 1.00% 50 years 1.00% 1.00% 1.00%

Mortality - GA 1983 Mortality TableDisability - Long Term Disability 1987 Soc. Sec. Table.Retirement age - Normal retirement Age , or age on valuation date , if greater.

An actuarial valuation of the gratuity was carried out as at 31st March 2013 by Piyal S Goonetilleke and Associates, a firm of professional actuaries. The valuation method used by the actuary to value the Fund is the ""Projected Unit Credit Method"", recommended by LKAS 19



32.3 Sensitivity of Assumptions Employed in Actuarial ValuationThe following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the retirement benefit liability measurement.

The sensitivity of the Statement of Comprehensive Income & Statement of Financial Position is the effect of the assumed changes in discount rate and salary scale on the profit or loss and retirement benefit obligation for the year.

2013 2013

Increase/(Decrease) in discount rate

Increase/(Decrease) in salary increment

Sensitivity Effect on Statement of Comprehensive Income - Increase/(Reduction) in results for the year (Rs Mn)

Sensitivity Effect on Retirement Benefit Obligation - Increase/(Reduction) in the liability (Rs Mn)

1% 5.8 -5.8

-1% -6.9 6.9

1% -6.8 6.8

-1% 5.8 -5.8

2013 2012 2011 No of Shares Rs. No of Shares Rs. No of Shares Rs.

33. STATED CAPITAL33.1 Issued and Fully Paid-Ordinary SharesAt the beginning of the Year 69,257,142 838,282,159 69,257,142 838,282,159 69,257,142 838,282,159Issued during the Year - - - - - -At the end of the Year 69,257,142 838,282,159 69,257,142 838,282,159 69,257,142 838,282,159

33.2 Rights of ShareholdersThe holders of ordinary shares confer their right to receive dividends as declared from time to time and are entitled to one vote per share at the meeting.

All shares rank equally with regard to the Company’s residual assets.

2013 2012 Rs. Rs.

34. RETAINED EARNINGSAs at 01 April 2,075,561,407 1,089,864,093Dividend Paid (346,285,710) (242,399,997)Profit for the Year 1,702,665,042 1,713,994,093Appropriation of Bad debts - 10,059,929Transfers to Investment Fund Account (Note 35) (239,005,723) (170,940,690)Transfers to Statutory Reserve Fund (Note 35) (340,533,008) (325,016,021)As at 31 March 2,852,402,008 2,075,561,407

Retained Earnings represents the undistributed earnings held by the Company to be used in the Company's operations. This could be used to absorb future possible losses or dividends payable.






Investment Available Statutory Fund for Sale Reserve Reserve Reserve Total Rs. Rs. Rs. Rs.

35. RESERVESAs at 01 April 2011 527,502,392 30,854,696 57,701,020 616,058,108Transfers to/(from) during the year 325,016,021 170,940,690 - 495,956,711Net loss on available for sale assets - - (57,760,935) (57,760,935)As at 01 April 2012 852,518,413 201,795,386 (59,915) 1,054,253,884

Transfers to/(from) during the year 340,533,008 239,005,723 - 579,538,731Net loss on available for sale assets - - 4,124,508 4,124,508As at 31 March 2013 1,193,051,421 440,801,109 4,064,593 1,637,917,123

35.1 Reserve Fund is a capital reserve which contains profits transferred as required by Section 3(b)(ii) of Central Bank Direction No. 1 of 2003.

35.2 Investment Fund ReserveAs per the guidelines issued to Finance Companies as proposed by 2011 Budget, the Company shall transfer following to build a permanent fund.

(i) 8% of the profits calculated for the payment of VAT on Financial Services as Specified in the VAT Act for payment of VAT.(ii) 5% of the profits before tax calculated for payment of Income Tax purposes on dates specified in section 113 of the Inland Revenue Act for

the self assessment payment of tax.

2013 2012 2011 Rs. Rs. Rs.

At the Beginning of the Year 201,795,386 30,854,696 -Profit Transferred during the Year 239,005,723 170,940,690 30,854,696 440,801,109 201,795,386 30,854,696

35.2 (a) Utilisation of Investment Fund Account (IFA)Balance available for utilisation 165,404,364 30,854,696 -Total transfers to IFA 239,005,722 170,940,690 30,854,696Total approved loans granted - (36,391,022) -Total Investments in Government Securities (361,614,444) - -Balance available for utilisation as at 31st March 2013 42,795,642 165,404,364 30,854,696



Number Total Interest of Loans Amount Rates Tenure Granted Outstanding

35.2 (b) Total Loans Granted(a) Cultivation of Agriculture / Plantation corps 15.10% 7 1 1,595,000(b) Factory/Mills modernisation - - - -(c) Small and Medium Enterprises - - - -(d) Information Technology and BPO 15.10% 7 1 5,566,022(e) Infrastructure Development 15.10% 7 5 29,230,000(f) Education - - - -(g) Housing - - - -(h) Construction of hotels and related purposes - - - -(i) Restructuring of loans extended for above purposes - - - - 7 36,391,022

Face Year of Cost of Outstanding Value Maturity Investment (Rs.)

35.2 (c) Investments in Government SecuritiesTreasury Bonds over 7 years 200,000,000 2021 179,772,971 178,914,691 50,000,000 2022 40,145,628 40,645,923 100,000,000 2022 80,154,151 81,291,846 91,000,000 2020 61,541,695 67,470,636Total Investments in Government Securities 441,000,000 361,614,444 368,323,096

36. FAIR VALUE OF FINANCIAL INSTRUMENTSFinancial instruments recorded at fair valueThe following is a description of how fair values are determined for financial instruments that are recorded at fair value using valuation techniques. These incorporate the Company’s estimate of assumptions that a market participant would make when valuing the financial instruments.

Financial Investments - Held for TradingFinancial investments measured at fair value are quoted equities. For quoted equities Company uses quoted market price in active markets as at the reporting date.

Financial Investments - Available for SaleFinancial Investments - Available for Sale, primarily consist of equity securities and Government debt securities are valued using valuation techniques or pricing models. These assets are valued using models that use observable data. Government debt securities are valued using yield curves published by the Central Bank of Sri Lanka and quoted equities are valued using quoted market prices in the active markets as at the reporting date.






36.1 Determination of Fair Value and Fair Value HierarchyThe Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by Valuation techniques.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

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy.

As at 31 March 2013 Level 1 Level 2 Level 3 Total Rs. Rs. Rs. Rs.

Financial AssetsFinancial Investments - Held for TradingQuoted Equities 7,323,047 7,323,047

Financial Investments - Available for SaleGovernment Securities 368,323,096 368,323,096Quoted Equities 105,111,522 105,111,522Unquoted equities 304,700 304,700

Total Financial Assets 480,757,665 304,700 - 481,062,365

As at 31 March 2012 Level 1 Level 2 Level 3 Total Rs. Rs. Rs. Rs.

Financial AssetsFinancial Investments - Held for TradingQuoted Equities 6,740,091 6,740,091

Financial Investments - Available for SaleGovernment Securities - -Quoted Equities 127,762,845 127,762,845Unquoted Equities 304,700 304,700

Total Financial Assets 134,502,936 304,700 - 134,807,636

There were no financial liabilities recorded at fair value as at 31 March 2012 & 2013.There were no transfers between Level 1 and Level 2 during 2012 & 2013.



36.1 Determination of Fair Value and Fair Value Hierarchy (Contd.)Set out below is the comparison, by class, of the carrying amounts of fair values of the Company'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.

2013 2012 Carrying Fair Carrying Fair Amount Value Amount Value Rs. Rs. Rs. Rs.

Financial AssetsCash and Bank Balances 4,019,673,357 4,019,673,357 1,954,236,790 1,954,236,790Loans and Receivables 16,452,987,398 16,415,722,497 12,771,107,882 12,649,326,011Lease Rentals Receivable & Stock out on Hire 28,271,346,675 27,329,892,251 23,686,391,711 22,725,239,279Other Financial Assets 1,487,399,284 1,487,494,318 1,019,833,542 1,021,653,963 50,231,406,714 49,252,782,423 39,431,569,925 38,350,456,043

Financial LiabilitiesDue to Banks 6,366,217,339 6,364,159,218 8,910,254,584 8,908,272,010Due to Customers 38,742,699,819 38,682,541,439 27,172,161,417 27,103,038,272Debt Issued and Other Borrowed Funds 2,244,209,686 2,244,209,686 1,541,554,566 1,541,554,566Other Financial Liabilities 638,010,603 638,010,603 - - 47,991,137,447 47,928,920,946 37,623,970,567 37,552,864,848

Fair Value of Financial Assets and Liabilities not Carried at Fair ValueThe following describes the methodologies and assumptions used to determine the fair values for those financial instruments which are not already recorded at fair value in the Financial Statements.

Assets & Liabilities for which Fair Value Approximates Carrying ValueFor financial assets and financial liabilities that have a short term maturity, it is assumed that the carrying amounts approximate their fair values. This assumption is also applied to fixed deposits, certificate of deposits and savings deposits without a specific maturity.

Long term deposits accepted from customers for which periodical interest is paid and loans and advances granted to customers with a variable rate are also considered to be carried at fair value in the books.

Fixed Rate Financial InstrumentsCarrying amounts are considered as fair values for short term credit facilities. All credit facilities with fixed interest rates were fair valued using market rates at which fresh credit facilities were granted during the last month of the reporting year. Conversely, fixed deposits with remaining tenors above one year and interest paid at maturity were discounted using current market rates offered to customers during the last month of the reporting year.

Reclassification of Financial AssetsThere have been no reclassifications during 2012 & 2013.






37. CURRENT AND NON CURRENT ANALYSIS OF ASSETS AND LIABILITIESThe table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled.

2013 2013 2013 2012 2012 2012 With in 12 After 12 Total as at With in 12 After 12 Total as at Months Months 31/03/2013 Months Months 31/03/2012 Rs. Rs. Rs. Rs. Rs. Rs.

