annual report 2019/20 - clc · 2020. 12. 1. · clc would continue to invest further in human...

ANNUALREPORT2019/20

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CONTENTS

OVERVIEWAbout Us ....................................................................................................................... 1Financial Highlights ........................................................................................................ 2Chairman’s Message ..................................................................................................... 4Chief Executive Officer’s Message ................................................................................. 6Board of Directors ......................................................................................................... 8Management Team ...................................................................................................... 10Regional Management Team ....................................................................................... 11

MANAGEMENT DISCUSSION & ANALYSISManagement Discussion & Analysis ............................................................................. 12Branch Network .......................................................................................................... 17Financial Review .......................................................................................................... 18Sustainability Report .................................................................................................... 23

GOVERNANCEReport on Corporate Governance ................................................................................ 25Enterprise Risk Management ....................................................................................... 52Report of The Board of Directors ................................................................................. 55Report of the Audit Committee ................................................................................... 58Report of the Integrated Risk Management Committee ................................................ 60Report of the Remuneration Committee....................................................................... 61Report of the Related Party Transaction Review Committee......................................... 62Report of the Nomination Committee........................................................................... 63Directors’ Statement on Internal Control over Financial Reporting ................................ 64Auditors’ Assurance Report on the Directors’ Statement on Internal Control ................ 66Chief Executive Officer’s and Head of Finance’s Responsibility Statement ................... 67Directors’ Responsibility for Financial Reporting ........................................................... 68

FINANCIAL STATEMENTSFinancial Calender ....................................................................................................... 69Independent Auditor’s Report ...................................................................................... 70Statement of Profit or Loss .......................................................................................... 74Statement of Profit or Loss & Other Comprehensive Income ........................................ 75Statement of Financial Position .................................................................................... 76Statement of Changes in Equity ................................................................................... 78Statement of Cash Flows ............................................................................................. 82Notes to the Financial Statements ............................................................................... 84Shareholder Information ............................................................................................. 158Summarised Quarterly Statics.................................................................................... 160Ten Year Summary ..................................................................................................... 161Sources and Distribution of Income ........................................................................... 163Statement of Value Added ........................................................................................ 164

SUPPLEMENTARY INFORMATIONGlossary Terms .......................................................................................................... 165Notes ........................................................................................................................ 169Notice of Annual General Meeting .............................................................................. 170Form of Proxy ............................................................................................................ 171

ABOUT US

Commercial Leasing & Finance PLC (CLC) is one of Sri Lanka’s leading Non-Banking Financial Service Providers offering solutions ranging from leasing, fixed deposits, savings, loans, flexi cash, microfinance, Islamic finance, gold loans to factoring. With 65 customer touch-points spread across the country, CLC has become a trusted brand, synonymous with stability and dependability, playing an invaluable role as a key catalyst in financial empowerment.

CLC is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No. 42 of 2011 and registered under the Finance Leasing Act No. 56 of 2000. CLC is a listed company on the Colombo Stock Exchange and is rated (SL) A (stable) by ICRA Lanka Ltd.

CLC was incorporated as a Public Limited Liability Company on 22nd of April 1988 under the provisions of the Companies Act No. 17 of 1982 and re-registered under the Companies Act No. 07 of 2007 under the Company Registration No. PQ 131 PBPQ.

OUR VISION To soar into the future, giving wings to the dreams, hopes and aspirations of our people and everyone who has a stake in the success of our enterprise.

To forge ahead to reach new frontiers, to touch new horizons, seeking new challenges and exploring new opportunities.

Together with our people with diverse strengths, committed to achieving personnel excellence and the continuous growth of our enterprise.

MISSIONIn order to make our vision a reality, we always strive: Toprovideinnovativefinancialsolutionsofhighestpossible quality at an optimum value.

To ensure utmost customer focus and dedication to superior customer service.

To provide best returns to our stakeholders through the strength of our customer, strategic partner and employee satisfaction.

CORE VALUES To serve our customers with utmost care. To serve our customers professionally. To do work with utmost integrity. Be performance driven. To work as a team and treat fellow colleagues as one family.

2 COMMERCIAL LEASING & FINANCE PLC

FINANCIAL HIGHLIGHTS

For the year ended 31st March 2016 2017 2018 2019 2020

PERFORMANCE INDICATORS (RS. ‘MN)

Interest income 8,110 10,898 13,348 14,126 12,792

Interest expense 3,373 6,126 6,995 6,697 6,160

Net interest income 4,738 4,772 6,353 7,429 6,632

Other income including net income (expense) from other financial instruments at FVTPL

1,281 2,331 2,477 1,750 2,302

Profit before tax 2,008 2,205 2,905 2,041 1,997

Profit after tax 1,574 1,686 2,144 1,198 1,547

New executions (leases and loans) 31,986 32,833 44,670 33,609 34,629

Factoring funds in use 5,085 6,547 4,017 2,622 2,001

FINANCIAL POSITION(RS. 'MN)

Total assets 84,359 77,761 73,508 70,804 69,632

Net lending portfolio 46,793 53,904 59,777 53,493 54,139

Outstanding borrowings 58,051 45,742 30,445 26,464 22,614

Deposits from customers 12,348 15,936 23,485 24,316 24,946

Shareholders' funds 11,797 14,176 16,506 17,459 18,925

KEY FINANCIAL INDICATORS

Earnings per share (Rs.) 0.25 0.26 0.34 0.19 0.24

Net asset value per share (Rs.) 1.85 2.22 2.59 2.74 2.97

Closing price per share (Rs.) 3.80 2.60 2.70 2.60 1.80

Interest cover (times) 1.59 1.36 1.41 1.30 1.32

Debt to equity ratio (times) 6.43 4.75 3.45 2.99 2.61

Return on average shareholders' funds (ROE) (%) 14.37 12.99 13.98 7.05 8.50

Return on average assets (ROA) (%) 3.17 2.72 3.84 2.83 2.84

Gross non performing loan ratio (%) 1.09 1.93 2.62 4.90 7.05

REGULATORY RATIOS - CAPITAL ADEQUACY

Tire 1 capital ratio (%) minimum 6.5% from 1st July 2019 20.22 21.11 23.69 20.51 21.79

Total capital ratio (%) minimum 10.5% 1st July 2019 18.42 19.49 21.74 19.52 20.97

Core capital (minimum Rs.1.5 Bn from 1st January 2019) 11,627 13,300 15,317 15,425 16,970

3ANNUAL REPORT 2019/20

Core Capital Ratio (%) (minimum 6.5%) Total Risk Weighted Capital Ratio (%) (minimum 10.5%)

15

20

25

2016 2017 2018 2019 2020

CAPITAL ADEQUACY RATIOS(%)

Gross NPL RatioIndustry NPL Ratio

0

2

4

6

8

10

12

2016 2017 2018 2019 2020

COMPANY GROSS NPL RATIO & INDUSTRY NPL RATIO(%)

Net Asset Value Per ShareClosing Price Per Share

1.5

2.0

2.5

3.0

3.5

4.0

2016 2017 2018 2019 2020

NET ASSET VALUE PER SHARE TO CLOSING PRICE PER SHARE(%)

NET LENDING PORTFOLIO TO TOTAL ASSETS

2016

Net Lending Portfolio Total Assets

2017 2018 2019 2020

(Rs. Mn)

0

20,000

40,000

60,000

80,000

100,000

0

10,000

20,000

30,000

40,000

50,000

NEW EXECUTIONS(Rs. Mn)

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

CUSTOMER DEPOSITS TO TOTAL LIQUID ASSETS

2016

Customer DepositsTotal Liquid Assets

2017 2018 2019 2020

(Rs. Mn)

0

5,000

10,000

15,000

20,000

25,000


MACRO-ECONOMIC CONDITIONSThe economic environment during FY2019/20 was subject to multiple, unprecedented shocks. The already low business confidence was further eroded since the political events of November 2018. The Easter Sunday attacks in April 2019 and the post-attack violence which spread to several districts, then the COVID-19 pandemic and the resulting precautionary lockdown measures later in the year had an adverse impact on general economic performance, whilst certain key areas of the economy such as tourism, apparel, aviation, international trade and travel, and inflow of remittances remain badly affected. As a cumulative effect, the performance of financial institutions was impacted, judging

from financial results of banks in 2019 and the performance of leasing companies for the year 2019/20. Their main challenges have been moderation of asset growth and profits, low demand for credit and emergence of high Non-Performing Loan (NPL) ratios. At the end of 2019, the real GDP growth was a low 2.3% while inflation was rising since October 2018. As a result, the finance and leasing companies as a group posted a lacklustre performance in 2019/20, showing only marginal expansion in the asset base, negative credit growth and declining profitability. Needless to say, the pandemic has bared the weaknesses in the systems (including the ‘working of supply chains’) and massive reforms are needed to nurture the economy to good health.

RESILIENT PERFORMANCEAmidst this challenging operating environment, CLC demonstrated resilience and ended FY2019/20 with a PBT of Rs. 2 Bn which reflects a 2% decrease over the previous year. The gross six-month NPL ratio was contained at 7.05% which is far below the industry average of 11.56%. However, the rising NPL ratio, which was high during March/April 2019, was brought down to 6% by October 2019 but has been creeping up since then due to COVID-19 lockdown effect on the economy, resulting in slow loan growth. Rising NPLs require higher provisioning and higher provisioning erodes profitability. Peer comparison will show that we posted the best profit growth performance in second and third

CHAIRMAN’S MESSAGE


quarters but COVID-19 halted the acceleration of growth.

In terms of rating, CLC was one of the few financial and leasing institutions to retain its investment ‘A’ grade rating, which reflects it’s stable earnings growth, sound capital adequacy, asset quality, sufficient liquidity and sound management systems and processes. During 2019/20, CLC had to implement a relatively cautions lending approach, being more selective in its choice of lending, imposing higher loan underwriting standards, and deployment of extra measures on loan recovery and collection, while strengthening its risk management, internal control efforts, treasury management and liquidity planning. These are metrics we are always monitoring and for this effort, good data support and agility are required from the management, which I should state with satisfaction has been forthcoming.

CHALLENGES FACED AND MITIGATION STRATEGIES In overcoming obstacles, CLC banked upon solid partnerships built with customers and closer customer engagements in view of their rising economic stresses. This is a clear affirmation of CLC’s mid-term strategic direction for sustainable growth in spite of the tight market conditions. We have sound risk management practices and good governance in place. CLC, over the years, has introduced a large number of product lines to meet the demands of its varied and granular customer base. We cater to large-scale companies as well as SMEs and micro enterprises. However, as at 31st March 2020, almost 80% of credit disbursements were concentrated around 8 products, including term loans, flexicash, IBU facilities and leasing, which were most sought after products through the year. We expect this trend to continue.

CLC’s success lies in the success of customers. As such, CLC would remain committed to provide products to customers that are relevant, affordable and convenient. We also strive to align business priorities to the national economic policy. So, keeping customer convenience in mind and to remain cost-effective, CLC has invested in digital platforms to bring digital financial services to customers while keeping in mind cyber

security concerns, which has positioned us well to respond quickly to customer needs during the lockdown.

CLC would continue to invest further in human resources as we are a Rs. 70 Bn asset base company and need to upgrade skills of human resources to nurture and grow the Team CLC to maintain them at a high level. CLC will continue to leverage on its strengths of sound capital, strong management, resourceful branch network base and our agility to adapt to new challenges to drive towards the next level of growth post 2020.

BUILDING A STRONGER INDUSTRY The asset base of Licensed Finance Companies (LFCs) and Specialised Licensed Finance Companies (SLCs) is Rs. 1.3 trillion and serves a customer base of Micro, Small and Medium Enterprises (MSMEs), a category of customers who are generally excluded from formal banking sector. There is a strong intent to gear those customers with better profiles.