AssetsCash and Bank Balances 4,019,673,357 - 4,019,673,357 1,954,236,790 - 1,954,236,790Financial Investments - Held for Trading 7,323,047 - 7,323,047 6,740,091 - 6,740,091Loans and Receivables 13,925,971,760 2,527,015,639 16,452,987,398 11,468,370,293 1,302,737,590 12,771,107,882Lease Rentals Receivable & Stock out on Hire 11,388,041,811 16,883,304,863 28,271,346,674 8,888,425,008 14,797,966,703 23,686,391,711Financial Investments - Available for Sale 473,739,318 - 473,739,318 128,067,545 - 128,067,545Other Financial Assets 1,459,776,942 27,622,342 1,487,399,284 996,127,892 23,705,651 1,019,833,542Other Non Financial Assets 1,033,010,401 172,219,439 1,205,229,840 662,168,950 404,452,947 1,066,621,897Intangible Assets - 23,669,453 23,669,453 - 19,339,794 19,339,794Property, Plant & Equipment - 2,100,938,825 2,100,938,825 - 1,868,286,218 1,868,286,218Deferred Tax Assets - 180,551,381 180,551,381 - 117,779,183 117,779,183Total Assets 32,307,536,636 21,915,321,942 54,222,858,579 24,104,136,567 18,534,268,086 42,638,404,653

LiabilitiesDue to Banks 4,224,322,259 2,141,895,081 6,366,217,340 5,293,646,457 3,616,608,127 8,910,254,584Due to Customers 32,847,147,666 5,895,552,154 38,742,699,819 22,971,576,897 4,200,584,520 27,172,161,417Debt Issued and Other Borrowed Funds 1,666,932,974 577,276,712 2,244,209,686 517,709,103 1,023,845,462 1,541,554,566Other Financial Liabilities 638,010,603 - 638,010,603 - - -Other Non Financial Liabilities 694,933,195 - 694,933,195 757,274,892 - 757,274,892Post Employment Benefit Liability - 60,230,318 60,230,318 - 44,231,036 44,231,036Current Tax Liabilities 147,956,328 - 147,956,328 244,830,708 - 244,830,708Deferred Tax Liabilities - - - - - -Total Liabilities 40,219,303,025 8,674,954,265 48,894,257,289 29,785,038,057 8,885,269,145 38,670,307,203

Net (7,911,766,389) 13,240,367,678 5,328,601,289 (5,680,901,490) 9,648,998,941 3,968,097,451

2013 2012 2011 Rs. Rs. Rs.

38. COMMITMENTS AND CONTINGENCIES38.1 Contingent LiabilitiesGuarantees issued to Banks and other Institutions 15,300,000 5,150,000 6,200,000Import LC & Ordinary Guarantees 89,637,623 30,650,363 181,581,795

Total Contingent Liabilities 104,937,623 35,800,363 187,781,795


2013 2012 2011 Rs. Rs. Rs.

38.2 CommitmentsCommitment for Unutilised Facilities 1,118,332,877 583,528,789 170,703,705 1,118,332,877 583,528,789 170,703,705

The Company has purchase commitments for acquisition of Property , Plant & Equipment & Vehicle Stocks incidental to the ordinary course of business as at March 31, as follows:

Capital Expenditure CommitmentsApproved and contracted for - - 899,664,152 - - 899,664,152

Total Commitments 1,118,332,877 583,528,789 1,070,367,857

Total Commitments and contingencies 1,223,270,500 619,329,152 1,258,149,652

38.3 Litigations Against the CompanyThe Company has contingent liabilities in respect of legal claims arising in the ordinary course of business. Based on the information currently available, the Board of Directors are of the opinion that the ultimate resolution of the litigations would not likely to have a material impact on the Company.

2013 2012 2011 Rs. Rs. Rs.

Cases Pending Against the Company (Values Claimed) 22,800,000 9,270,925 9,053,210

39. ASSETS PLEDGEThe following assets have been pledged as security for liabilities.

Nature of Assets Nature of Liability Carring Amount Pledged Included Under 2013 2012 2011 Rs. Rs. Rs.

Lease Rentals Receivable & Loans & Overdrafts 8,295,127,696 8,404,583,094 5,014,164,870 Lease Rentals Receivable & Stock out on Hire Stock out on HireReal State Loans Overdraft 65,000,000 65,000,000 65,000,000 Other Non Financial AssetsFreehold Land Overdraft 8,000,000 8,000,000 8,000,000 Property, Plant & EquipmentVehicles Loans - 1,217,262 3,134,083 Property, Plant & Equipment 8,368,127,696 8,478,800,356 5,090,298,953

40. EVENTS OCCURRING AFTER THE REPORTING DATESubsequent to the Reporting date, no circumstances have arisen which would require adjustment to or disclosure in the financial statements.







41. RELATED PARTY TRANSACTIONSThe Company carried out transactions with parties who are defined as Related Parties as per the Sri Lanka Accounting Standard - LKAS 24 ‘Related Party Disclosures’.

Details of related party transactions which the company had during the year are as follows:

41.1 Transactions with Key Managerial Personnel (KMPs)Related party includes KMPs defined as those persons having authority and responsibility for planning directing and controlling the activities for the Company. Such KPMs include the Board of Directors of the Company (inclusive of Executive and Non-Executive Directors), and executives who directly report to Board of Directors.

41.1.1 Key Management Personnel Compensation

2013 2012 Rs. Rs.

Short Term Employment Benefits 142,658,817 93,892,606Directors Fees & Expenses 9,973,423 6,240,225 152,632,240 100,132,831

In addition to the above, the Company has also paid non cash benefits such as vehicles and fuel to key management personnel in line with the approved employment benefits of the Company.

41.1.2 Transactions, Arrangements and Agreements Involving KMPs, and their Close Members of the Family (CFMs)CFMs of a KMPs are those family members who may be expected to influence, or be influenced by, that KMP in their dealing with the entity.

2013 2012 Rs. Rs.

Statement of Financial PositionLiabilitiesFixed Deposits 799,647,335 37,590,000

Statement of Comprehensive IncomeInterest Expense 19,497,423 1,051,000

Other TransactionsDividend Paid on Share Holdings 2,693,040 50,324,000Deposits Accepted During the Year 884,056,002 29,990,000 886,749,042 80,314,000


41.1.3 Transaction, arrangements and agreements involving with Entities which are controlled, and/or jointly controlled by the KMP's and their CFMs or shareholders

2013 2012 Rs. Rs.

Statement of Financial PositionAssetsLoans and Receivables 2,599,000 4,757,000Lease Rentals Receivable & Stock out on Hire 501,616 1,339,768 3,100,616 6,096,768

LiabilitiesFixed Deposits 339,066,000 175,980,000

Total 342,166,616 182,076,768

Statement of Comprehensive IncomeInterest Income 935,000 219,000Other Operating Income 14,147,000 14,147,000Interest Expense 4,696,000 896,000 19,778,000 15,262,000

Other Transactions Deposits Accepted During the Year 960,572,007 55,000,000 960,572,007 55,000,000

41.1.4 Transactions with Group EntitiesThe Group entities include the Parent , Fellow Subsidiaries and Associate companies of the parent.

41.1.4.1 Transactions with Parent Company

2013 2012 Rs. Rs.

Statement of Financial PositionLiabilitiesFixed Deposits 1,113,000,000 1,785,000,000

Statement of Comprehensive IncomeInterest Expense 41,988,486 53,948,000

Other TransactionsDeposits Accepted During the Year 678,459,315 1,785,000,000Dividend Paid on Share Holdings 176,606,000 123,624,200 855,065,315 1,908,624,200







2013 2012 Rs. Rs.

41.1.4.2 Transactions with Fellow SubsidiariesStatement of Financial PositionAssetsLease Rentals Receivable & Stock out on Hire 10,999,705 13,088,137Property, Plant & Equipment 14,520,663 5,404,000 25,520,368 18,492,137

Statement of Comprehensive IncomeInterest Income 2,302,000 618,000Other Operating Expenses 1,030,000 11,000 3,332,000 629,000

Other TransactionsDividend Paid on Share Holdings 89,516,385 13,365,429

42. CAPITALThe Company maintains capital in order to cover risks inherent in the business and meet the capital adequacy requirements of Central Bank of Sri Lanka . The adequacy of the Company's capital is monitored based on the measures, rules and ratios adopted by Central Bank of Sri Lanka.

42.1 Capital ManagementThe primary objective of Company's capital management policy are to ensure that the Company complies with externally imposed capital requirements and healthy capital ratios in order to support its business and to maximise shareholders' value.

43. RISK MANAGEMENT43.1 INTRODUCTIONRisk is inherent in the Company’s activities but is managed through a process of ongoing identification, measurement and monitoring. This process of risk management is critical to the Company’s continuing profitability and each individual within the Company is accountable for the risk exposures relating to his or her responsibilities.

Risk Management FrameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has delegated its authority to Integrated Risk Management Committee (IRMC) which is responsible for developing and monitoring Company’s risk management policies. The Committee is headed by an Independent Non-Executive Director and comprises of Executive and Non-Executive Directors, CRO, CFO, and Head of Treasury. Meetings of IRMC are held regularly, and the Board of Directors are duly updated of its activities.The Company’s risk management policies are established to identify and analyse the risks faced by the Company, 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 Company, 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.



43.1 INTRODUCTION CONTD.Integrated Risk Management Unit (IRMU)The Business units (i.e. Credit Departments, Fixed and Savings Deposits Divisions, Branches and Treasury etc.) have primary responsibility for Risk Management. The Integrated Risk Management Unit, which provides an independent oversight function, acts as the 2nd line of defence. IRMU is headed by the CRO who directly reports to the Managing Director and also has a functional reporting to the IRMC.

Risk Measurement & ReportingThe Company’s Risks are measured using appropriate techniques based on the type of risk, and industry best practices. The Company also carries out procedures to identify the effect of extreme events/worst case scenarios in most of the major type of risks and the results are reported to IRMC on a periodic basis.

Monitoring and controlling risks is primarily performed based on policies, limits & thresholds established by the Company. These limits reflect the business strategy and market environment of the Company as well as the level of risk that the Company is willing to accept.

Assets and Liability Management Committee (ALCO)ALCO is chaired by the Managing Director and has representatives from Treasury Department, Credit Departments, Finance Department, the Chief Financial Officer & the Chief Risk Officer. The Committee meets regularly to monitor and manage the assets & liabilities of the Company and also overall liquidity position to keep the Company’s liquidity at healthy levels, whilst satisfying regulatory requirements.

Credit CommitteeCredit Committee is chaired by the Managing Director and comprises of executive directors, representatives from Credit Departments, Finance Department, the Chief Financial Officer & the Chief Risk Officer. The Committee meets regularly to monitor and manage the Company’s lending portfolio, asset quality and recovery actions. Committee also periodically reviews Company’s credit policy and lending rates to different business segments, in light of prevailing market conditions and industry dynamics.

43.2 CREDIT RISKCredit risk is the risk of financial loss to the Company if a borrower or counter party to a financial instrument, fails to meet its contractual obligations, and arises principally from the Company’s loans and advances to customers/other Companies and investments in debt securities.Credit risk constitutes the Company’s largest risk exposure category. This can be broadly categorized into two types; default and concentration risk.

Default Risk as the risk of the potential financial loss resulting from the failure of customer or counter party to meet its debt or contractual obligations and arises principally from the company’s loans and advances to customers.

Concentration Risk is the credit exposure being concentrated as a result of excessive buildup of exposure to a single counter party, industry, product, geographical location or insufficient diversification.

Given the importance of Gold Loan business to the Company’s overall lending operation, fluctuations to the gold prices could have an adverse impact to earnings from this particular segment. Gold price risk could arise from either of adverse movements in the world prices, exchange rates, basis between local and world prices.

Company currently manages the credit risk of lending against gold by adopting following strategies;

• Quicker re-pricing cycle: Company as a strategy grants for shorted periods allowing it to re-price its cost promptly• Frequent revision of Loan-To-Value (LTV) ratio: Company practices a process of revising advancing ratio to allow for market value

fluctuations.






43.2.1 CREDIT QUALITY BY CLASS OF FINANCIAL ASSETS

Neither Past Past Due Due Nor But Not Individually As at 31 March 2013 Impaired Impaired Impaired Total Rs Rs Rs Rs

AssetsCash and Bank Balances 4,019,673,357 - - 4,019,673,357Financial Investments - Held for Trading 7,323,047 - - 7,323,047Loans and Receivables (Gross) 9,146,618,455 7,555,979,808 224,498,763 16,927,097,026Lease Rentals Receivable & Stock out on Hire (Gross) 11,557,217,743 17,289,986,528 202,945,330 29,050,149,602Financial Investments - Available for Sale 373,702,818 - 100,036,500 473,739,318Other Financial Assets 1,487,399,284 - - 1,487,399,284Total Financial Assets 26,591,934,705 24,845,966,336 527,480,593 51,965,381,634

43.2.1.1 Aging Analysis of past due(i.e. facilities in arrears of 1 day and above) but not impaired loans by class of financial assets.

Past Due But Not Impaired Less than 31 to 60 61 to 90 More than 31 days days days 90 days Total

Loans and Receivables (Gross) 2,454,618,152 1,657,052,445 1,337,132,392 2,107,176,819 7,555,979,808Lease Rentals Receivable & Stock out on Hire (Gross) 7,239,900,927 6,003,887,026 2,237,426,641 1,808,771,934 17,289,986,528 9,694,519,079 7,660,939,471 3,574,559,033 3,915,948,753 24,845,966,336



43.2.2 ANALYSIS OF RISK CONCENTRATION43.2.2.1 INDUSTRY ANALYSISThe following table shows the risk concentration by industry for the components of the Statement of Financial Position.

Sector wise Breakdown

Cash and Bank Balances

Rs.

Financial Investments -

Held for TradingRs.

Loans and Receivables **

Rs.

Lease Rentals Receivable & Stock

out on Hire **Rs.

Financial Investments -

Available for SaleRs.

Other Financial

AssetsRs.

Total Financial Assets

Rs.

Agriculture - - 68,883,265 1,644,737,813 - - 1,713,621,078

Manufacturing - - 189,217,687 912,874,590 - - 1,102,092,277

Construction - - 294,861,097 665,253,420 - - 960,114,518

Financial Services 4,019,673,357 - 211,144,211 14,381,800 - 1,487,399,284 5,732,598,651

Trading - 7,323,047 2,328,939,828 9,231,663,898 105,416,222 - 11,673,342,995

Retail - - 10,550,851,131 - - - 10,550,851,131

Government - - - - 368,323,096 - 368,323,096

Hotels - - 29,527,710 174,924,339 - - 204,452,048

Services - - 2,779,562,470 15,627,510,815 - - 18,407,073,284

Total 4,019,673,357 7,323,047 16,452,987,399 28,271,346,674 473,739,318 1,487,399,284 50,712,469,079

**Provincial breakdown for (01) Loans and Receivables (02) Lease Rentals Receivable & Stock out on Hire from customers within Sri Lanka is as follows.Province Loans and Receivables

Rs.

Lease Rentals Receivable & Stock out on Hire

Rs.

Total

Rs.

Central 1,470,976,624 2,520,449,875 3,991,426,499

Eastern 666,808,133 1,153,998,164 1,820,806,297

North Central 258,978,985 1,488,453,835 1,747,432,820

North Western 839,240,531 2,543,359,894 3,382,600,425

Northern 921,270,911 915,298,234 1,836,569,145

Sabaragamuwa 361,538,968 2,114,628,492 2,476,167,460

Southern 809,761,844 2,440,958,434 3,250,720,278

Uva 319,330,871 882,210,627 1,201,541,499

Western 10,805,080,532 14,211,989,118 25,017,069,649

Total 16,452,987,398 28,271,346,674 44,724,334,073

43.3 LIQUIDITY RISK & FUNDING MANAGEMENTLiquidity risk refers to the possibility of Company not having sufficient cash to meet its payment obligations. This arises primarily due to mismatches in the maturity profile of Company’s assets and liabilities. Adequate liquidity is critical to meet the Company’s financial commitment and to accommodate additional funding needs of the growing business volumes

The Company’s primary objective in liquidity risk management is to ensure adequate funding for its businesses throughout market cycles, including periods of financial stress. To achieve this objective Assets and Liability Management Committee (ALCO) analyses and monitors liquidity risk, maintains an adequate margin of safety in liquid assets.






43.3 LIQUIDITY RISK & FUNDING MANAGEMENT CONTD.ALCO meets weekly and is responsible for managing and controlling the overall liquidity of the Company and reviews the impact of strategic decisions on Company’s liquidity position.

Furthermore the Company maintains the statutory liquid assets ratio at its required level as a method to measure and control daily liquidity risk.

43.3.1 Analysis of Financial Assets and Liabilities by Remaining Contractual MaturitiesThe table below summarises the maturity profile of the undiscounted cash flows of the Company’s financial assets and liabilities as at 31 March 2013. On Less than 03-12 01-05 Over 05 Total Demand 03 Months Months Years Years Rs Rs Rs Rs Rs Rs

Financial AssetsCash and Bank Balances 1,171,637,040 2,900,476,762 - - - 4,072,113,802Financial Investments - Held for Trading 7,323,047 - - - - 7,323,047Loans and Receivables 5,855,820,952 7,032,721,849 2,525,757,635 3,349,052,071 157,700 18,763,510,208Lease Rentals Receivable & Stock out on Hire 1,894,292,057 4,060,414,366 11,290,044,505 21,936,562,927 32,490,877 39,213,804,733Financial Investments - Available for Sale 473,739,318 - - - - 473,739,318Other Financial Assets - 503,169,250 1,068,233,517 32,280,000 - 1,603,682,768Total Financial Assets 9,402,812,416 14,496,782,228 14,884,035,657 25,317,894,998 32,648,577 64,134,173,876

Financial LiabilitiesDue to Banks 878,493,156 1,355,775,772 2,383,495,488 2,572,423,515 148,568,813 7,338,756,744Due to Customers 285,872,153 19,183,284,784 15,642,937,405 7,336,218,313 - 42,448,312,655Debt Issued and Other Borrowed Funds 2,757,671 508,506,482 1,371,248,160 784,781,000 - 2,667,293,314Other Financial Liabilities 638,010,603 - - - - 638,010,603Total Financial Liabilities 1,805,133,583 21,047,567,038 19,397,681,054 10,693,422,828 148,568,813 53,092,373,316

Total Net Financial Assets/(Liabilities) 7,597,678,833 (6,550,784,810) (4,513,645,397) 14,624,472,170 (115,920,236) 11,041,800,560

43.3.2 Contractual Maturities of Commitments & ContingenciesThe table below shows the contractual expiry by maturity of the Company’s contingent liabilities and commitments. Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

Less than 03-12 01-05 Over 05 On Demand 03 Months Months Years Years Total Rs Rs Rs Rs Rs Rs

Contingent LiabilitiesGuarantees Issued to Banks and Other Institutions - 1,000,000 13,800,000 500,000 - 15,300,000Import LC & Ordinary Guarantees 89,637,623 - - - - 89,637,623Total Contingent Liabilities 89,637,623 1,000,000 13,800,000 500,000 - 104,937,623

CommitmentsCommitment for Unutilised Facilities 1,118,332,877 - - - - 1,118,332,877Total Commitments 1,118,332,877 - - - - 1,118,332,877

Total Commitments and Contingencies 1,207,970,500 1,000,000 13,800,000 500,000 - 1,223,270,500


43.4 Market RiskMarket risk refers to the possible losses to the Company that could arise from changes in market variables like interest rates and equity prices. Among them, interest rate risk has been identified as the most critical risk given Company’s business profile.

43.4.1 Interest Rate RiskInterest rate risk is a key constitute of the market risk exposure of the Company due to adverse and unanticipated movements in future interest rate which arises from core business activities; granting of credit facilities, accepting deposits and issuing debt instruments.

Due to the nature of operations of the Company, the impact of interest rate risk is mainly on the earnings of the Company rather than the market value of portfolios. Several factors give rise to interest rate risk; among these are term structure risk, which arises due to the mismatches in the maturities of assets and liabilities; basis risk which is the threat to income arises due to differences in the bases of interest rates.