The establishment of a new credit bureau system introducing a new credit scoring system is expected to bring changes to the existing credit management framework and is a healthy development. At the same time the new CRIB should speedily strengthen the secured transaction registry and its surrounding framework which will be of immense benefit to MSMEs as it will enhance the ability to use movable assets as collateral with financial institutions when borrowing and will facilitate more people to access loans. This would also stop the vexing problem of unlawful transfer of leased properties to third parties.

It is noteworthy that Sri Lanka’s economic growth has slowed down in the last five years, resulting in us slipping to a Lower Middle Income Country category from an Upper Middle Income Country category. This has been due to the fact that private investment and export trade did not perform well enough for a long period of time due to the economic fallout that has taken place over a number of years. At the point when COVID-19 hit, the economy, Sri Lanka had exhausted much of the economic strength needed to face it. At the time of preparing this message, official data from the Department of Census and Statistics covering GDP numbers for Q1

of 2020 was not available for an accurate assessment of the COVID-19 impact on the economy, and is widely regarded as a negative growth.

Economic forecasters having predicted a global recession, it is very unlikely that our economy would post a positive GDP growth in real terms in 2020. However, there will come a time for post–COVID-19 global economic revival. At that time, the right conditions including the necessary reforms should be in place for the economy to forge beyond the restoration margin and come back to decent rates of economic growth, supported by more private investment and export-led expansion.

APPRECIATIONOur journey during the financial year 2019/20 would not have been possible without the support of our stakeholders, especially our valued customers who have continued to place their confidence in CLC. My appreciation to the Deputy Governor and Assistant Governors of Central Bank and to the Director for Supervision of Non-Banking Financial Institutions who have provided astute counsel which has been greatly beneficial to us. Within CLC, my colleagues on the Board of Directors, Chairpersons and Members of Sub Committees have provided valuable guidance which has enabled us to charter a successful growth path under very trying conditions.

I would like to place on record my gratitude for group support, especially the counsel from Group Chairman, Ishara Nanayakkara, and Group Managing Director, Kapila Jayawardena. To all those customers, both institutional and individuals, other parties and well-wishers I wish to express CLC’s deep appreciation for the support provided. I would like to thank the shareholders, retail and institutional, for continuing to place their trust in CLC and lend a very big thank you to CLC employees at all levels for their unstinted support and hard work in extremely difficult circumstances.

Priyantha FernandoChairman/ Independent Non-Executive Director


The financial year 2019/20 was probably one of the most challenging in recent memory as first Sri Lanka was assailed by the Easter Sunday attacks in April 2019, and just when green shoots of recovery were being seen in the economy, the COVID-19 pandemic struck in the fourth quarter of 2019/2020. Despite the tough operating conditions in the industry, CLC succeeded in sustaining its financial performance on par with the previous year whilst enhancing Profit after Tax figures. This was no mean feat considering the rise in Non-Performing Loans (NPLs) across the industry.

STRONG FINANCIAL PERFORMANCEOur strategy of prudent management of the credit portfolio while keeping overheads within reasonable limits helped the Company to post impressive financial results. CLC’s strong performance has instilled confidence amongst depositors, with its depositor base growing to Rs. 25 Bn and accounting for 52% of the total funding. The Company’s other funding sources include DFI borrowings, bank funding, capital market products and a full range of liability products. CLC’s equity stands at Rs. 17 Bn in Tier-1 capital which is well over the

Central Bank of Sri Lanka’s capital adequacy requirements, making CLC one of the highest capitalised financial institutions in the country.

Reputed as the fastest-growing financial services Company closely engages with all its stakeholders and forecasts significant growth potential from Gold Loans, Islamic Finance and Microfinance. CLC commenced its Gold Loan operation in the previous financial year and has now expanded the service to 55 of its 65 branches.

CHIEF EXECUTIVE OFFICER’S MESSAGE


HIGHLIGHTS OF THE YEARIf I were to sum up CLC’s performance in the most challenging year in my career - I would call it ‘exceptional’. Further endorsing CLC’s notable performance in 2019/20, the Company managed to retain its rating of ‘A’ stable with ICRA Lanka, strongly supported by the holding company LOLC, and the sale of its Cambodian subsidiary company, Prasac Microfinance Ltd, for a sum of USD 603 Mn. The sale of Prasac is one of the largest and most significant offshore transactions by a Sri Lankan Company and one of national importance, especially at a time like the present.

CLC has fully complied with the Central Bank of Sri Lanka’s directive to extend moratoriums and granted 59,000 moratoriums granted to its customers whose livelihoods were affected due to COVID-19. In turn, the company also experienced a rise in customer deposits which truly reflects the public perception of the company as a reliable and trustworthy financial services partner. Despite the volatility in the microfinance sector during 2018 and 2019, CLC remained steadfastly loyal to its customer base, ensuring its financial services remained accessible at all times, even during the lockdown period.

LOOKING AHEADHow companies manage internal and external stakeholder relationships, systems and processes, and leverage communication and branding, will determine how they come through this challenging period. Companies will not only have to build strong balance sheets, but might also have to challenge and question their business models, cost and overhead structures, and conventional revenue streams and capital adequacy to face this unprecedented disruption. CLC scores high across all these parameters and I am confident it will sustain and improve its credit rating further, while upholding its pioneering status in the industry. Enhancing CLC’s brand equity further and adding yet another feather to its cap, the company was rated within the Top 50 brands by LMD for 2019/20, reflecting strong acceptance amongst the public as a leading financial institution in Sri Lanka.

In execution of the strategy, the company prioritized its business and processes in the following key areas:

• Maximisation of digital platforms

• Enhancing portfolio and its asset quality

• Digital and social media communication both externally and internally

• Strategic partnerships with strong and like-minded companies

• Enhancing products and funding bases

• Enhancing employee engagement

The success of the industry would depend on successful strategy and its implementation together with public confidence. The regulatory compliance and governance together with self-regulation and good practices also create and enhance public and investor confidence. CLC places a high degree of importance on these aspects. Going ahead, we expect consolidation in the industry to be led by the regulator. The consolidation would probably revolve around core capital requirements, but portfolio performance, solid processes including AML and KYC compliance and self-regulation would also need to be looked at. CLC would be a role model in the above context.

APPRECIATIONOur strong performance during the period under review is a result of all key stakeholders working together. Staff of CLC, shared services, visionary leadership, and the Board of Directors, has contributed equally to build this strong organization. In this endeavour my appreciation as a CEO is extended to everyone individually and collectively.

Krishan ThilakaratneDirector/ Chief Executive Officer


BOARD OF DIRECTORS

PRIYANTHA FERNANDOChairman/Independent Non-Executive Director

LUXHMAN JAYARATNEIndependent Non-Executive Director

Mr. Priyantha Fernando has more than 35 years of experience at the Central Bank where he rose to the position of Deputy Governor. He was the Deputy Governor of the Central Bank in 2010-2011 in charge of the Financial System Stability and the Corporate Services clusters. Mr. Fernando has extensive experience and expertise in the fields of Banking and Financial Sectors, particularly at the policy-making levels in financial regulation and supervision, Information technology, national accounting, macro-economic analysis and statistics and fund management. At the Central Bank, he was the Chairman of the Financial Stability Committee, a member of the Monetary Policy Committee, member of the Risk Management Committee and Chairman of the National Payment Council. He also functioned as the Secretary to the Monetary Board during 2009/2010. He holds a M.Sc in Statistics from the University of Birmingham, England and a B.Sc (Second Class Upper Div) from the University of Peradeniya, Sri Lanka.

He was an ex-officio board member in several regulatory organisations namely the Securities and Exchange Commission, the Insurance Board of Sri Lanka, the Chairman of the Credit Information Bureau, Institute of Bankers –Sri Lanka and has also served as a Board Member of the Employees Trust Fund, Lanka Clear (Pvt) Ltd. and Lanka Financial Services Bureau. He was also a member of the Cabinet Appointed, Sub-Committee approved government lender boards.

Mr. Luxhman Jayaratne has over 37 years of banking experience. He has worked in several countries in Asia, Europe and Africa, focusing on Management of Operations and Technology with involvement in product management. He had been directly involved in setting up Citibank in Sri Lanka, and Romania. He had also been the Head of Operations and Technology of Africa Citibank covering 14 countries before joining Union Bank of Nigeria PLC.

Mr. Jayaratne specialises in operations and technology management, process regionalisation and centralisation, and commercial banking.

During his career he has initiated and spearheaded several key projects of national importance, especially in the area of developing the infrastructure for the national payments clearing and settlement systems.

Mr. Fernando has served a number of committees at national level covering a range of subjects representing the Central Bank.

He has been appointed Chairman of Golden Key Credit Card Company and currently serves on the boards of Union Bank of Colombo PLC (as Deputy Chairman), Ambeon Capital PLC, Golden Key Hospitals Ltd., Thomas Cook Travels Sri Lanka, Imperial Institute of Higher Education (Pvt) Ltd and Millennium Information Technologies (Private) Limited as a Non-Executive Independent Director.


EBERT SILVAIndependent Non-Executive Director

THAMOTHARAMPILLAI SANAKANIndependent Non-Executive Director

KRISHAN THILAKARATNEExecutive Director/CEO

Mr. Ebert Silva has over 30 years of experience in Banking, Regulatory and Financial Reporting, Human Resource Management and Administration as a former official of the Central Bank of Sri Lanka. He joined CBSL in 1986 and has worked in the Bank Supervision, Employees’ Provident Fund, Facilities Management departments and in the Centre for Banking Studies until his retirement in year 2017.

He holds a B.Sc. degree in Business Administration from the University of Sri Jayawardenapura and has read for his M.A in Economics from the University of Ohio, USA.

He is also an associate member of the Institute of Bankers of Sri Lanka.

Mr. T. Sanakan counts for over 20 years of experience at top management level in multiple industries such as Financial Services, Trading, Manufacturing, Healthcare and Consumer. Presently he serves as the Group Chief Financial Officer of the Browns Group of Companies and he was involved in directing Browns business lines for profitability, growth and sustainability through strategic finance directives. He was directly involved in setting up LOLC Securities Ltd., which deals with capital markets. He previously held the position of Chief Operating Officer at LOLC Securities Ltd. and served as a Rule setting committee member at the Securities and Exchange Commission of Sri Lanka.

He excels in the areas of change management, new business start-ups, business process re-engineering, project management and strategic business management. He also serves on the boards of Associated Battery Manufacturers (Ceylon) Limited, Browns Pharmaceuticals Limited, Browns Pharma Limited, Browns Health Care Negombo (Pvt) Ltd, Browns Leisure (Pvt) Ltd, Snowcem Products Lanka (Pvt) Ltd and Klevenberg (Pvt) Ltd. He is an Associate Member of Chartered Institute of Management Accountants of UK and Chartered Global Management Accountants of USA.

Mr. Krishan Thilakaratne is the Director/CEO of Commercial Leasing and Finance PLC and a Member of the Senior Management Team of LOLC Holdings PLC.

Mr. Thilakaratne is a Board member of Seylan Bank PLC and Credit Information Bureau of Sri Lanka (CRIB). He further serves in the Board of Commercial Insurance Brokers (Pvt) Ltd the largest Insurance brokering company in Sri Lanka. He is the immediate past Chairman of the Finance Houses Association of Sri Lanka (FHASL), the apex body for Non-Bank Financial Institutions (NBFIs) in Sri Lanka.

He is a Member of the Associateship of Institute of Bankers of Sri Lanka (AIB). He has followed a Strategic Leadership training programme in Micro Finance at Harvard Business school USA and counts over 25 years of experience in Management, Credit, Channel Management, Marketing, Factoring, Portfolio Management and Islamic Finance.