Excessive movements in market interest rate could result in severe volatility to Company’s net interest income and net interest margin. Company’s exposure to interest rate risk is primarily associated with factors such as;

• Reprising risk arising from a fixed rate borrowing portfolio where reprising frequency is different to that of the lending portfolio.• Yield curve risk arising from unanticipated shifts of the market yield curve

Interest Rate risk is managed principally through minimizing interest rate sensitive asset liability gaps. In order to ensure interest rate margin and spreads are maintained, the Company conducts periodic reviews and re-prices its assets accordingly.

43.4.2 Interest Rate Risk Exposure on Financial Assets & LiabilitiesThe table below analyses the Company's interest rate risk exposure on financial assets & liabilities. The Company's assets & liabilities are included at carrying amount and categorized by the earlier of contractual repricing or maturity dates.

Up to 03 03-12 01-03 03-05 Over 05 Non interest Total as at Months Months Years Years Years bearing 31/03/2013 Rs Rs Rs Rs Rs Rs Rs

AssetsCash and Bank Balances 2,848,036,317 - - - - 1,171,637,040 4,019,673,357Financial Investments - Held for Trading - - - - - 7,323,047 7,323,047Loans and Receivables 11,859,408,262 2,123,545,682 1,998,011,303 471,871,200 150,950 - 16,452,987,398Lease Rentals Receivable & Stock out on Hire 4,278,631,261 7,113,456,995 14,285,378,463 2,565,228,101 28,651,854 - 28,271,346,674Financial Investments - Available for Sale 368,323,096 - - - - 105,416,222 473,739,318Other Financial Assets 497,321,453 962,455,489 27,622,342 - - - 1,487,399,284

Total Financial Assets 19,851,720,389 10,199,458,165 16,311,012,108 3,037,099,302 28,802,804 1,284,376,310 50,712,469,078

Financial LiabilitiesDue to Banks 3,991,191,653 1,492,709,180 882,316,506 - - - 6,366,217,339Due to Customers 18,756,967,981 14,090,179,685 4,848,496,162 1,047,055,992 - - 38,742,699,819Debt Issued and Other Borrowed Funds 492,512,042 1,174,420,931 32,276,712 545,000,000 - - 2,244,209,686Other Financial Liabilities 638,010,603 - - - - - 638,010,603

Total Financial Liabilities 23,878,682,279 16,757,309,797 5,763,089,380 1,592,055,992 - - 47,991,137,448

Interest Sensitivity Gap (4,026,961,890) (6,557,851,631) 10,547,922,728 1,445,043,310 28,802,804 1,284,376,310 2,721,331,631







44. SEGMENTAL INFORMATIONFor management purposes, the Company is organised into four operating segments based on services offered to customers as follows. The following table presents income and profit and certain asset and liability information regarding the Company’s operating segments.

Leasing & Stock out on Hire Loans & Receivables Others Total 2013 2012 2013 2012 2013 2012 2013 2012 Rs Rs Rs Rs Rs Rs Rs Rs

Interest Income 6,536,359,538 5,012,223,621 3,301,415,955 2,098,796,563 487,251,417 186,570,950 10,325,026,910 7,297,591,134Interest Expenses (3,811,288,954) (2,365,835,718) (1,783,240,295) (1,011,507,337) (351,177,483) (174,643,369) (5,945,706,732) (3,551,986,422)Net Interest Income/(Expenses) 2,725,070,584 2,646,387,903 1,518,175,660 1,087,289,226 136,073,934 11,927,581 4,379,320,178 3,745,604,712

Fee and Commission Income 320,855,035 230,700,815 310,008,892 286,569,880 98,745,671 44,976,765 729,609,598 562,247,460Other Operating Income 113,013,938 36,686,079 - - (1,200,604) 40,547,448 111,813,334 77,233,527Impairment Charge/Reversal on Loans and Losses (243,449,233) (317,472) (161,937,893) (107,341,388) 5,080,418 (8,364,553) (400,306,708) (116,023,413)

Net Operating Income 2,915,490,324 2,913,457,325 1,666,246,659 1,266,517,718 238,699,419 89,087,241 4,820,436,403 4,269,062,286

Other Costs 707,828,448 537,942,402 551,756,499 456,548,145 653,959,480 506,385,786 1,913,544,427 1,500,876,333Depreciation 71,342,349 63,129,873 59,747,134 55,208,797 72,994,158 61,782,586 204,083,641 180,121,256Operating Profits Before Taxes 2,136,319,527 2,312,385,050 1,054,743,026 754,760,776 (488,254,219) (479,081,131) 2,702,808,334 2,588,064,695

Taxes (1,000,143,292) (874,070,603)Profits for the Year 1,702,665,042 1,713,994,093

Segmental Assets 29,327,946,329 24,806,618,846 17,024,008,650 13,281,034,282 7,718,057,384 4,401,634,929 54,222,858,579 42,638,404,653

Segmental Liabilities 568,209,261 296,557,193 454,934,734 152,286,126 47,869,905,032 38,219,700,570 48,894,257,289 38,670,307,203

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profits or losses which, in certain respects, are measured differently from operating profits or losses in the financial statements. Income taxes are managed on a group basis and are not allocated to operating segments.

No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Company’s total revenue in 2012 or 2013.

With Value

Our vision is to deliver value to all strata of society while continuing our goal of creating personalised partnerships with each of our stakeholders

With ValueINFORMATION211 Glossary of Terms213 Distribution Channels217 Independent Assurance Report on Sustainability219 GRI Compliance Index228 Notes230 Notice of Annual General Meeting231 Form of Proxy






AAccounting Policies Accounting Policies The specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

Accrual BasisAccrual BasisThe system of accounting wherein revenue is recognised at the time it is earned and expenses at the time they are incurred, regardless of whether cash has actually been received or paid out.

AmortisationAmortisationThe systematic allocation of the depreciable amount of an intangible asset over its useful life.

Available for SaleAvailable for SaleNon derivative financial assets that are not classified as loans and receivables, held to maturity investments or financial assets at fair value through profit or loss.

CCapital Adequacy RatioCapital Adequacy RatioThe relationship between capital and risk weighted assets as prescribed by the Central Bank of Sri Lanka.

Capital ReservesCapital ReservesReserves identified for specific purposes and considered not available for distribution.

Cash EquivalentsCash EquivalentsShort term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Collective Impairment ProvisionsCollective Impairment ProvisionsImpairment is measured on a collective basis for homogeneous groups of lending facilities that are not considered as individually significant.

ContingenciesContingenciesA condition or situation existing at balance sheet date where the ultimate outcome of which, gain or loss, will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events.

GLOSSARY OF TERMS

Corporate GovernanceCorporate GovernanceThe process by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others.

Cost to Income RatioCost to Income RatioOperating expenses excluding impairment charge/ provision for bad and doubtful debts as a percentage of total operating income (net of interest expenses).

Credit RatingCredit RatingAn evaluation of a corporate’s ability to repay its obligations or the likelihood of not defaulting, carried out by an independent rating agency.

DDeferred TaxationDeferred TaxationSum set aside for income tax in the financial statements that may become payable/ receivable in a financial year other than the current financial year.

DerecognitionDerecognitionRemoval of a previously recognised financial asset or liability from an entity’s statement of financial position.

Dividend CoverDividend CoverProfit attributable to ordinary shareholders as a percentage of gross dividends; indicates number of times dividend is covered by current year’s distributable profits.

Dividend Pay-out Ratio Dividend Pay-out Ratio Dividend divided by profit after tax; indicates the percentage of earnings paid out to shareholders as dividends.

Dividend per Share (DPS)Dividend per Share (DPS)Value of the total dividend paid out and proposed to ordinary shareholders divided by the number of ordinary shares in issue; indicates the proportion of current year’s dividend attributable to an ordinary share in issue.

Dividend YieldDividend YieldDividend expressed as a percentage of market value of a share. In absence of any capital gains this shows the return on investing on a share relative to its market price.

EEarnings per Share (EPS)Earnings per Share (EPS)Profit attributable to ordinary shareholders divided by the number of ordinary shares in issue; indicates the proportion of current year’s earnings attributable to an ordinary share in issue.

Economic Value Added (EVA)Economic Value Added (EVA)A measure of performance considering cost of total invested equity.

Effective Interest Rate (EIR)Effective Interest Rate (EIR)Rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or liability.

Effective Tax RateEffective Tax RateProvision for taxation expressed as a percentage of the profit before taxation.

Efficiency RatioEfficiency RatioOperating expenses including impairment charge/ provision for bad and doubtful debts as a percentage of total operating income (net of interest expenses).

FFair ValueFair ValueThe amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Fair Value through Profit or LossFair Value through Profit or LossA financial asset or financial liability that is held for trading or upon initial recognition designated by the entity as fair value through profit or loss.

Finance LeaseFinance LeaseA contract whereby a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortise the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risks and rewards of ownership to the lessee.

Financial InstrumentFinancial Instrument A financial instrument is any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.


GGross DividendGross DividendThe proportion of profit distributed to shareholders including the tax withheld.

Guarantees Guarantees An assurance made by a third party (Guarantor) who is not a party to contract between two others, that the guarantor will be liable if the Guarantee fails to fulfil the contractual obligation.

HHeld-to-Maturity InvestmentsHeld-to-Maturity InvestmentsNon derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity.

Hire PurchaseHire PurchaseA contract between hirer and financier where the hirer takes on hire a particular article from the financier, with the option to purchase the article at the conclusion of the agreed rental payments.

IInterest CoverInterest CoverEarnings before interest and taxes divided by interest cost. This indicates the number of times interest expenses is covered by earnings before interest and tax; indicates ability to cover interest expenses.

Interest SpreadInterest SpreadRepresents the difference between the average interest rate earned on average interest earning assets and the average interest rate paid on average interest bearing liabilities.

KKey Management Personnel (KMP)Key Management Personnel (KMP)People those who are having authority and responsibility for planning, directing and controlling the activities of the entity.

LLending PortfolioLending PortfolioTotal value of lending products net of unearned income, amounts received in advance and allowance for impairment.

Liquid AssetsLiquid AssetsAssets that are held in cash or in a form that can be converted to cash readily.

Liquid Assets RatioLiquid Assets RatioLiquid assets as a percentage of public deposits.

MMarket CapitalisationMarket CapitalisationNumber of ordinary shares in issue multiplied by the market value of a share as at a date.

NNet Assets Value per Ordinary ShareNet Assets Value per Ordinary ShareShareholders’ funds excluding preference shares, if any, divided by the number of ordinary shares in issue.

Net Interest IncomeNet Interest IncomeThe difference between interest income earned from interest earning assets and interest expenses incurred on interest bearing liabilities.

Net Interest MarginNet Interest MarginNet interest income expressed as a percentage of average interest earning assets.

Non-Performing Loan PortfolioNon-Performing Loan PortfolioThe aggregate value of the advances portfolio that has been delinquent for a period of more than six months.

NPL Ratio NPL Ratio Total non-performing loans as a percentage of the total lending portfolio.

OOff Balance Sheet TransactionOff Balance Sheet TransactionTransactions that are not recognised as assets or liabilities in the statement of financial position, which give rise to the commitment and contingencies in future.

PPrice Earnings Ratio (P/E Ratio) Price Earnings Ratio (P/E Ratio) Market price of a share divided by earnings per share, reflects number of years that would be taken to recoup shareholders’ capital outlay in the form of earnings.

Probability of Default Probability of Default An internal estimate for each borrower grade of the likelihood that an obligor will default on an obligation.

RRelated PartyRelated PartyParties have the ability to control or exert a significant influence over the company’s financial and operating decisions.

Return on Assets (ROA)Return on Assets (ROA)Net profit for the year expressed as a percentage of average total assets; indicates overall effectiveness in generating profits with available assets.

Return on Equity (ROE)Return on Equity (ROE)Net profit for the year, less dividends on preference shares, if any, expressed as a percentage of average shareholders’ funds/equity.

Risk Weighted Assets Risk Weighted Assets On balance sheet assets and the credit equivalent of off balance sheet assets multiplied by the relevant risk weighting factors.

SSpecific Impairment Specific Impairment Impairment measured for the loans which are individually significant to the Company

TTier I Capital Tier I Capital Core capital representing permanent shareholders’ equity and reserves created or increased by appropriations of retained earnings or other surpluses.

Tier II CapitalTier II CapitalSupplementary capital representing revaluation reserves, general provisions and debt instruments such as subordinated term debts and other hybrid capital instruments which combine certain characteristics of equity and debt.

VValue AddedValue AddedValue of wealth created by providing financial and other related services less the cost of providing such services.

GLOSSARY OF TERMS






DISTRIBUTION CHANNELS

Branch Telephone Fax Address

Western Province

Aluthgama 034-2271161 034-2271155 No. 185, Galle Road, Aluthgama

Awissawella 036-4929910 036-4270790 No. 25, Yatiyantota Road, Awissawella

Boralesgamuwa 011-4381033 011-2518389 No. 28, Dehiwala Road, Boralesgamuwa

Corporate Office 011-2155000 011-2574777 No. 20, Dharmapala Mawatha, Colombo 03

Dam Street 011-4378798 011-2435259 No. 371/1, Dam Street, Colombo 12

Dehiwala 011-4361869 011-2722446 No. 84 A, Galle Road, Dehiwela

Delkanda 011-4347118 011-2804343 No. 595, High Level Road, Gangodawila, Nugegoda

Gampaha 033-4670650 033-4670464 No. 01 B, Bauddhaloka Mawatha, Gampaha

Head Office 011-4521000 011-5345328 No.275/75 Prof. Stanley Wijesundara Mawatha, Colombo 07

Homagama 011-4361877 011-2894380 No. 76, High Level Road, Homagama

Horana 034-4286120 034-4286255 No. 02, Rathnapura Road, Horana

Ja-Ela 011-2229820 011-2244155 No.6/1/1, Old Negombo Road, Ja-ela

Kadawatha 011-4339644 011-2926917 No. 139/6, Kandy Road, Kadawatha

Kaduwela 011-4542136 011-2538222 No. 484, Avissawella Road, Kaduwela

Kalutara 034-4936065 034-2223343 No. 334, Main street, Kalutara South

Kandana 011-4380250 011-2231925 No. 06, Station Road, Kandana

Kiribathgoda 011-4334550 011-4818192 No. 02, Kandy Road, Kiribathgoda

Kochchikade 031-4922478 031-2074205 No. 03, Main Street, Chilaw Road, Kochchikade

Kotahena 011-4376198 011-2424795 No. 03, Street Lucia’s Street, Kotahena

Maharagama 011-4300350 011-4300350 No. 69, Dehiwala Road, Maharagama

Malabe 011-4381083 011-2742970 No. 834/7, Kaduwela Road, Malabe

Maradana 011-4024679 011-2685359 No. 538, Maradana Road, Colombo 10

Matugama 034-4947764 034-2249343 No. 34, Aluthgama Road, Mathugama

Moratumulla 011-4216863 011-2653365 No. 227, De Soyza Road, Moratumulla, Moratuwa

Negambo 031-4936551 031-2231266 No. 80, Greens Road, Negombo

Nugegoda 011-4541333 011-4541735 No. 92, Stanley Thilakarathne Mawatha, Nugegoda

Panadura 038-4282500 038-2243525 No. 508, Galle Road, Panadura

Piliyandala 011-4343409 011-2608895 No. 67, Horana Road, Piliyandala

Pitakotte 011-4381335 011-2820967 No. 429, Kotte Road, Pitakotte

Rajagiriya 011-4362962 011-2885551 No. 374/1, Kotte Road, Rajagiriya

Sea Street 011-4375934 011-2434597 No.197, Sea Street, Colombo 11




Central Province

Dambulla 066-4928929 066-2284990 No. 38, Kurunegala Junction, Dambulla

Gampola 081-4486444 081-2351455 No. 22, Nuwara Eliya Road, Gampola

Hatton 051-4924378 051-2225736 No. 34 A, Dunbar Road, Hatton

Kandy 081-4474223/5 081-4474224 No. 115, Milton House, Kotugodella Veediya, Kandy

Kandy City 081-4481728 081-2204155 No. 266, D S Senanayaka Street, Kandy

Katugasthota 081-4949236 081-4949236 No. 19, Madawala Road, Katugasthota

Maskeliya 051-4924366 051-2277088 No. 175, Main Street, Maskeliya

Matale 066-4460937 066-2222266 No. 251, Main Street, Matale

Nawalapitiya 054-2223110 054-2224050 No. 3A, Urban Council Road, Nawalapitiya

Nuwara Eliya 052-4924362/3 052-4490030 No.71, City Light Building, Queens Elisabeth Drive, Nuwara Eliya

Pilimathalawa 081-4951272 081-2579575 No. 353, Colombo Road, Pilimathalawa

Eastern Province

Trincomalee 026-4924794 026-2226737 No. 275, Central Road, Trincomalee

Akraipattu 067-4923975 067-2279655 Sagama Road, Akkaraipattu

Ampara 063-4925110 063-2223504 No. 04, Opposite Clock Tower, Ampara

Batticaloa 065-4923930 065-2224329 No. 175, Thirumalei Street, Batticaloa

Kattankudi 065-4926492 065-2245280 No. 301, Mohomad Aiyar Building, Main Street, Katthankudi

Kalawanchikudy 065-2251626 065-2251646 Hospital Road, Kaluwanchikudy

Kalmunai 067-4924040 067-2220418 Batticaloa Road, Kalmunai

Pothuvil 063-4925557 063-4925557 Main Street, Pothuvil

Saindamarathu 067-4923744 067-2225366 No. 209, Main Street, Saindamarudu

Samanthurai 067-4923976 067-2261394 Opp. Hiraj Jummah Mosque, Ampara Road, Samanthurai

North Western Province

Chillaw 032-4929638 032-2224725 No. 1/40 A, Colombo Road, Chilaw

Kuliyapitiya 037-4931076 037-4696319 No. 12, Main Street, Kuliyapitiya

Kurunegala 037-4690464 037-4690138 No. 21, Athula Cooray Building, Dambulla Road, Kurunegala

Kurunegala City 037-4936670 037-2233550 No 118 A, Colombo Road, Kurunegala

Puttlam 032-4928789 032-2266939 No. 10, Kurunegala Road, Puttalam

Wennappuwa 031-4931437 031-4874754 No. 134, Main Street, Wennappuwa

North Central Province

Anuradhapura 025-4926029 025-4580943 No. 137, Main street, Anuradhapura

Anuradhapura city 025-4927367 025-2226759 No. 514/A, New Town, Anuradhapura

Polonnaruwa 027-4926599 027-4599119 Rajarata Building, Main Street, Kaduruwela, Polonnaruwa

Thambuttegama 025-4928717 025-2275567 No. 256, New Town, Thambuththegama







Sabaragamuwa Province

Kegalle 035-4932339/41 035-4932339 No. 315, Main Street, Kegalle

Balangoda 045-4932546/7/8 045-4640000 No. 19, Rest House Approach Road, Balangoda

Embilipitiya 047-4924424 047-2261990 No. 43, Main Street, Embilipitiya

Rathnapura 045-4641010 045-4641013 No. 49, Senanayaka Mawatha, Rathnapura

Warakapola 035-2267267 035-2267788 No. 92, Main Street, Warakapola

Southern Province

Ambalangoda 091-4382588/ 091-4933948 091-4382590 No. 96/2, Galle Road, Ambalangoda

Akuressa 041-2283559 041-2283560 No. 83, Deniyaya Road, Akuressa

Elpitiya 091-4941658 091-2290419 No. 14, Main Street, Elpitiya

Galle 091- 4385065 091-4381644 No. 150, Main Street, Galle

Matara 041-4390847/8 041-4390849 No. 13, Station Road, Matara

Tissamaharama 047-4931676 047-2237360 No. 06, Mahajana Junction, Tissamaharama

Matara City 041-2224496 041-2228666 No. 282, Anagarika Dharmapala Mawatha, Matara

Pitigala 091-4935445 091-4935445 No. 87, Main Street, Pitigala

Tangalle 041-2241750 041-2241751 No. 66, Tissa Road, Tangalle

Northern Province

Vauniya 024-4925127 024-2226043 No. 32B, 2nd Cross Street, Vavuniya

Kilinochchi 021-4923362 021-2285349 Opposite Kandasamy Kovil, Kandy Road, Kilinochchi