MANAGEMENT TEAM

Name Current Designation

Nihal Weerapana Head of Recoveries

Deepamalie Abhayawardane Chief Operating Officer - Commercial Factors

Prasanna Karandagolla Head of Channels

Tharanga Indrapala Head of Operations

Upul Samarasinghe Head of Credit

Prasanna Dayaratne Assistant General Manager - Factoring Operations

Suneetha Samarawickrama Assistant General Manager - Recoveries

Terrance Kaushalya Head of Savings & Deposits

Harsha Thilakumarage Head of Microfinance

Raveendrini Seneviratne Director - LOLC Corporate Services

Sarath Wijenayake Assistant General Manager - Microfinance

Nimesh Fernando Head of ABF & SME products

Chathura Perera Assistant General Manager - Credit

Suresh Amarasekera Head of Information Technology

Mithila Saranapala Head of Human Resources

Tyrone Fonseka Head of Gold Loan

Anuradha Gamage Chief Manager - Recoveries

Chamila Rodrigo Senior Manager - Enterprise Risk Management

Oshanka De Silva Senior Manager - Treasury

Hasitha Hemasiri Head of Customer Service

R.R.D.D Punsara Head of Finance

Rasika Ranatunga Manager - Human Resources

Prasad Perera Head of Marcom

Ilsam Awfer Head of Islamic Business

Naleen Amunugama Head of Finance Operations - CLC

Thuvagar Asohan Manager - Gold Loan

Ranjan Gunathilaka Head of Administration

Roshan Hewage Compliance Officer

Dilan Jayawardena Senior Business System Analyst - CLC


REGIONAL MANAGEMENT TEAM

Name Current Designation

Lal Abeyratne Assistant General Manager – Colombo Region

Pradeep Madurasinghe Assistant General Manager – Negombo Region

Samitha Aruggoda Assistant General Manager – Kelaniya Region

Prasanna Goonetilleke Assistant General Manager – Central & Eastern Region

Sunil Shantha Assistant General Manager – Ambalangoda Region

Sampath Palliyaguruge Regional Manager – Matara Region

Arumuganathan Pranavan Regional Manager – Northern Region

Chandrakumara Sirisena Regional Manager – North Central Region

Lankesh Atapattu Regional Manager – Avissawella Region

Floyd Barthelot Assistant Regional Manager – Eastern Region

Amila Fernando Assistant Regional Manager – Negombo Region

Janaka Karunarathne Assistant Regional Manager – Kandy Region


ABOUT USCLC is an iconic brand synonymous with trust, playing an invaluable role as a key catalyst in financial empowerment through its vast network of customer touch points island-wide. A member of the LOLC Group, CLC is one of the leading financial service providers in Sri Lanka offering solutions ranging from leasing, fixed deposits, savings, loans, flexi cash,islamic finance,gold loans to factoring.

MACRO-ECONOMIC BACKDROPThe dismal performance of Sri Lanka’s economy from 2018 continued into the year under review. The Easter Sunday attacks had a severe impact on the tourism sector and the adverse spill-over effects were felt across the economy, worsening the sluggish growth and further dampening business confidence. The agriculture sector recorded a growth of 0.6% in 2019 compared to 6.5% in 2018. Extreme weather conditions affected the agriculture sector in 2019, with growing of tea and rubber, marine fishing and marine aquaculture sub-sectors and forestry and logging activities recording notable contractions. Meanwhile, the industry sector registered a growth of 2.7% in 2019, compared to the growth of 1.2% in the previous year. With the impact of the Easter Sunday attacks on tourism related activities, the growth of the services sector decelerated significantly to 2.3% in 2019, compared to 4.6% in 2018.

Considering the need to support economic activity amidst muted inflation, well anchored inflation expectations and diminished pressures in the external sector, the Central Bank adopted an accommodative monetary policy stance and took steps to expedite the transmission of monetary policy measures to the economy through regulatory action aimed at reducing market interest rates. Growth of credit to the private sector decelerated sharply, driven by subdued economic activity and weak business confidence, affecting the performance of the financial sector.

INDUSTRY PERFORMANCEThe Licensed Finance Companies (LFCs) and Specialised Leasing Companies’ (SLCs) performance deteriorated during the year with negative credit growth, declining profitability

MANAGEMENT DISCUSSION & ANALYSIS

and increase in Non-Performing Loans (NPLs). The slowdown in the sector was mainly due to subdued economic activities, prevailing political uncertainty, lack of investor confidence and security concerns created by the Easter Sunday attacks. The sector as a whole remained stable, with capital maintained at healthy levels along with adequate liquidity buffers well above the regulatory minimum levels. Deposits dominated the funding mix, as increased assets were mainly funded through deposits, while borrowings of the sector largely declined compared to the previous year. The Central Bank continued to take prudential measures to maintain the stability of the sector with much consideration on reviving LFCs with supervisory concerns.

The total asset base of the sector expanded marginally by 0.1% in contrast with 5.6% in 2018. The asset base of the sector mainly consisted of loans and advances which accounted for 77.0% of the total assets. Finance leases accounted for the major part, representing 52.9% of the gross loans and advances, followed by other secured loans representing 37%.

Lending activities of the sector showed signs of slowing down during 2019 in response to policy measures to curtail importation of motor vehicles and lending towards vehicles such as the direction of Loan to Value (LTV) ratios for credit facilities granted in respect of motor vehicles, prevailing higher market interest rates on lending, sluggish economic and commercial activities due to loss of business confidence which resulted from political instability in the run up to the presidential election and negative sentiments caused by the Easter Sunday attacks. Credit provided by the LFCs and SLCs sector declined by 3% compared to a growth of 7.6% in the corresponding period of 2018.

Meanwhile, the Colombo Stock Exchange recorded a mixed performance during 2019 amidst adverse developments in the domestic and global environment. The ASPI grew by 1.3% in 2019 against the 5% decline reported in 2018 while S&P SL20 index declined by 6.3% in 2019 compared to the 14.6% decline reported in 2018. ASPI declined by 3.6%

immediately after the Easter Sunday attacks and reached 5,200 in May 2019, its lowest value reported since 2012, and picked up gradually. The CSE indicators picked up during the month of November 2019 mainly due to the positive sentiments that prevailed among investors towards the presidential election. Foreign outflows from CSE continued during 2019, though some improvements were observed in terms of net foreign outflows when compared to 2018.

COMPANY PERFORMANCEOperationsAfter a particularly challenging year in 2018/19, the Non-Banking Finance Institution (NBFI) sector had geared up for a favourable 2019/20. However, the Easter Sunday attacks in April 2019, the presidential elections and the spread of COVID-19 at the tail-end of the year provided less than desirable conditions for strong economic growth. As a result, operations generally remained subdued, although CLC succeeded in recording one of the strongest financial performances in the industry on account of its visionary leadership, highly skilled technical staff and advanced technology platforms.

During the year under review, routine enhancements were undertaken. Our focus on becoming a paperless operation was sustained thereby infusing greater digitalisation, resulting in all disbursement and approvals shifting online. The lockdown period was a severe test of our IT preparedness as we switched with ease to fulfil work from home requirements and even successfully moved staff payments online. The year also witnessed heavy use of online communications platforms to remain engaged with customers, employees and other stakeholders. Despite these constraints, business volumes increased through the year.

The year under review was characterised by consolidation of operations while optimising opportunities for training and development of staff. One of the key initiatives during the year was to initiate the Direct Debit process which will enable customers to make payments through their savings accounts which should improve collections. Going ahead, we expect to start same-day disbursements and infuse convenience to the customer experience.


Business ChannelsThe external operating environment was highly unfavourable to business activity at the start of the year due to the Easter Sunday attacks in April 2019 which resulted in weak economic activity until June, when we started seeing a rapid gradual uptick in transactions. By August 2019, transactions had picked up pace to match normal volumes. During the year, 56,228 new contracts were executed amounting to Rs. 33 Bn. We managed to achieve this portfolio growth amidst a challenging year. The company’s SME portfolio grew by Rs. 0.4 Bn in the SME segment, marking a growth of 1%, apart from. During 2019/20, Portfolio rose from Rs. 53 Bn in the previous year to Rs. 54 Bn in 2019/20. The tough conditions in the market impacted the payment capacity of customers as high Non-Performing Loans (NPLs) became the norm across the industry. However, CLC managed to retain its NPL ratio at 7.05%, well under industry average through focused collection strategies.

During 2019/20, the Board granted approval for expanding CLC’s footprint by 10 more branches. In the initial phase of this strategic expansion CLC will inaugurate the first 3 branches approved by the Central Bank by the start of the 2020/21 financial year.

Since the business volume declined drastically, CLC utilised the existing staff to target the gold loan market. The year was extremely eventful for the company as the new product development team remained active in finalisation of the business model and the roll-out of gold loan services. Gold loan execution was rolled out to 50 branches by end of the financial year.

In an exciting development during the year under consideration, the Super Dealer Point network was established at 32 branches. This is an outsourced dealer model and is proving to be a strategic asset. The company’s entire product and service portfolio is distributed through its network of 65 branches along with the introducer network. This strategy had helped bring in more than 2,000 active dealers who are ushering in new business for CLC.

Of the 65 CLC branches presently, 57 made reasonable profits through 2019/20, which is a significant achievement in the prevailing economic circumstances. During the year under review, we leveraged on digital communication with customers and envision investing in this area further as it ensures uninterrupted engagement with the customer base even if they are unable to physically visit branches as was the case during the lockdown. Going ahead, we plan to inaugurate the remaining branches to enhance the network while working towards becoming a paperless operation and introduce greater digital innovations such as digital field credit evaluations in the next financial year.

DepositsCLC’s strong performance through a challenging financial year instilled confidence amongst depositors, which was reflected in deposit base growth and accounting for over 52% of the total funding. Interest rates came down sharply during the year coupled with changes in related policies and taxation along with several finance companies failing due to mismanagement, thereby altering the perception of finance companies. It was a truly challenging year and exacerbating the situation further, flight of capital was seen from finance companies to banks as the interest rate differential narrowed. In 2019/20 the interest rates came down below 9% but in the preceding year the interest rates fluctuated between 13-14%.

The company was able to sustain its deposit growth since it is rated ICRA “A” stable and more secure with a retention ratio of approximately 95%. CLC was able to continuously engage with the deposit customers and this relationship was strengthened further during the lockdown period which helped sustain our fixed deposit portfolio as people trust the CLC brand. The Deposits team performed strongly despite a drop in fixed deposit rates and the country’s lockdown situation.

Our main strategy was to retain clients while continuing to provide world-class service standards. CLC has consistently promoted

the savings habits amongst citizens, providing savings products for all age categories from newborn to seniors which is evidenced in its wide array of products and services to fulfil every need along the entire life-cycle. In addition, ability to withdraw cash from over 4,000 VISA ATMs island wide infuses greater convenience for CLC Debit card customers.

CLC leveraged its advanced digital platform effectively, encouraging customers to move towards SMS and online banking. In the preceding year, our strategy was to retain customers while offering them the best service level while encouraging them to move on to online platforms. In the year under review, the company not only increased its online customer base, but also the volume and value of online transactions.

Even though the prevailing weak market conditions did not make 2019/20 an opportune period to launch new products, the company focused on growing its existing products and services while leveraging on the company’s advanced digital platform.

CreditThe Credit division of CLC was under pressure from an unfavourable external climate as the aftermath of the April 2019 attacks led to a negative impact on economic and business sentiment. Further, severe restrictions on importation of vehicles continued from the previous year. The situation was rendered more untenable with the outbreak of COVID-19 in the last quarter of the year which constrained credit growth of the company further. With very few unregistered vehicles entering the market, the focus had to be shifted to second-hand market of vehicles and three-wheeler market.