Chavakachcheri 021-4923361 021-2270623 No. 136, Kandy Road, Chavakachcheri

Jaffna 021-4920310 021-2220249 No. 440, Hospital Road, Jaffna

Nelliady 021-4923358 021-2262923 No. 10, Point - Pedro Road, Nelliady

Manipay 021-4923356 021-2255523 No. 110, Jaffna Road, Manipay

Chunnakam 021-4920331 021-2241334 No. 55, K. K. S. Road, Chunnakam

Uva Province

Badulla 055-4 499523 / 4 499744 055-2231964 No. 26, Anagarika Dharmapala Mawatha, Badulla

Badulla II 055-4927888 055-2231964 No. 55, Lower Street, Badulla

Bandarawela 057-4926386 057-2225424 No. 187, Main Street, Bandarawela

Welimada 057-4926081 057-4926082 No. 51/A, Nuwara Eliya Road, Welimada

Monaragala 055-4927685 055-4927891 No. 100, Near New Bus Stand, Moneragala

Mahiyanganaya 055-4927701 055-4927702 No. 56, Edwin Wikramarathna Super Market, New Town, Mahiyanganaya


Gold Loan Centre Telephone Address

Western Province

Attidiya 011-4339633 No. 269, Main Road, Attidiya, Dehiwala

Aluth Mawatha 011-4343878 No. 367/1, Aluth Mawatha, Colombo 15

Bandaragama 038-2289425 No. 4, Panadura Road, Bandaragama

Beruwala 034-4288369 No. 175, Galle Road, Beruwala

Borella 011-4614440 No. 54, D S Senenayake Mawatha, Colombo 08

Deans Road 011-4374656 No. 133, Deans Road, Maradana

Dehiwala II 011-4366502 No. 124, Galle Road, Dehiwela

Dematagoda 011-4610963 No. 551, Dematagoda Road, Colombo 9

Elakanda 011-4347464 No. 18, Elakanda Road, Hendala, Wattala

Golumadama 011-4340420 No. 05, Kaldemulla Road, Moratuwa

Grandpass-Stadium 011-4335105 No. 395, Grandpass Road, Colombo 14

Grandpass-Sulaiman 011-4619866 No. 47, Grandpass Road, Colombo 14

Gothatuwa 011-4348649 No. 52/17, Gothatuwa, New Town

Hultsdorf 011-4340496 No. 04, Hultsdorf St, Colombo 12

Jampattah 011-4014668 No. 66, Jampattah Street, Colombo 13

Kelaniya 011-4814050 No. 722, Waragoda Road, Vihara Junction, Kelaniya

Keselwatte 038-4281885 No. 18, Galle Road, Keselwatte, Panadura

Kirulapona 011-4512759 No. 91, High Level Road, Colombo 6

Kiribathgoda (Makola) 011-4380252 No. 44, Makola Road, Kiribathgoda

Kolonnawa 011-4376746 No. 141 A, Kolonnawa Road, Kolonnawa

Kosgashandiya 011-4613210 No. 21, St. Josephs Street, Grandpass, Colombo 14

Madampitiya 011-4334700 No. 343, Madampitiya Road, Colombo 14.

Maligawatta 011-4367623 No. 157/D , New Pradeepa Road, Maligawatta, Colombo 10

Moratuwa 011-4369268 No. 10, Station Road, Moratuwa

Mattakkuliya 011-4614107 No. 7D/2, Sri Wickrama Mawatha, Mattakkuliya, Colombo 15

Modara 011-4615670 No. 81, Modera Street, Colombo 15

Negombo II 031-4936331 No. 356, Main Street, Negambo

Nittambuwa 033-4934107 No. 597/1B, Kandy Road, Nittambuwa

Ragama 011-4967388 No. 640, Tewatte Road, Ragama

Slave Island 011-4736824 No. 135, Malay Street, Colombo 2

Sri Sangaraja Mawatha 011-4380288 No. 259, Sangaraja Mawatha, Colombo 10

Thihariya 033-4678082 No.117, Kandy Road, Thihariya

Thotalanga 011-4366686 No. 284, Nagalagam Street, Colombo 14

Maharagama II 011-4300350 No. 69, Dehiwala Road, Maharagama

Wattala 011-4378087 No. 5B, Hunupitiya Station Road, Wattala

Wellawatta 011-4527435 No. 224 , Galle Road, Wellawatta, Colombo 6

Ganemulla 033-2265866 No. 229/1, Kadawatha Road, Ganemulla







Independent Assurance Report Independent Assurance Report to the management of LB Finance to the management of LB Finance PLC on the Sustainability Report - PLC on the Sustainability Report - 2012/20132012/2013

Introduction and scope of Introduction and scope of engagementengagementThe management of LBF Finance PLC (“LBF”) engaged us to provide independent assurance on the following elements of the Sustainability Report 2012/2013 (“the Report”).

•• Reasonable assurance on the information on financial performance as specified on page 64 and 65 of the Report.

•• Limited assurance on LBF’s self declaration (“the self declaration”) in respect of the content of the Report prepared in accordance with the requirements of the Global Reporting Initiative G3.1 guidelines (GRI) including Financial Service Sector Supplement at application level ”C+”.

Basis of our work and level of Basis of our work and level of assurance assurance We performed our procedures to provide limited assurance in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE 3000): ‘Assurance Engagements Other than Audits or Reviews of Historical

Financial Information’, issued by the Institute of Chartered Accountants of Sri Lanka (“ICASL”).

The evaluation criteria used for this limited assurance engagement are based on the Sustainability Reporting Guidelines (“GRI Guidelines”) and related information in particular, the requirements to achieve GRI application level “C+” in the ‘GRI Application Level’ publication ,publicly available at GRI’s global website at “www.globalreporting.org”.

Our engagement provides limited assurance as defined in SLSAE-3000. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement conducted in accordance with SLSAE-3000 and consequently does not enable to obtain assurance that we would become aware of all significant matters that might be identified in a reasonable assurance engagement. Accordingly, we do not express an opinion providing reasonable assurance.

Management of LBF’s responsibility Management of LBF’s responsibility for the Reportfor the ReportThe management of the LBF is responsible for the preparation of the self declaration, the information and statements contained within the Report, and for maintaining

adequate records and internal controls that are designed to support the sustaining reporting process in line with the GRI Sustainability Reporting Guidelines.

Ernst & Young’s responsibilityErnst & Young’s responsibilityOur responsibility is to express a conclusion as to whether we have become aware of any matter that causes us to believe that the self-declaration contained in the Report has not been prepared, in all material respect, in accordance with the requirements of the GRI Guidelines at application level “C+”. This report is made solely to LBF in accordance with our engagement letter dated 14 May 2013. We disclaim any assumption of responsibility for any reliance on this report to any person other than LBF or for any purpose other than that for which it was prepared. In conducting our engagement, we have complied with the independence requirements of the Code for Ethics for Professional Accountants issued by the ICASL.

Key assurance procedures Key assurance procedures We planned and performed our procedures to obtain the information and explanations considered necessary to provide sufficient evidence to support our limited assurance conclusions. Key assurance procedures included:

INDEPENDENT ASSURANCE REPORT ON SUSTAINABILITY


•• Interviewing relevant LBF’s personnel to understand the process for collection, analysis, aggregation and presentation of the self declaration.

•• Reviewing and validation of the information contained in the self declaration and the Report.

•• Checking the calculations performed by the LBF on a sample basis through recalculation.

•• Reconciling and agreeing the data on financial performance are properly derived from the LBF’s audited financial statements for the year ended 31 March 2012.

•• Comparison of the content of the Report against the criteria for a self declaration at a “C+” level in accordance with the GRI Application Level publication.

Our procedures did not include testing electronic systems used to collect and aggregate the information.

Limitations and considerationsLimitations and considerationsEnvironmental and social performance data are subject to inherent limitations given their nature and the methods used for determining, calculating and estimating such data.

ConclusionConclusionBased on the procedures performed, as described above, we conclude that

•• The information on financial performance as specified on page 64 and 65 of the Report are properly derived from the audited financial statements of the LBF for the years ended 31 March 2012 and 31 March 2013.

•• Nothing has come to our attention that causes us to believe the GRI self declaration contained in the page 227 of the Report has not been prepared, all material respects, in accordance with the requirements of the GRI Guidelines at application level” C+”.

4th June 2013Chartered Accountants

Colombo

INDEPENDENT ASSURANCE REPORT ON SUSTAINABILITY






GRI COMPLIANCE INDEX

No. Description Disclosure Page No.