COVID-19 increased risks of extending credit as most industries were adversely impacted and repayment became a challenge. Furthermore, finance companies are required to grant concessions and moratoriums to customers for certain sectors and asset categories as directed by the Central Bank. It was indeed a turbulent period but CLC went ahead with the executions, concentrating on the second-hand market.


Despite the subdued nature of the market, the company continued to invest in training front-line staff to handle the prevailing market situation. The asset-backed finance campaign was continued through the year as the company took a stance to remain positive in the face of odds. 2019/20 was a good year for Asset-Back Lending due to a much better performance we thought would not be possible due to the fallout from the Easter Sunday attacks at the beginning of the year. CLC experienced year on year growth for its asset-backed lending products.

We partnered with dealers and other leaders in leasing through the branch network to enhance profitability. Campaigns were conducted which gave a call to action to customers to avail of low interest rates. Deals offered to customers were quite attractive as they ensured customers didn’t need to focus on interest rates. The partnership with IDEAL motors generated over Rs. 100 million worth of business. Similar activations at ground level continue to support the ground staff to engage in lending.

MicrofinanceDespite the negative footing on which the 2019/20 began, we managed to turnaround the microfinance business by May 2019, ending the financial year with a portfolio of Rs. 3.7 Bn from Rs. 3 Bn a year earlier.

One of the key initiatives in the year under review was our collaboration with mCash for customers to pay via the mobile money platform with ease. This will be a safe way to collect loan repayments. We are also trying to mobilise savings through mCash with approval from Central Bank.

Looking ahead, we plan to reach Rs. 5 Bn by end 2020/21 by leveraging on collateral backed products. We are drawing up plans to launch a product for government servants while marketing our five existing products besides conventional group loans. By end of the year the government had directed finance companies and banks to extend moratoriums which we have complied with.

Client Protection Principles (CPP) CLC remains committed to acquiring Client Protection Principles (CPP) certification and is working diligently towards its goal. Regular training programmes are carried out in customer care training for the customer care staff through tailor-made programmes. Our focus on training and recruitment will lead to maximum efficiency, and a fair and transparent service for the protection of customers. A customer complaint handling policy for the company was implemented and our focus is to further improve transparency. The newly-updated web page also details a procedure for customers on how to lodge their complaint and details the process. This and other steps were taken to improve transparency for customers in line with Central Bank regulations.

Islamic FinanceThe overall performance of the Islamic Finance unit of CLC was satisfactory considering the challenging operating environment. The economic climate was not conducive and from August 2019 we adapted to the evolving situation by conducting more shop to shop, door to door and street promotions to maintain the business standard as before. Diminishing Musharakah performed well on the asset side and Wakala Investments on liability side. Amidst the turbulent environment for business, CLC Islamic Finance managed to grow the asset book up to Rs. 3.9 Bn with an increase compared to last financial year. This year is the first financial year where the portfolio was 100% funded by public deposits and inter-company Wakala Investments for cost of funds. As a result, Profit paid out recorded an increase of 44% amounting to Rs. 288 Mn. The total profit before tax was Rs. 140 Mn. 2019/20 and retained profit balance increased up to Rs. 802 Mn by 14% compared to last year.

During the year under review, we introduced a new product, ‘Mudarabah Super Saver’ which is a savings account with additional profit sharing for increase in balance. We continue to offer the highest profit share in the Islamic

Banking and Finance Industry which is a key highlight and testimony to a well-managed business. During the year under review, we innovated an alternative product for traditional pawning, called Al-Rahn which is ready to launch.

Although no new locations were inaugurated during the year under review, we persisted with promotions and managed to grow customer base in untapped markets. Interestingly during the lockdown, people explored alternative financing and we leveraged this by conducting an awareness programme titled ‘Sustainability of Islamic Finance on a COVID-19 era’ which is another industry-first initiative bringing top scholars and professionals in the industry together via an online platform. As a result, we were able to on-board lot of new customers. We also adopted a strategic recovery approach which helped customers during the pandemic and business recession to survive and return to their normal payment cycles. We have expanded our team during the year to support operations at 2 new dedicated centres in Polonnaruwa and Puttalam which will be inaugurated in 2020/21. We plan to establish more centres in the next financial year in key locations to expand our footprint from the 4 service centres we operate presently. `

CLCL’s Islamic Finance operation has received numerous accolades and during the year under review the business unit took centre-stage at the Sri Lanka Islamic Banking & Finance Industry (SLIBFI) Awards 2019, winning three awards, namely, Islamic Finance Leasing Company of the Year – Gold Award; Islamic Finance Window/Unit of the Year – Silver Award; and Islamic Finance Entity of the Year – Bronze Award. On a regional platform, the business unit was bestowed with Islamic Finance Leasing Company of the Year – Gold Award and Islamic Finance Window/Unit of the Year – Bronze Award at the reputed Islamic Finance Forum of South Asia (IFFSA) Awards 2019. These local and regional accolades provide the motivation to expand further while re-affirming customer confidence in the company.



RecoveriesIn order to sustain operations in the Microfinance industry it is essential to have a well-oiled Recoveries process that works smoothly and efficiently. CLC has traditionally prioritized the recoveries function and trained a professional, courteous and skilled team to bring in collections – a quality that was apparent in the year under review when CLC ended the 2019/20 with NPLs of 7.05% as compared to 11.56% in the industry. CLC was in a very comfortable position with low NPLs and delivered attractive provisional figures. The maximum collection takes place in the last month of the financial year but unfortunately If not for COVID-19 the Recoveries team would have achieved very attractive numbers. The team remained committed despite the lockdown, using online platforms to organize collections with customers. As a result of the efficient operations at CLC the company should bounce back much faster as opposed to other players in the industry. The recoveries team is liaising closely with the in-house legal team to accelerate recoveries to ensure see that the process is done in an ethical and transparent manner.

Leasing The leasing industry faced a negative impact similar to other industries due to the twin setbacks of the Easter Sunday attacks in April 2019 and COVID-19 in early 2020. Before these challenges, the industry was already under pressure from the restrictions on vehicle imports imposed by the Central Bank of Sri Lanka in the previous year coupled with duty increases and the low LTV ratio which combined served to slow down the leasing sector. Moreover, due to the loan to value ratio there was a trend for customers to opt for second-hand vehicle leasing as opposed to brand new vehicles. During the year the company’s Leasing team speedily adapted to the trend and built a strong portfolio of second-hand financing of vehicles. Despite the odds in the leasing industry, CLC’s Marketing & Recoveries teams worked in a coordinated fashion to deliver excellent results. Every effort was made to gain new business while retaining existing customers. Although no major leasing campaign was launched during the year, CLC opened vehicle sales yards in Mihintale and

Ampara for asset backed finance and one sales centre in Anuradhapura as well to attract new business. Amidst the Covid-19 pandemic still impacting the markets, the leasing team is looking ahead to launch new campaigns and drive loyalty as the market gathers momentum.

FactoringConditions for the factoring business have not been favourable for the past several years, however the business has been nurtured carefully during this time as it is a segment with a lot of potential. As the economy revives and businesses commence normal operations, entrepreneurs will have greater need for factoring as a useful financial tool to support their aspirations. Since a significant portion of the company’s factoring portfolio is exposed to the service and goods providers connected to the tourism industry, business activity is at an all-time low. With the Easter Sunday attack in April 2019, businesses of this nature were severely affected, and just as tourist inflow was seen towards early 2020, the global pandemic struck, which brought the tourism industry to a grinding halt. As a result of these challenges, CLC’s factoring portfolio dropped from Rs. 2.6Bn in 2018/19 to Rs. 2Bn in 2019/20. During the year under review some of the competitors curtailed factoring business, making CLC the only company providing uninterrupted, fully-fledged factoring services to its client base. Another challenge faced by importers during the year was the Increase in exchange rate which discouraged traders although high net-worth clients seemed to withstand turbulent market conditions. The factoring department temporarily stopped marketing through the branch network due to the unfavourable market conditions.

Nevertheless, the factoring team kept refreshing its skills in customer care and risk management through product training and knowledge sharing. During the year under review, we created a LinkedIn page for CLC Factoring and have exciting plans to launch an advertising campaign on Facebook once the economy shows signs of a recovery. The Factoring team is preparing to begin aggressive marketing through branch network in 2020.

Customer ServiceCustomer expectations have changed drastically over the last decade, pushing the bar for customer service standards higher. Today, customer service encompasses a wide variety of aspects, online or offline, and includes the entire experience from initial contact to final sale and beyond. One of the pillars of CLC’s market leadership is excellent customer service. The company has a dedicated Customer Service department focusing on the resolution of all matters relating to its customer base spread across the country. At CLC, the customer service team is supported by a call centre that handles inward and outward calls, and operates all seven days for customers to call in with grievances and queries.

The team also supports Fixed Deposits operations every year. During the year under review, a Mobile App was developed by the Savings team, which was popularised amongst customers by the customer service team. A direct payment process whereby customers could fulfil leasing repayments through their savings account directly was implemented and supported by the customer service team. The team played a critical role in the year 2019/20 by keeping all customers informed about changes taking place and reassuring them with factual information. New rules due to COVID-19 and information about moratoriums as directed by the Central Bank were shared widely with customers.

Training customer service and call centre staff is an ongoing exercise as it refreshes their skills and keeps them at the cutting edge of professionalism.

Despite various industry challenges over the last two years, the Customer Service team has shown exceptional dedication to improve and sustain profits. A marketing arm within the customer service department communicates the digital platforms and technical improvements to the customers.

In overcoming obstacles, CLC banked upon solid partnerships built with customers and closer customer engagements in view of


their rising economic stresses. This is a clear affirmation of CLC’s mid-term strategic direction for sustainable growth in spite of the tight market conditions. CLC’s success lies in the success of customers. As such, CLC would remain committed to provide products to customers that are relevant, affordable and convenient.

Marketing CommunicationsCustomer engagement formed the key pillar of Marketing Communications during the year backed by a solid digital communication strategy. The efficacy of our digital strategy on social media is evident from the newly acquired customers who claimed to have heard about our offerings via digital platforms. Our digital strategy during 2019/20 is part of a greater integrated media strategy to ensure we connect with diverse segments of customers across various platforms. The aim of the campaign is to ensure top of the mind recall for our brand and the qualities it stands for. Given the difficult conditions in the operating environment, we were still able to share details about our Deposit and Lending products with customers. Overall expenses were curtailed during the year as we invested more in BTL strategies to drive loyalty and personal selling. Gold loan is the latest addition to the product portfolio of this financial year and the products were promoted through SMS campaigns, emails and social platforms.

Furthermore, CLC was ranked 63rd in the LMD 100 for 2018/19. The ‘Commercial Leasing’ brand is also placed among the top 50 most valuable consumer brands in Brands Annual 2020, as compiled by Brand Finance and published by Media Services. Moreover, in the 2020 edition of Most Respected entities, Commercial Leasing & Finance features at No. 54 of the survey based rankings undertaken by Nielsen on behalf of Media Services.

AdministrationAdministration expenses for 2019/20 increased as a result of branch relocations conducted at four locations, namely, Gampola, Gampaha, Negombo and Neliyadi.

Furthermore, two branch expansions were undertaken in Dambulla and Kilinnochchi. Meanwhile, with new pawning solutions being offered at many CLC branches, an additional investment was needed in CCTV monitoring and alarm systems while the Easter Sunday attacks in April resulted in greater security arrangements at all branches.