1.0 Strategy and Analysis

1.1 Statement from the Managing Director Managing Director’s Message 61

1.2 Description of key impacts, risks, and opportunities Sustainability Report 63

2.0 Organizational Profile

2.1 Name of the organisation L B Finance PLC -

2.2 Primary brands, products, and/or services Management Discussion and Analysis 25 - 35

2.3 Operational structure of the organisation Regulatory Reporting 100

2.4 Location of organisation’s headquarters Corporate Information- Inner Back Cover -

2.5 Number of countries where the organisation operates Overview 1

2.6 Nature of ownership and legal form Overview 4

2.7 Markets served Risk Management and Sustainability Report

49, 50,88, 96

2.8 Scale of the reporting organisation Overview 1

2.9 Significant changes during the reporting period regarding size, structure, or ownership

None -

2.10 Awards received in the reporting period Sustainability Report 86

3.0 Report Parameters

Report profile

3.1 Reporting period Overview 1

3.2 Date of most recent previous report Overview 1

3.3 Reporting cycle Overview 1

3.4 Contact point for questions regarding the report or its contents Overview 1

Report scope and boundary

3.5 Process for defining report content Overview 1

3.6 Boundary of the report Overview 1

3.7 Specific limitations on the scope or boundary of the report None -

3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations

Overview 1

3.9 Data measurement techniques Not required for C level reporting -

3.10 Explanation of the effect of any re-statements of information provided in earlier reports, and the reasons for such re-statement

Overview 1

3.11 Significant changes from previous reporting periods in the scope, boundary, or measurement methods applied in the report

Overview 1

GRI content index

3.12 Table identifying the location of the standard disclosures in the report Information 219 - 227




Assurance

3.13 Policy and current practice with regard to seeking external assurance for the report

Information 217 - 218

4.0 Governance, Commitments, and Engagement

Governance

4.1 Governance structure of the organisation Regulatory Reporting 100

4.2 Indicate whether the Chair of the highest governance body is also an executive officer

Regulatory Reporting 102

4.3 Number of members of the highest governance body that are Independent and/or Non-Executive members


4.4 Mechanisms for shareholders and employees to provide recommendations or direction

Regulatory Reporting 128-130

4.5 Linkage between compensation for members of the highest governance body Regulatory Reporting 134, 135, 146

4.6 Processes in place for the highest governance body to ensure conflicts of interest are avoided


4.7 Process for determining the qualifications and expertise of the members of the highest governance body


4.8 Internally developed statements of mission or values, codes of conduct, and principles

Vision, Mission, Values and Goals 4 - 5

4.9 Procedures of the highest governance body for overseeing the organisation’s identification and management of economic, environmental and social performances


4.10 Processes for evaluating the highest governance body’s own performance Regulatory Reporting 133-134

Commitment to external initiative

4.11 Explanation of whether and how the precautionary approach or principle is addressed by the organisation

None -

4.12 Externally developed economic, environmental, and social charters, principles, or other initiatives

Not required for C level reporting -

4.13 Memberships in associations in the industry Sustainability Report 84

Stakeholder engagement

4.14 List of stakeholder groups engaged by the organisation Sustainability Report 67 - 69

4.15 Basis for identification and selection of stakeholders Sustainability Report 67 - 69

4.16 Approaches and frequency of engagement by type and by stakeholder group Sustainability Report 67 - 69

4.17 Key topics and concerns raised through stakeholder engagement Sustainability Report 67 - 69

Product and Service ImpactProduct and Service performance indicators

FS1 Policies with specific environmental and social components applied to business lines.

Sustainability Report 61 - 98







FS6 Percentage of the portfolio for business lines by specific region, size and by sector.

Risk Management 43 - 60

FS7 Monetary value of products and services designed to deliver a specific social benefit for each business line broken down by purpose.

Risk Management 43 - 60

Economic ImpactEconomic performance indicators Economic performance

EC1 Economic value generated and distributed Sustainability Report 64 - 65

EC2 Financial implications and other risks and opportunities for the organisation’s activities due to climate change

Sustainability Report 65

EC3 Coverage of the organisation’s defined benefit plan obligations Sustainability Report 74

EC4 Significant financial assistance received from the government The Company has not received any significant financial assistance from the government

-

Market presence

EC5 Standard entry level wage by gender compared to local minimum wage Sustainability Report 74

EC6 Practices and proportion of spending on locally-based suppliers at significant locations of operation


EC7 Procedures for local hiring and proportion of senior management hired from the local community


Indirect economic impact

EC8 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in - kind, or pro bono engagements


EC9 Understanding and describing significant indirect economic impacts including the extend of impacts

Not reported during the year -

Environmental impactManagement approachEnvironmental performance indicators Materials

EN1 Materials used by weight or volume Not reported during the year -

EN2 Percentage of materials used that are recycled input materials Not reported during the year -

Energy

EN3 Direct energy consumption by primary energy source Not reported during the year -

EN4 Indirect energy consumption by primary source Not reported during the year -

EN5 Energy saved due to conservation and efficiency improvements Sustainability Report 85 - 86

EN6 Initiatives to provide energy-efficient or renewable energy-based products and services, and reductions in energy requirements as a result of these initiatives

None -

EN7 Initiatives to reduce indirect energy consumption and reductions achieved Not reported during the year -




Water

EN8 Total water withdrawal by source Not reported during the year -

EN9 Water sources significantly affected by withdrawal of water Not reported during the year -

EN10 Percentage and total volume of water recycled and reused Not reported during the year -

Biodiversity

EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas


EN12 Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas


EN13 Habitats protected or restored Not reported during the year -

EN14 Strategies, current action and future plans for managing biodiversity Not reported during the year -

EN15 Number of IUCN Red List Species & National Conservation List Species with habitats in areas affected by operations, by level of extinction risk


Emissions, Effluents and Waste

EN16 Total direct and indirect greenhouse gas emissions by weight Not reported during the year -

EN17 Other relevant indirect greenhouse gas emissions by weight Not reported during the year -

EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved Not reported during the year -

EN19 Emissions of ozone-depleting substances by weight Not reported during the year -

EN20 NO, SO, and other significant air emissions by type and weight Not reported during the year -

EN21 Total water discharge by quality and destination Not reported during the year -

EN22 Total weight of waste by type and disposal method Not reported during the year -

EN23 Total Number of and Volume of significant spills Not reported during the year -

EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, & VIII, and percentage of transported waste shipped internationally


EN25 Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the reporting organisation’s discharges of water and runoff


Products and services

EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation


EN27 Percentage of products sold and their packaging materials that are reclaimed by category


Compliance

EN28 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance with environmental laws and regulations

No instances of non compliance has been reported during the reporting period

-







Transport

EN29 Significant environmental impacts of transporting products and other goods and materials used for the organisation’s operations, and transporting members of the workforce


Overall

EN30 Total environmental protection expenditures and investments by type Not reported during the year -

Social impact Labour practices and decent workManagement approach Labour practices and decent work performance indicatorsEmployment

LA1 Breakdown of total workforce by employment type and by region Sustainability Report 70 - 71

LA2 Total number and rate of new employee hires and Employee turnover by age, gender and region

Sustainability Report 70, 74

LA3 Benefits provided to full-time employees that are not provided to temporary or part-time employees, by significant locations of operations


LA15 Return to work and retention rates afterParental leave, by gender.


Labour management relations

LA4 Percentage of employees covered by collective bargaining agreements Not reported during the year -

LA5 Minimum notice period(s) regarding operational changes, including whether it is specified in collective agreements

There were no significant operational changes observed during the reporting period

-

Occupational health and safety

LA6 Percentage of total workforce represented in formal joint management, worker health and safety committees that help monitor and advice on occupational health and safety programmes


LA7 Rates of injury, occupational diseases, lost days, and absenteeism, and number of work related fatalities


LA8 Education, training, counseling, prevention of diseases, and risk-control programs in place to assist workforce members, their families, or community members regarding serious diseases


LA9 Health and safety topics covered in formal agreements with trade unions Not reported during the year -

Training and education

LA10 Average hours of training per year per employee by employee category Sustainability Report 72 - 73

LA11 Programmes for skills management and lifelong learning that support the continued employability of employees and assist them in managing career endings


LA12 Percentage of employees receiving regular performance and career development reviews by gender





Diversity and equal opportunity

LA13 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity

Sustainability Report and Regulatory Reporting

70,102

Equal remuneration for women and men

LA14 Ratio of basic salary and remuneration of women to men by employee category, by significant locations of operation

The Company makes no distinction between male and female employees as regards to salaries

-

Human rights Management approachHuman rights performance indicators Investment and procurement practices

HR1 Percentage and total number of significant investment agreements and contracts that include clauses incorporating human rights concerns, or that have undergone human rights screening


HR2 Percentage of significant suppliers, contractors, and other business partners that have undergone human rights screening, and actions taken


HR3 Total hours of employee training on policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained


Non – discrimination

HR4 Total number of incidents of discrimination and actions taken Not reported during the year -

Freedom of association and collective bargaining core

HR5 Operations and significant suppliers identified in which the right to exercise freedom of association and collective bargaining may be violated or at significant risk, and actions taken to support these rights


Child labour

HR6 Operations and significant suppliers identified as having significant risk for incidents of child labour and measures taken to contribute to the effective abolition of child labour


Forced and compulsory labour

HR7 Operations and significant suppliers identified as having significant risk for incidents of forced or compulsory labour, and measures to contribute to the elimination of all forms of forced or compulsory labour


Security practices

HR8 Percentage of security personnel trained in the organisation’s policies or procedures concerning aspects of human rights that are relevant to operations








Indigenous rights

HR9 Total number of incidents of violations involving rights of indigenous people and actions taken


Assessment

HR10 Percentage and total number of operations that have been subject to human rights reviews and/or impact assessments


Remediation

HR11 Number of grievances related to human rights filed, addressed and resolved through formal grievance mechanisms


SocietyManagement approach Society performance indicatorsLocal communities

SO1 Nature, scope, and effectiveness of any programs and practices that assess and manage the impacts of operations on communities, including entering, operating, and exiting


Corruption

SO2 Percentage and total number of business units analysed for risks related to corruption


SO3 Percentage of employees trained in organisation’s anti-corruption policies and procedures


SO4 Actions taken in response to incidents of corruption Not reported during the year -

Public policy

SO5 Public policy positions and participation in public policy development and lobbying


SO6 Total value of financial and in-kind contributions to political parties, politicians, and related institutions by country


Anti-competitive behaviour

SO7 Total number of legal actions for anti-competitive behavior, anti-trust, and monopoly practices and their outcomes


Compliance

SO8 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance with laws and regulations


Product responsibility Management approachProduct responsibility performance indicatorsCustomer health and safety

PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures





PR2 Total number of incidents of non-compliance with regulations and voluntary codes concerning health and safety impacts of products and services

The Company has not identified any non-compliance with regulations and voluntary codes

-

Products and service labelling

PR3 Type of product & service information required by procedures and percentage of significant products and services subject to such information requirements


PR4 Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling by type of outcomes


PR5 Practices related to customer satisfaction, including results of surveys measuring customer satisfaction


FS16 Initiatives to enhance financial literacy by type of beneficiary Sustainability Report 77

Marketing Communications

PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion, and sponsorship


PR7 Total number of incidents of non-compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship by type of outcomes

The Company has not identified any non-compliance with regulations and voluntary codes

-

Customer Privacy

PR8 Total number of substantiated complaints regarding breaches of customer privacy and losses of customer data

The Company has not identified any substantiated complaints regarding breaches of customer privacy and losses of customer data

-

PR9 Monetary value of significant fines for non-compliance with laws and regulations concerning the provision and use of products and services







Report Application LevelReport Application Level

Rep

ort E

xter

nally

Ass

ured

Rep

ort E

xter

nally

Ass

ured

Rep

ort E

xter

nally

Ass

ured

Stan

dard

Dis

clos

ures

ProfileDisclosures

Report on:1.12.1-2.103.1-3.8, 3.10-3.124.1-4.4, 4.14-4.15

Report on all criteria listed for Level C plus:1.23.9,3.134.5-4.13, 4.16-4.17

Same as requirement for Level B

Not Required Management ApproachDisclosures for eachIndicator Category

Management ApproachDisclosed for eachIndicator Category

Report fully on a minimum of any 10 Performance Indicators, including at least one from each of: Social, Economic and Environmental.**

Report fully on a minimum of any 20 Performance Indicators, at least one from each of: Economic, Environment, Human Rights, Labour, Society, Product Responsibility.***

Respond on each core and Sector Supplement* Indicator with due regard to the Materiality Principle by either: a) reporting on the indicator or b) explaining the reason for its omission.

Disclosures onManagementApproach

PerformanceIndicators & SectorSupplementPerformance Indicators

* Sector supplement in final version

** Performance Indicators may be selected from any finalised Sector Supplement, but 7 of the 10 must be from the original GRI Guidelines

*** Performance Indicators may be selected from any finalised Sector Supplement, but 14 of the 20 must be from the original GRI Guidelines


NOTES







NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the Fortieth (40th) Annual General Meeting of L B Finance PLC will be held at the Corporate Office of the Company No. 20, Dharmapala Mawatha, Colombo 3 on Friday, 28th June 2013 at 3.30 p.m. for the following purposes:

1 To receive and consider the Annual Report of the Board of Directors on the affairs of the Company and the Statement of Accounts for the year ended 31st March 2013 and the Report of the Auditors thereon.

2. To declare a dividend as recommended by the Directors.

3. To re-elect Mr. Lalit Nihal de Silva Wijeyeratne, who retires by rotation in terms of Articles 85 and 86 of the Articles of Association, as a Director.

4. To re-elect Mr. Thosapala Hewage as a Director in terms of Article 92 of the Articles of Association.

5. To re-elect Mrs. Anandhiy Gunawardhana as a Director in terms of Article 92 of the Articles of Association.

6. To re-appoint Messrs Ernst & Young, Chartered Accountants, the retiring Auditors and to authorise the Directors to determine their remuneration.

7. To authorise the Directors to determine donations for the year ending 31st March 2014 and up to the date of the next Annual General Meeting.


P W Corporate Secretarial (Pvt) LtdDirector / Secretaries

Colombo31st May 2013

Notes:

1. A shareholder entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote on behalf of him/her.

2. A proxy need not be a shareholder of the Company.

3. The Form of Proxy is enclosed for this purpose.

4. The completed Form of Proxy must be deposited at the Corporate Office of the Company, No. 20, Dharmapala Mawatha, Colombo 03 by 3.30 p.m. on 26th June 2013.






FORM OF PROXY

I/We* ............................................................................................................................................................................................................................................

of ..................................................................................................................................................................................................................................................

shareholder/s of L B FINANCE PLC hereby appoint ..............................................................................................................................................................

……………………………………...............................................…….. (holder of NIC No…………………....................……………….) of ……….........................…………….…….

…………………………………………………..................................................................................………………………. or failing him*

Mr. Thosapala Hewage or failing him*Mr. Kulapurachchige Don Dhammika Perera or failing him*Mr. Lalit Nihal de Silva Wijeyeratne or failing him*Mr. John Anthony Sunil Sumith Adhihetty or failing him*Mr. Wannakuwattewaduge Don Nimal Hemasiri Perera or failing him*Mr. Niroshan Udage or failing him*Mr. Biyawalage Dudley St. Auburn Perera or failing him*Mrs. Kimarli Fernando or failing her *Mrs. Shirani Jayasekara or failing herMrs. Anandhiy Krisnajina Gunawardhana

as my/our* proxy to represent me/us* to speak and to vote as indicated hereunder for me/us* and on my/our* behalf at the Fortieth (40th ) Annual General Meeting of the Company to be held on 28th June 2013 and at every poll which may be taken in consequence of the aforesaid meeting and at any adjournment thereof.

For AgainstFor Against

1. To receive and consider the Report of the Directors and the Statement of Accounts for the year ended 31st March 2013 with the Report of the Auditors thereon.

2. To declare a dividend as recommended by the Directors.

3. To re-elect Mr. Lalit Nihal de Silva Wijeyeratne who retires by rotation in terms of Articles 85 and 86 of the Articles of Association as a Director.

4. To re-elect Mr. Thosapala Hewageas a Director in terms of Article 92 of the Articles of Association.

5. To re-elect Mrs. Anandhiy K Gunawardhana as a Director in terms of Article 92 of the Articles of Association.

6. To re-appoint Messrs Ernst & Young, Chartered Accountants the retiring Auditors and to authorise the Directors to determine their remuneration.

7. To authorise the Directors to determine donations for the year ending 31st March 2014 up to the date of the next Annual General Meeting.

In witness my/our* hand this ……………… day of …………………. Two Thousand and Thirteen.

……………………………….........Signature of Shareholder

*Please delete what is inapplicable.


FORM OF PROXY

Instructions for completionInstructions for completion

1. The instrument appointing a Proxy shall be in writing under the hand of the appointer or of his/her Attorney duly authorised in wiring or if such appointer is a Company/corporation, either under its Common Seal (If required), or under the hand of an Officer/s or Attorney duly authorised in terms of the Articles of Association /Statute.

2. In the case of a proxy signed by an Attorney, the original Power of Attorney must be deposited at the Secretaries’ Office (i.e. P W Corporate Secretarial (Pvt) Ltd, No. 3/17, Kynsey Road, Colombo 08 – Telephone :011-4640360/3) for registration.

3. In perfecting the Form of Proxy please ensure that all details are legible.

4. If you wish to appoint a person other than the Chairman (or failing him, one of the Directors) as your Proxy please insert the relevant details in the space provided.

5. Please indicate with an X in the space provided how your proxy is to vote on the resolution. If no indication is given, the proxy will vote as he thinks fit.

6. To be valid, this Form of Proxy must be deposited at the Corporate Office No. 20, Dharmapala Mawatha, Colombo 3, by 3.30 p.m. on 26th June, 2013.

CoRPoRAte InFoRMAtIon

name of CompanyL B Finance PLC

Legal FormPublic Limited Liability CompanyIncorporated in Sri Lanka under the provisions of the Companies’ Ordinance No. 51 of 1938 (Cap 145) and listed on the Colombo Stock Exchange in January, 1998 and re-registered as per the Companies Act No. 7 of 2007 on 6th June 2008.

A Finance Company registered under the Finance Companies Act No. 78 of 1988.

A registered Financed Leasing Establishment in terms of Finance Leasing Act No. 56 of 2000.

stock exchange Listing30th December 1997

Date of Incorporation30th May 1971

Company Registration numberPQ 156

tax Payer Identification number104033431

VAt Registration number104033431 7000

Central Bank Registration numberRFC 1003

Principal ActivitiesProviding finance leases, hire-purchase, term loans, fixed deposits, savings deposits, Islamic finance, margin trading, gold loans, factoring, power draft, money transfers and utility payment.

Registered officeNo. 275/75, OPA Building, Prof. Stanley WijesundaraMawatha, Colombo 07.Tel – 011-4521000Fax- 011-5345327

Corporate officeNo. 20, Dharmapala Mawaha, Colombo 03Tel- 011-2155000Fax- 011-2575098

Distributions ChannelsBranches - 89Gold Loan Centers - 37

Websitewww.lbfinance.com

Financial Year end31st March

Credit RatingA-/P2 (stable) RAM Ratings (Lanka) Limited

Board of Directors and sub-CommitteesBoard of DirectorsMr. Thosapala Hewage(Chairman)Mr. Dhammika Perera(Executive Deputy Chairman)Mr. Lalit N de S Wijeyeratne(Independent Non-Executive Director/Senior Director)Mr. J A S Sumith Adhihetty(Managing Director)Mr. W D Nirmal H Perera(Executive Director)Mr. Niroshan Udage (Executive Director)Mr. B D St A Perera (Executive Director)Mrs. Kimarli Fernando (Independent Non Executive Director)Mrs. Shirani Jayasekara (Independent Non Executive Director)Mrs. Anandhiy K Gunawardhana (Independent Non Executive Director)

Audit CommitteeMr. Lalit N de S Wijeyeratne (Chairman)Mrs. Shirani JayasekaraMrs. Anandhiy K Gunawardhana

Remuneration CommitteeMr. Thosapala Hewage (Chairman)Mr. Lalit N de S WijeyeratneMrs. Kimarli Fernando

nomination CommitteeMr. L N De S Wijeyeratne (Chairman)Mrs. Kimarli FernandoMr. J A S Sumith Adhihetty

Integrated Risk Management CommitteeMrs. Shirani Jayasekara (Chairperson)Mrs. Kimarli FernandoMr. J A S Sumith AdhihettyMr. Niroshan Udage (Executive Director)Mr. B D St A Perera (Executive Director)

secretariesP W Corporate Secretarial (Pvt) LimitedNo. 3/17, Kynsey Road, Colombo 08Tel- 011-4640360-3Fax- 011-4740588Email- [email protected]

external AuditorsErnst & Young

Internal AuditorsBDO PartnersKPMG Ford Rhodes Thornton & Company

LawyersNithya PartnersMessrs. Paul Ratnayake Associates

BankersBank of CeylonCommercial Bank of Ceylon PLCHatton National Bank PLCNDB Bank PLCPan Asia Banking Corporation PLCPeople’s BankPublic Bank BerhadSampath Bank PLCSeylan Bank PLCUnion Bank of Colombo PLCNations Trust Bank PLC

ANNUAL REPORT 2012/13

With Stability - LB Finance | Best Retail Finance Company in … Stability We believe that the key to capturing hearts and minds is by possessing a firm foundation from which to grow

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