Through the period under consideration we sustained focus on the business continuity plan by conducting fire awareness programme at all branches while also providing first aid training for head-office staff. These are critical life skills that could prove highly useful in times of emergency situations.

Another reason for the increase in administration expenses is the opening of vehicle sales yards in Mihintale and Ampara where centres were opened for asset backed finance and one sales centre opened in Anuradhapura for which we had to provide adequate infrastructure. The company also had to spend on COVID-19 related safety equipment, such as hand sanitizers, hand-held temperature gauges etc to ensure total protection of employees and visitors to our premises. The company has also established solar panels on rooftops for solar power generation which was yet another investment by the company.

Going ahead, the Administration division will be responsible for maintenance of any CLC acquired property.

FUTURE OUTLOOKConsidering its strong performance during the year under review, CLC has proved yet again its credentials as the leading NBFI in the industry. CLC was one of the few financial and leasing institutions to retain its investment ‘A’ grade rating, which reflects its stable earnings growth, sound capital adequacy, asset quality, sufficient liquidity and sound management systems and processes. The company’s prudent lending approach and effective loan recovery has placed it in a position of strength to bounce back fast once economic activity


resumes. CLC’s strong partnerships with customers helped it retain customer loyalty for sustainable growth. The company’s investment in digital platforms to bring the latest digital financial services and convenience both internally and externally augurs well for its future growth and expansion.


Nelliady

Kilinochchi

Mannar Parakramapura

Thambuththegama

Trincomalee

Serunuwara

Batticaloa

Kalmunai

Ampara

Monaragala

BadullaNuwara Eliya

Welimada

RatnapuraMaharagama

Kalutara

NugegodaBambalapitiya

Pettah

KiribathgodaBorella

BattaramullaKaduwela

Avissawella

Kalawana

Tissamaharama

Embilipitiya

Udugama

AmbalangodaPitigala

Baduraliya

GalleMatara Tangalle

Anuradhapura

Nochchiyagama

DambullaPolonnaruwa

Bakamuna

Puttalam

ChilawKurunegala

Nikaweratiya

Matale

Mahiyanganaya

KandyKandy Metro

Warakapola

Gampaha

Kuliyapitiya

Negombo

Wennappuwa

Medawachchiya

Vavuniya

DehiwalaPiliyandala

Grandpass

MinuwangodaKegalle

Gampola

Nawala

Horana

Wattala

BRANCH NETWORK

CLC Branches


FINANCIAL REVIEW

OVERVIEW2019/2020 was a challenging year, however, the Company has achieved a pre-tax profit of Rs.2 Bn, a 2% drop from Rs.2.04 Bn reported in the FY 2018/19. The decline was due to lower net interest income and higher impairment provisions owing to the increase in non-performing loans. The reversal of Deferred Tax increased post-tax profit by 29% to Rs. 1.5Bn from Rs.1.2 Bn.

A 44.33% owned LOLC Development Finance PLC contributed Rs. 48 Mn and 40% owned Commercial Insurance Brokers Limited contributed Rs. 18 Mn to the share of profit of equity accounted investees during 2019/2020. The comparative, in last year was a loss was Rs. 68 Mn from LOLC Development Finance PLC and a gain of Rs. 13 Mn from Commercial Insurance Brokers Limited.

The Company’s interest in LOLC Myanmar Micro-Finance Company Limited in the FY 2019/2020 increased to 13.83% from 4.04% with the additional investment of USD 2 Mn. This investment was classified under financial assets measured at fair value through profit or loss (FVTPL), which contributed a gain of Rs.320 Mn compared to a loss of Rs.3 Mn recorded in the previous year.

Interest incomeInterest income of the Company decreased by 9.4% from Rs. 14.13 Bn to Rs. 12.79 Bn, with a marginal increase in the loan book from Rs.53.49 Bn to Rs.54.14 Bn by 31 March 2020. The Company followed a more cautious approach in expanding its lending portfolio in view of the challenging economic conditions.

In Rs. MnInterest income

FY 2019/2020

FY 2018/2019

Variance %

Leasing & hire purchase 2,948 3,271 -10%

Loans & advances 8,218 8,915 -8%

Factoring 476 701 -32%

Overdue interest 911 991 -8%

Rentals & sales proceeds - contracts written off 239 249 -4%

Total interest income 12,792 14,126 -9%

All the income sources saw negative variances in 2019/2020 due to stagnant portfolio and the reducing interest rates.

A decrease in interest income from leasing & hire purchase, loans and advances by 10% and 8% respectively, was witnessed compared to the last financial year. The Factoring income dipped significantly from Rs. 701 Mn to Rs.476 Mn, with the decline in the factoring portfolio.

INTEREST EXPENSEInterest expense of the Company accounted for 48.15% and 40.18% of the interest income and total income (including other income) respectively. Interest expense decreased by 8% from Rs. 6.69Bn to Rs. 6.16 Bn with the decrease in borrowing base (including deposits) from Rs.50. 67 Bn to Rs.47.5 Bn.

NET INTEREST INCOME

In Rs. Mn FY 2019/2020

FY 2018/2019

Variance %

Interest income 12,792 14,126 -9%

Interest expense (6,160) (6,697) -8%

Net interest income 6,632 7,429 -11%

The Company’s net interest income (NII), decreased by 11% over the previous year. The Company generated a NII of Rs.6.63 Bn compared to Rs.7.42 Bn recorded last year. The opening net portfolio is Rs.53.49 Bn as at 31st March 2019 and it was Rs.54.14 Bn as at 31st March 2020.

OTHER INCOMEProfit before tax of the Company includes other income which comprises of fee income, interest on government securities, debentures, gains and losses arising from mark to market valuation of quoted shares, unit trusts held for trading purposes and change in fair value of investment properties.

Fee income relating to the lending portfolio decreased marginally by 3% from Rs. 809 Mn to Rs.786 Mn. Other income increased due to fair valuation of quoted investments and fair value gain on investment in LOLC Myanmar Micro-Finance Company Limited. As a result, total other income shows a favourable variance of 32%.

NET INTEREST INCOME

Net interest incomeNet Interest Margin

(Rs. Mn) (%)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9

12

15

2016 2017 2018 2019 2020


In Rs. Mn FY 2019/2020 FY 2018/2019 Variance %

Fee income 786 809 -3%

Other income 1,516 942 61%

Total other income 2,302 1,750 32%

OPERATIONAL EFFICIENCYOperating expenses of the Company decreased by Rs. 77 Mn, to Rs. 7 Bn. There is a significant increase of Allowance for Bad & Doubtful Debts due to increasing non-performing facilities. As at 31st March, Company’s gross non- performing loan ratio increased mainly due to lower collection in last two weeks of the financial year due to the Covid-19 pandemic. However, the company managed to reduce the Direct expenses, Personal costs and Other Operating expenses by Rs. 744.2 Mn which softened the negative impact. Increase in Depreciation and amortization is as a result of amortization of right to use assets amounting to Rs. 134.47 Mn in line with SLFRS 16.

Direct taxes including VAT on financial services, crop insurance levy and debt repayment levy (DRL) increased by 8%. Amidst the above operational expenses, the cost-to-income ratio decreased to 51% in 2019/2020 compared to 57% of last year.

In Rs. Mn FY 2019/2020 FY 2018/2019 Variance %

Expenses

Direct expenses 274 410 -33%

Premises, equipment & establishment expenses 347 417 -17%

Personnel costs 1,456 1,515 -4%

Allowance for impairment & write offs 2,406 1,886 28%

Depreciation and amortization 292 130 125%

Other operating expenses 1,482 2,032 -27%

VAT on financial services 747 693 8%

Total operating expenses 7,005 7,082 -1%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Direct expensesPremises,equipment & establishment expPersonal expensesAllowance of impairement & write offsDepreciation and amortisationOther operating expensesValue added tax on fin.services and NBT

COMPOSITION OF OPERATING EXPENSES(Rs. Mn)

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

OPERATING EXPENCES INCLUDING ALLOWANCE FOR IMPAIRMENT

4,000

5,000

6,000

7,000

8,000

(Rs. Mn)

2016 2017 2018 2019 2020

COST TO INCOME RATIO

40

50

60

70

(%)

2016 2017 2018 2019 2020

NON-PERFORMING PORTFOLIO TO PERFORMING PORTFOLIO

Non Performing PortfolioPerforming Portfolio

(Rs. Mn)

0

10,000

20,000

30,000

40,000

50,000

60,000

0

1,000

2,000

3,000

4,000

5,000

2016 2017 2018 2019 2020


FINANCIAL REVIEW

ASSET QUALITY - QUALITY OF LOAN PORTFOLIOThe allowance for impairment on leases, loans and factoring receivables, increased by 28% to Rs.2.41 Bn from Rs.1.88 Bn reported in the previous year with the increase in non-performing loans.

As at 31st March 2020 2019

Gross Non-Performing Accommodations Rs. Mn 4,013 2,730

Gross Non-Performing Accommodations Ratio % 7.05 4.90

Net Non-Performing Accommodation Ratio % 2.25 0.99

Low collections during the last two weeks of the financial year as a result of the impact of lockdown due to the pandemic, and the slowdown in economic growth experienced in previous years have resulted in higher non-performing loans (NPL) in the Company. The gross non-performing accommodations in absolute terms increased by Rs.1.28 Bn compared to the previous year. Accordingly, the Gross Non-performing loan ratio increased from 4.90 % to 7.05 %. NPL includes facilities backed by property mortgages amounting to Rs. 1.47 Bn.

TAX EXPENSEThe current year’s profit after tax reached Rs.1.55 Bn after providing Rs.619.5 Mn for income taxes and there a reversal of Rs.169.75 Mn from deferred tax. The Company’s tax expense decreased by 47%, from Rs.843.3 Mn to Rs.449.8 Mn.

ASSET GROWTHThe asset base mainly consists of the lending portfolio, which is 78% of the company’s assets compared to 76% the previous year. The Company’s lending portfolio increased marginally by 1% from Rs. 53.49Bn to Rs. 54.14 Bn recording a rupee growth of Rs.645.62 Mn.

0

20,000

40,000

60,000

80,000

100,000

Loans & Advances-netInvestments Investments in associate and subsidiary companyInvestment in Properties, Intangible Assets and Property Plant & EquipmentOther assets

COMPOSITION OF TOTAL ASSSETS(Rs. Mn)

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

PROVISION COVER

40

60

80

100

120

(%)

2016 2017 2018 2019 2020


Composition of Assets and Liabilities As at 31-03-2020

Share As at 31-03-2019

Share Change

Item Rs. Mn % Rs. Mn % %

Assets

Cash and cash equivalents 2,134.74 3% 2,550.27 4% -16%

Loans & Advances-net 54,138.57 78% 53,492.95 76% 1%

Investments 7,146.34 10% 9,512.78 13% -25%

Investments in associates 1,496.43 2% 1,440.87 2% 4%

Investment in Properties,Intangible Assets and Property Plant & equipment

3,956.33 6% 3,307.02 5% 20%

Right-to-Use Asset 513.31 1% - 0% 100%

Other assets 245.94 0% 499.89 1% -51%

Total Assets 69,631.67 100% 70,803.78 100% -2%

Liabilities

Customer deposits 24,945.67 36% 24,316.11 34% 3%

Borrowings 22,613.88 32% 26,464.23 37% -15%

Equity 18,924.56 27% 17,458.53 25% 8%

Total Funds 66,484.11 95% 68,238.87 96% -3%

Other 3,147.57 5% 2,564.91 4% 23%

Total Liabilities and Equity 69,631.67 100% 70,803.78 100% -2%

Total Assets of the Company decreased by Rs. 1.17 Bn compared to last year. Main reason for the decline is decrease in Investments. The investment portfolio comprises of investments in equities, corporate debt instruments and government securities. There was a 25% decrease in investments due to utilization of excess funds.

Net assets value per share of the Company improved to Rs. Rs.2.97, from Rs. 2.74 as at 31st March 2019. Profitability in terms of Return on Assets (before tax) and Return on Equity (after tax) were recorded at 2.84% and 8.5% respectively compared to 2.83% and 7.05% last year.

CUSTOMER DEPOSITSCustomer deposits reached Rs.24.94Bn with a moderated 3% growth from Rs.24.31Bn amidst intense competition seen throughout the year. Customer deposits accounted for 52% of the funding mix compared to 48% in the previous year.

BANK BORROWINGS AND FOREIGN FUNDINGThe funding base of the company further decreased from Rs.26.35 Bn to Rs.22.55 Bn due to capital repayments of foreign borrowing and settlement of short-term loans. The Company obtained some securitisation facilities during the year. Foreign borrowings accounted for 18% of the total borrowing including customer deposits.

SHAREHOLDER FUNDS, CAPITAL ADEQUACY AND LIQUIDITYThe shareholder funds of the Company reached Rs. 18.92 Bn from Rs. 17.46 Bn with the earnings from its operations and increase in reserves.

The Company’s rich repository of capital continues to strengthen the Company’s growth prospects.

FUNDING MIX

Foreign funding agenciesSecuritisation & othersOther long-term fundingShort-term fundingCustomer depositsDebenture

10%

As at 31.3.2019

As at 31.3.2020

36%

1%3%36%

17%

7%

31%

18%

1%

16%52%

11%

8%2%1% 1%

48%

10%

(%)


FINANCIAL REVIEW

Regulatory Capital Adequacy

As at 31st March 2020 2019

Core Capital (Tier-1 Capital) Rs. Mn 16,970 15,425

Total Capital Base Rs. Mn 16,335 14,679

Core Capital Adequacy Ratio,as % of Risk Weighted Assets(Minimum Requirement, 6.5%) 21.79% 20.51%

Total Capital Adequacy Ratio,as % of Risk Weighted Assets(Minimum Requirement, 10.5%) 20.97% 19.52%

Capital Funds to Deposit Liabilities Ratio(Minimum Requirement,10%) 68.03% 63.44%

The Company remains well capitalized with a strong core capital adequacy ratio of 21.79% and a total capital adequacy ratio of 20.97%, calculated under the revised direction issued by the Central Bank of Sri Lanka. This is well above the stipulated regulatory requirement of minimum of 6.5% and 10.5% each.

Regulatory Liquidity-In Rs. Mn 31.03.2020 31.03.2019

Required minimum amount of Liquid assets 3,110 3,071

Available amount of Liquid Assets 6,186 8,715

Required minimum amount of Government Securities 3,740 3,962

Available amount of Government Securities 4,051 6,165

RISK WEIGHTED ASSETS TO TOTAL ASSETS

2016

Risk weighted assetsTotal assets

2017 2018 2019 2020

(Rs. Mn)

0

20,000

40,000

60,000

80,000

100,000

The available liquid assets of the Company exceed the required minimum amount.

The earnings per share improved to Rs. 0.24 from Rs. 0.19 during the previous year.

The Market capitalization of the company is Rs. 11.48 Bn with a closing share price of Rs.1.80 (As at 31st March 2019 - Rs.2.60), which resulted in a Price Earning (PE) ratio of 8 (times) compared to 14 (times) in 2019.

ICRA Lanka Ltd. reviewed company’s rating and reaffirmed the rating at [SL] A with a stable outlook.

The outlook for 2020/21 is equally challenging given the lockdown due to Covid-19 and the resultant impact on the economy. Drop in interest rates, is expected to kick start the economy battered by the pandemic. Collections will be the key focus for the business while building the portfolio will also be based on selective credit expansion.


SUSTAINABILITY REPORT

Sustainable management at CLC alludes to the intersection of business and sustainability while managing the triple bottomline - people, planet and profits - to ensure optimal focus is placed on all three for long-term viability. The company balances the need for growth with the active protection of the environment including planting trees to reduce GreenHouseGases (GHG) emissions and to lower the organisational carbon footprint. CLC’s aim is to be known as a responsible environmental steward while also helping to support stakeholders in the wider society. At CLC, stakeholders consist of Employees, Environment and the Community.

OUR EMPLOYEES Human Capital costs form a major investment for the company because we believe the employees are the driving force for the economy. The needs of employees are changing and the entry of Millennials into this equation requires us to transform our recruiting practices to align with organisational goals and the employee’s aspirations. There is a greater reliance on the intellectual capital of the workforce which requires the company to allocate a substantial budget for training and development purposes. The infusion of greater automation and fin-tech is transforming the roles employees play, especially in the financial services industry. CLC considers all these factors in its approach to managing its valued employees. CLC’s stellar growth has been the result of an excellent team of professionals working together to achieve the corporate objectives.

Recruitment and RetentionCLC’s strategies towards this aspect of human capital management fulfils critical criteria such as enabling fulfilment, providing opportunities to grow, empowering responsible employees and supporting them to success. Clear Key Performance Indicators (KPIs) are set out to ensure transparency and imbue a sense of trust between employees and management. Achieving the company’s vision drives our performance, but within this framework, the company is responsive to evolving trends when it comes to recruitment and retention of talent. In order to retain employees, CLC provides a motivating and inclusive workplace where talent is given due recognition. Open and honest feedback promotes understanding and ensures human resources are always growing and learning.

CLC conducts recruitment across various channels including media, employment and recruitment agencies, career fairs, social media and other network platforms and walk-in interviews in its search for the best industry talent. Apart from looking for specific skills in keeping with the job description, the company recruits based on the right mindset which determines how well the recruited candidates will fit into CLC’s work culture. CLC is an equal opportunity employer irrespective of gender, race and religion and promotes a zero tolerance policy against discrimination of potential or existing employees on any grounds whatsoever. CLC offers competitive and fair remuneration and benefits to attract and retain the best people.

In a bid to ensure talent retention, CLC offers new and exciting areas of responsibility, career paths, and skills development opportunities. The result is a talent and knowledge-based culture, which ensures employees have the right technical and leadership skills and knowledge about industry developments to take informed decisions for the benefit of the company. CLC provides a strong leadership structure that enables managers to support and encourage their employees. Managers are responsible for leading their employees to success and for supporting them in their professional development, supported by the guidance and tools they need to succeed.

Training & DevelopmentThe company invests in intensive training and development programmes to enhance a knowledge-based culture and ensure career growth for employees. Training needs are analysed across the business annually, to identify priorities and to ensure that learning plans support business strategy.

At CLC, a proportionate budgetary allowance is made for training and development programmes in regulatory changes, technical expertise, product knowledge and soft skills. Training programmes are conducted both in-house and with the help of external resources depending on the nature of the training. These programmes encompass formal training, on-the-job experience and coaching and mentoring. Overseas training is extended to management staff as foreign exposure offers them an insight into global industry trends.

Total Training Hours – 2019/20: 16,287 hoursTotalNo.ofStaffthatunderwenttraining: 1,078 employees

Employees undergo other essential soft skills programmes such as leadership development to develop their emotional intelligence and to develop critical skills for success. The company identifies high-performing employees, matches their skills to its business needs and helps them achieve their development goals.

Succession PlanningDeveloping a pipeline of future leaders to be placed in key managerial roles is a key focus. Employees displaying strong leadership potential are groomed for top leadership positions. During 2019/20, leadership programmes such as outbound training was held for field-based and back-office staff; while technical training is also held to develop knowledge about microfinance products for the field force.

Customer Protection PrinciplesThe company’s customer-centricity serves to maintain its competitive edge. CLC is complying with the Central Bank of Sri Lanka’s Customer Protection Principles and anti-money laundering training for employees. During the period under consideration, anti-money laundering training was imparted region-wise and branch-wise as per the requirement of the regulator. Half the number of branches was covered during the previous year while the other half was completed in the year under review. All regulatory requirements were adhered to during the year under review.

Employee Appraisal A comprehensive employee appraisal process helps to closely track career progression and an employee feedback channel provides further feedback on the employee satisfaction levels. Employees who have made exceptional contributions receive promotions and are awarded on a company-wide platform at the annual Employee Long Service and Excellence Awards, which is a key event in the calendar.

Employee Engagement An employee feedback mechanism encourages staff to express themselves freely to better engagement. Our open door culture encourages employees to interact with Senior Management for advice or to air grievances.


HR Day is organised at Branch locations and conduct individual interviews with each staff member. At this interview, every employee is given a chance to express their ideas to the HR representative openly. Information gathered is collated by the respective HR representative and a report submitted to the Management for consideration.

Branch visits by the Senior Management team, the heads of departments and the shared services team infuse a sense of belonging and pride. Regular meetings are held amongst regional managers, branch managers, middle and top management to discuss issues and strategise. At every meeting, the management is committed to addressing any grievances or outstanding performance by staff. In addition, regional managers make it a point to visit the branches at least once a week, which gives them an opportunity to meet the branch staff to discuss any concerns. The meeting also enables the regional manager to share any vital company information with the branch.

CLC have created a culture where ample opportunities are available for staff to develop their knowledge and skills. CLC also provides higher education expenses upon completing their relevant study course. There is a higher education policy in place, which provides staff the opportunity to claim educational expenses, after completing their Master’s Degree. Employees have made use of this opportunity to gain the necessary qualifications. Furthermore, case studies and other similar tasks have exposed employees to various complex scenarios, which improve their skills in decision making.

CLC’s top management reflects its high retention rates and this wealth of experience and wisdom is key to creating an open and empowering culture for the rest of the staff. The close-knit CLC employee base thrives in an environment of open communication and frequent interaction with management.

Grievance Handing The Group’s Grievance Redress Procedure has created a solid and trustworthy platform for employees to raise any grievance that affects effective discharge of their duties/ employment. Employees have been assured of the confidentiality of the issues raised.

The Whistle-blowing Policy that is applicable to the entire Group is another important policy made available for our employees. The policy encourages all employees to inform the Enterprise Risk Management Unit of any activity or possible activity that might be detrimental to the best interest of the Group, including but not limited to financial irregularities or fraud, corruption or mismanagement, non-conformity with legal provisions, rules and regulation, company policies, etc. The said policy has paved way to strengthen the Corporate Governance culture across the Group. The Enterprise Risk Management Department has been empowered to take timely and necessary actions to address any sort of undesirable situations.

Work-Life balanceTo maintain optimal work-life balance, it is mandatory for all staff members to take annual leave during the year. The company also offers medical benefits for the employees and their family.

A Club Membership reimbursement facility is provided to employees, thereby, encouraging them to take some time off their work and engage in recreational and social activities. CLC promotes sports activities such as cricket, badminton, netball, bowling, and athletics for all employees and proactively takes part in many tournaments.

Further, CLC employees can avail of Group synergies, such as discounted rates from the LOLC Group’s leisure properties, to spend quality time with their families.

OUR ENVIRONMENT Sri Lanka’s forest density has been steadily dwindling from 82% in 1882 to 16.5% in 2019, which demonstrates the extent to which the lush green forests have been depleted and razed to the ground to make way for human settlements and commercial purposes. The nation’s rich bio diversity is well known but while plans are made for ambitious infrastructure development, as responsible citizens we need to ensure the sanctity of our forests and green cover needs to be maintained. Towards this end, CLC launched a tree-planting programme under the Group LOLC sustainability arm which has been going from strength to strength year after year. CLC’s Island-wide Schools Tree Planting Initiative

commenced with the planting of over 100 trees at Royal College, Polonnaruwa and up to date has succeeded in planting 900 trees in 68 schools.

The trees ranged from selected mango varieties (Willard, Kartha Kolomban, Vella Kolomban, Dampara, Alphonso and Tom EJC), with saplings sourced from the Agricultural Department’s regional nurseries. CLC is working with other partners in the project.

CLC’s 65 branches cover 10 regions across Sri Lanka and each branch was given the task of selecting a minimum of two schools within a radius of five Km. The branch works closely with the administrators of the schools who together select suitable tree varieties and planting locations. They are expected to arrange an orientation session with the schools in order to give the school authorities and the students a sense of ownership and responsibility for the project. Once planted, the respective branch staff is expected to visit the schools on a monthly basis.

The overall goal is to create a greener Sri Lanka whilst making Sri Lankans live healthier. Furthermore, with the launch of this project, it is expected to inculcate the habit of tree planting amongst the youth and for them to feel a sense of pride in giving back to the environment.

This sustainable initiative is in line with LOLC’s triple bottom line approach; the people, the planet and profits. CLC’s mission is to commit towards a sustainable future by meeting the needs of the present without compromising the needs of the future generations to meet their own. With the aim of conserving Sri Lanka’s biodiversity and enhancing the natural eco-system, this new initiative will also go some way in raising the living standards of the island’s inhabitants across the country. In fact, CLC Green will go beyond just reforestation, as it also aims to teach the next generation the importance of the environment around us. Each school under the programme will also be allocated fencing and fertiliser to ensure that the protection and growth of each sapling is guaranteed. The second phase of the project will involve the recognition of those who have contributed positively to the growth of their trees, as well as recognising good maintenance habits in collaboration with the school and their appointed monitors.

SUSTAINABILITY REPORT


Commercial Leasing & Finance PLC (CLC) continued to maintain high standards of corporate governance and ethical business conduct across all aspects of its operations and decision-making processes during the year under review.

STRUCTUREThe governance structure of CLC ensures alignment of its business strategy and direction through effective engagement and communication with its stakeholders, Board of Directors, Board Sub-Committees and Management.

The Corporate Governance philosophy of CLC is within a framework of compliance and conformance, which has been established at all levels through a strong set of corporate values and a written Code of Conduct. All employees are required to embrace this philosophy in the performance of their official duties and in other situations that could affect the Company’s image.

INSTRUMENTS OF GOVERNANCEThe Corporate Governance framework of CLC encompassing external and internal instruments of governance, enables the Board to provide assurance to investors that they have discharged their duties responsibly. The Board of Directors of CLC and staff at all levels consider it their duty and responsibility to act in the best interests of the Company. It is this strong set of values that has facilitated the trust that our stakeholders have continued to place on the core values underlying our corporate activities.

The external instruments of governance at CLC include the Companies Act, No. 7 of 2007, the Finance Business Act, No. 42 of 2011, the Finance Leasing Act, No. 56 of 2000, the Foreign Exchange Act, No. 12 of 2017, the Payment and Settlement Systems Act, No. 28 of 2005, the Securities and Exchange Commission of Sri Lanka Act, No. 36 of 1987, and any amendments thereto, including rules and directions issued to finance companies from time-to-time by the Monetary Board of the Central Bank of Sri Lanka and the Listing Rules of the Colombo Stock Exchange.

REPORT ON CORPORATE GOVERNANCE

The internal instruments of governance include the Articles of Association, the Role of the Board, Board Approved Policies, Procedures, and Processes for internal controls and anti- money laundering.

Policies and procedures have been established taking into consideration governance principles that define the structure and responsibility of the Board to ensure legal and regulatory compliance, to protect stakeholder interests, to manage risk and enhance the integrity of financial reporting. A whistle-blowing policy has been introduced and the number of the related ‘hotline’ has been shared with all employees. This was done to enhance accountability, so that deliberate deviations from controls and/or processes and procedures could be highlighted by any employee and thus addressed promptly.

BOARD OF DIRECTORSThe Board is responsible for the stewardship of the Company and the Directors ensure good governance at Board level and below on the basis of sound principles that provide the framework of how the business is conducted.

The members of the Board consist of persons with multiple industrial/professional backgrounds in which they have achieved eminence, who contribute effectively to decisions made by the Board to guide CLC towards achieving its objectives. In accordance with best practices, the offices of Chairman and Chief Executive Officer are separate, and the Chairman is an Independent Non-Executive Director. This ensures a balance of power and enhances accountability.

The appointment of Directors is subject to Central Bank approval with subsequent approval taken from the shareholders (for re-election) at an Annual General Meeting (AGM). At these meetings, an opportunity is given to all shareholders (public and non-public) to approve or to reject such appointments. Resolutions on new appointments/re-appointment are communicated to the shareholders through the “Notice of the Annual General Meeting”, with due prior notice.

MONITORING AND EVALUATION BY THE BOARDCLC has in place a number of mandatory and voluntary Board Sub-Committees to fulfil regulatory requirements and for better governance of its activities. These committees meet periodically to deliberate on matters falling within their respective charters/ terms of reference and their recommendations are duly communicated to the main Board. The main Board held 12 scheduled monthly meetings during the year.

Audit CommitteeThe Audit Committee was established for the purpose of assisting the Board in fulfilling their responsibilities relating to financial governance. The Committee held five meetings during the year.

Integrated Risk Management CommitteeThe Integrated Risk Management Committee was established to assist the Board in performing its oversight function in relation to different types of risk faced by the Company in its business operations and ensures adequacy and effectiveness of the risk management framework of the Company. The Committee held four meetings during the year.

Remuneration CommitteeThe Remuneration Committee was established to assist the Board in evaluating and recommending remuneration for Board Members including the Chief Executive Officer. The Committee held one meeting during the year.

Related Party Transaction Review CommitteeOn behalf of the Board, the Committee ensures that all related party transactions of the Company are consistent with the Code of Best Practice on Related Party Transactions issued by the SEC. The Committee held four meetings during the year.

Nomination CommitteeThe Nomination Committee was established to assist the Board in assessing the skills required and recommending Director Nominees for election to the Board and to nominate members to its Sub-Committees


to effectively discharge their duties and responsibilities. The Committee held one meeting during the year.

Moreover, the following mechanisms enables the Board to oversee the accomplishment of the targets in the business plan: review the performance of CLC at monthly Board meetings; seek recommendations through Board appointed Sub-Committees on governance; including compliance with internal controls, human resources, risk management, credit and IT; review of statutory and other compliances through a monthly paper on compliance submitted to the Board covering the operations of CLC. The Company has also established three management level committees: a Credit Committee, an Asset & Liability Committee, to manage matters relating to credit, collections and liquidity and an Executive Management Committee to carry-out operational level planning and risk management.

SKILLS AND PERFORMANCE OF THE BOARDThe updating of the skills and knowledge of all Directors is achieved by updates on proposed/new regulations, industry best practices, market trends and changes in the macro environment. It is also facilitated by providing them access to external and internal auditors, access to other external professional advisory services and the Company Secretaries, keeping them fully briefed on important developments in the business activities of the Company and by periodic reports on performance, and opportunities to meet Senior Management.

As required by the Finance Companies Corporate Governance Direction, CLC has established a well-defined self evaluation mechanism undertaken by each Director annually to evaluate performance of the Board. These evaluations are subsequently tabled at a Board meeting for review and to address areas that require improvement. Related records are maintained by Company Secretaries. In addition to the overall self evaluation by the Board Members, additional evaluations are carried out by Non-Executive Directors and

members of the Audit Committee as a tool to evaluate performance.

AVOIDING CONFLICTS OF INTERESTThe governance structure at CLC ensures that the Directors take all necessary steps to avoid conflicts of interest in their activities with, and commitments to other organisations or related parties. If a Director has a conflict of interest in a matter to be considered by the Board, such matters are disclosed and discussed at Board Meetings, where Independent Directors who have no material interest in the transaction are present.

ENGAGEMENT WITH SHAREHOLDERSThe shareholders of CLC have multiple ways of engaging with the Board: the Annual General Meetings which are the main forum at which the Board maintains effective communication with its shareholders on matters which are relevant and are of concern to the general membership such as the performance and their return on investment of CLC; access to the Board and the Company Secretaries; written correspondence from the Company Secretaries to inform shareholders of relevant matters; the website of CLC which is accessible by all stakeholders and the general public; and disclosures disseminated through the Colombo Stock Exchange including interim reporting.

ENGAGEMENT WITH EMPLOYEESCLC recognises that employee involvement is a critical pre-requisite towards ensuring the effectiveness of the Corporate Governance system and therefore attaches great importance to employee communications and employee awareness of key events and significant developments.

The necessity of sincere and regular communication in gaining employee commitment to organisational goals and values are stressed extensively and intensively through various communiques issued periodically by the Directors’ Office. CLC follows an open-door policy for its employees at all levels. Regular dialogue is also maintained on work related issues as well as on matters pertaining to general interest that affect employees and their families.

In terms of engaging with the employees, the key channels used by the Board include the Executive Director/CEO who is an employee director and the main link between the Board and the rest of the employees; and the Board Members and Board Sub-Committees who conduct effective dialogue with the members of the Management on matters of strategic direction.

EXTERNAL AUDITM/s KPMG, Chartered Accountants were re-appointed as External Auditors of the Company by the shareholders at the Annual General Meeting held in September 2019. Their services were also engaged to seek:

a) an assessment of the Company’s compliance with the requirements of the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board and

b) the Company’s level of adherence to the internal controls on financial reporting.

The External Auditors’ certification on the effectiveness of the Internal Control Mechanisms in respect of the audited financial statements released has been published in this Annual Report in compliance with the requirements of the aforesaid Direction. Furthermore, based on a report issued by the External Auditors on Factual Findings on the Level of Compliance of the Corporate Governance Direction, the Board has determined that CLC has in fact adhered to its requirements.

The Directors confirm that no significant deviations have been observed by the External Auditors and that the Company has not engaged in any activity that contravenes any applicable law or regulation. To the best of the knowledge of the Directors, the Company has been in compliance with all prudential requirements, regulations and laws.

The following chart gives more details on the Company’s compliance:



Direction No.

Reference to the Finance Companies Corporate Governance Direction No. 3 of 2008

CLC’s Level of Compliance

2 THE RESPONSIBILITIES OF THE BOARD OF DIRECTORS

2.1 The Board of Directors shall strengthen the safety and soundness of the finance company by:

a. Approving and overseeing the finance company’s strategic objectives and corporate values and ensuring that such objectives and values are communicated throughout the finance company;

Complied withStrategic objectives, corporate values, overall business strategy and policies of the Company set by the Board are regularly overseen by the Board and are communicated to all levels of the Company.

The Company has developed a policy on Code of Conduct and Ethics for all employees, in line with strategic objectives & corporate values of the company.

b. Approving the overall business strategy of the finance company, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least immediate next three years;

Complied withA financial forecast for the period 2020/21 to 2024/25 has been approved by the Board.

All identified risks have been taken into account when preparing this forecast.

Further, a Risk Management Policy has been approved by the Board which includes risk management procedures and mechanisms.

c. Identifying risks and ensuring implementation of appropriate systems to manage the risks prudently;

Complied withThe Board has delegated this function to its Sub-Committee, the Integrated Risk Management Committee (IRMC).

Approved minutes of the quarterly meetings of IRMC are tabled at Board Meetings for review and guidance.

Risk Management Reports on liquidity and maturity of deposits are submitted to the Board on a monthly basis.

d. Approving a policy of communication with all stakeholders, including depositors, creditors, shareholders and borrowers;

Complied with The Board is responsible for ensuring effective communication with all stakeholders including depositors, creditors, shareholders and borrowers.

A Board approved stakeholder communication policy is in place and reviewed, as and when required.

The Annual General Meeting is used to have an effective dialogue with the shareholders on matters which are relevant and of concern to the general membership.

e. Reviewing the adequacy and the integrity of the finance company’s internal control systems and management information systems;

Complied with The Board is of the view that the system of internal controls and management information systems in place are sound and adequate to provide reasonable assurance regarding the reliability of management information and financial reporting.

The key processes that have been established by the Board to review the adequacy and integrity of the Company’s Internal Controls and Management Information Systems, include the following:


Direction No.



e. 1. The Board Audit Committee and the Board Integrated Risk Management Committee ensures that the Company’s controls and risks are being appropriately managed and actions proposed for mitigation of risks.

These two Committees facilitate an ongoing process for identifying, evaluating and managing significant risks faced by the Company, including enhancing the system to cater to changes in the business and regulatory environment.

2. The CEO through the Heads of Departments ensures that approved business strategies are implemented and that agreed policies and procedures on risk/internal control are implemented and adhered to.

The Heads of Departments are therefore accountable and responsible for their respective areas of operation, including the accuracy of information presented to the Management/ Board, and managing risk in their day-to-day activities through established processes and controls. In addition, the Internal Audit ensures that staff adheres to such processes and controls.

Where there is a breach of authority, such issues are escalated to the Board through the Board Audit Committee.

3. The Internal Audit performs a comprehensive exercise that entails reviewing of all aspects of MIS including operational and regulatory risks. Product-wise MIS reviews have been periodically carried out by the Internal Audit.

The Internal Audit also provides an independent assurance that the Company’s risk management, governance and internal control processes are operating effectively and fit for purpose.

f. Identifying and designating key management personnel, who are in a position to:

(i) influence policy;

(ii) direct activities; and

(iii) exercise control over business activities, operations and risk management

Complied withBoard Members including the CEO and Heads of Core Functions have been identified and designated as Key Management Personnel (KMP) by the Board as defined in the Sri Lanka Accounting Standards.

Their appointments have been approved by the Central Bank of Sri Lanka.

g. Defining the areas of authority and key responsibilities for the Board and for the key management personnel;

Complied withArticles 76-78 of the Company’s Articles of Association define the powers and duties of the Board of Directors.

Further, the responsibilities of the Board have been defined and approved.

The areas of authority and responsibilities of the Key Management Personnel defined in individual job descriptions have been approved by the Board.



Direction No.



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

Complied withThe Company has a policy on oversight of the affairs of the Company by KMPs including a process to review the delegation process approved by the Board.

Delegated authority given to KMPs is reviewed periodically by the Board to ensure that they remain relevant to the needs of the Company.

i. Periodically assessing the effectiveness of its governance practices, including:

(i) the selection, nomination and election of Directors and appointment of key management personnel;

(ii) the management of conflicts of interests; and

(iii) the determination of weaknesses and implementation of changes where necessary;

Complied withA Board approved procedure is in place for the appointment of Directors. Election of Directors is effected in accordance with the requirements of the directions issued by the Central Bank of Sri Lanka and the Companies Act No. 7 of 2007.

Directors are selected and nominated to the Board for skills and experience in order to bring about an objective judgment on issues of strategy, performance and resources. Effectiveness of this process is ascertained by their contribution at Board meetings in their respective fields.

A Nomination Committee has been appointed to assist the Board in identifying qualified individuals as potential Directors.

KMPs are selected and recruited in terms of the HR Policy of the Company. KMPs directly report to the CEO and performance appraisals are completed at least twice a year.

Conflicts of interest are managed on a monthly basis where Directors disclose their directorships in other companies. KMPs declare any interest annually. Weaknesses are identified from the above processes and changes may be implemented where necessary.

Annual self-evaluations of Directors were tabled subsequent to the financial year end, and reviewed to determine any weaknesses of the above process and to implement changes where necessary.

j. Ensuring that the finance company has an appropriate succession plan for key management personnel;

Complied withA Board approved succession plan is available. This will be reviewed to take into account any changes in the organisation structure, when necessary.

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

Complied withKey Management Personnel are called in by the members of the Board during Board and Board Committee Meetings when the need arises to explain matters relating to their area of functions.

l. Understanding the regulatory environment; Complied withAs a practice, the Company Secretary includes an agenda item in monthly Board Meetings tabling correspondence with regulators which enable the Directors to understand the regulatory environment, concerns and changes and make appropriate decisions.

A monthly compliance report is also submitted to the Board. This report includes details of weekly, monthly, and annual returns duly submitted to the CBSL and the requirements of all the directions issued by the Monetary Board, and the Company’s current position with regard to each direction.

A monthly confirmation is provided by the Head of Finance of statutory payments made such as VAT, VAT on financial services, WHT on FDs and savings interest, EPF, ETF, PAYE Stamp duty and Economic Service Charge


Direction No.



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

Complied withThe Board Audit Committee is responsible for hiring and overseeing External Auditors.

Article 122 of the Company’s Articles of Association lays down a process for appointing of External Auditors at the AGM.

The Audit Committee has recommended that the auditors be re- appointed for 2019/20.

The Audit Committee is governed by a Board approved Audit Charter/ TOR. This is periodically reviewed by the Board to ensure that it remains relevant.

The last review was carried out after the year under review.

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 in line with paragraph 7 of this Direction.

Complied withThe Chairman and CEO have been duly appointed and their functions and responsibilities have been defined and approved by the Board.

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 withA Board-approved detailed procedure has been established to obtain independent professional advice when necessary.

2.4 A Director shall abstain from voting on any Board resolution in relation to a matter in which he or any of his relatives or a concern in which he has substantial interest, is interested, and he shall not be counted in the quorum for the relevant agenda item at the Board meeting.

Complied withArticle 79 of the Company’s Articles of Association requires an interested Director to disclose his/her interest at Board Meetings.

Article 83 requires such a Director to abstain from voting on any Board resolution. He/she will not to be counted in the quorum.

In addition, a Board approved procedure is established to manage conflicts of interest of the Board Members

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 finance company is firmly under its authority.

Complied withThe Board has put in place systems and controls to facilitate the effective discharge of Board functions. Pre-set agenda of meetings ensure the direction and control of the Company is firmly under Board control and authority.

The agenda of the monthly Board Meetings includes reports on performance and on compliance with relevant regulations. This enables the Board to ensure that the company performs at an optimal level, while being fully compliant.

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 the Department of Supervision of Non- Bank Financial Institutions of the situation of the finance company prior to taking any decision or action.

This situation has not arisen during the yearThe Board has implemented a procedure to alert them of any such event - in that, the Compliance Officer reports in the monthly compliance statement that the Company could remain as a going concern.



Direction No.



2.7 The Board shall include in the finance company’s Annual Report, an annual corporate governance report setting out the compliance with this Direction.

Complied withThis report serves the said requirement.

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 withThe Directors carry out a self-evaluation annually. Self-evaluations for the year 2019/20 have been obtained and reviewed by the Board.

As per the evaluations, the areas assessed meet standards expected by the board members. Related records are in the custody of the Company Secretaries.

3 MEETINGS OF THE BOARD

3.1 The Board shall meet at least twelve times a financial 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 withThe Board met 12 times during the year. Please see page 50 for further details.

Approvals obtained through the circulation of resolutions (19) were subsequently tabled at the following Board Meeting.

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

Complied withA Board approved Policy on Board’s relationship with the Company Secretary is in place to enable all Directors to include matters and proposals in the agenda for regular Board Meetings.

3.3 A notice of at least 7 days shall be given of a regular Board meeting to provide all Directors an opportunity to attend. For all other Board meetings, a reasonable notice shall be given.

Complied withA schedule of all meetings for the upcoming year is circulated amongst all Directors at the end of December or beginning of January. At the beginning of each month, a reminder of all meetings during that month is also sent out. In addition, notices are sent out 7 days prior to the meeting. All these enable any Director to seek to include matters in the Agenda.

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. Provided that participation at the Directors’ meetings through an Alternate Director shall, however, be acceptable as attendance.

Complied withAll the members have attended two-thirds or more of the meetings during the year. Please see page 50 for further details.

3.5 The Board shall appoint a Company Secretary whose primary responsibilities shall be to handle the secretarial services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

Complied withLOLC Corporate Services (Private) Limited has been appointed as Company Secretaries to the Company.

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 withThe Board approved Policy on Board’s relationship with the Company Secretary provides powers to the Chairman to delegate authority to the Company Secretary for preparation of agenda for Board Meetings.


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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 withThe Board approved Policy on Board relationship with the Company Secretary provides that all Directors shall have access to the advice/ services of the Company Secretary.

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 withThe Company Secretary maintains the minutes of the Board Meetings and Directors have full access to inspect the Minutes of the Board Meetings at any reasonable time, at short notice.

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 finance company is exposed and an overview of the risk management measures adopted; and

(f) The decisions and Board resolutions.

Complied withDetailed minutes are kept covering the given criteria.

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.

Complied withThe Board comprised five directors as at 31st March 2020.

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. The total period in office of a Non-Executive Director shall be inclusive of the total period of service served by such Director up to the date of this Direction.

Complied withNone of the Non-Executive Directors have completed 9 years of service during the financial year under review.

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 Officer of the Company.

Complied withThere is one Executive Director (the CEO) and four Non-Executive Directors on the Board.



Direction No.



4.4 The number of independent Non-Executive Directors of the Board shall be at least one fourth of the total numbers of Directors. A Non-Executive Director shall not be considered independent if such Director:

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) has or had during the period of two years immediately preceding his appointment as Director, any business transactions with the finance company as described in paragraph 9 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;

c) has been employed by the finance 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 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 shareholding of 10% or more of the paid up capital in a company or business organisation:

Complied withThere are four Independent Non-Executive Directors on the Board as at 31st March 2020 exceeding one fourth of the total number of directors on the Board:

• Mr. P D J Fernando

• Mr. L Jayaratne

• Mr. U H E Silva

• Mr. T Sanakan

(i) which has a transaction with the finance company as defined in paragraph 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; or

(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 paragraph 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.

Based on the approval granted by the Central Bank of Sri Lanka and a review of the annual declarations provided by the these directors, the Board has determined that they are independent as per criteria set in sections (a) to (f) of 4.4 in the Corporate Governance Direction and the Rules of the Colombo Stock Exchange.

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 apply to the independent Non-Executive Director.

During the reporting period no such requirement has arisen. Will comply in the event an alternate Director is appointed for an Independent Director


Direction No.



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 withDirectors profiles are provided on pages 8 and 9.

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 that constitute the quorum at such meeting are Non-Executive Directors.

Complied withThe Company’s Articles of Association (Article 98) provide that a quorum for a meeting is a majority provided that half of such quorum is made up Non-Executive.

The quorum had been maintained at all Board Meetings held during the financial year 2019/20.

Details of attendance at meetings are provided on page 50.

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 which shall be an integral part of its Annual Report.

Complied withThe current directorate is as given below :Mr. P D J Fernando, Independent Non-Executive ChairmanMr. L Jayaratne, Independent Non-Executive DirectorMr. U H E Silva, Independent Non-Executive Director Mr. T Sanakan, Independent Non-Executive Director Mr. D M D K Thilakaratne, Executive Director/CEOThe Directors profiles are given on pages 8 and 9.

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 withA Board-approved procedure is in place for the Board Members to select and appoint new Directors to the Board. The Company’s Articles 70-74 address the general procedure for appointment and removal of Directors to the Board.

The Board has also formed a Nomination Committee to assist in assessing the skills required and recommending nominees for election to the Board and to nominate members to its Sub-Committees to effectively discharge their duties and responsibilities.

Furthermore, the Company adheres to the Finance Companies (Fitness and Propriety of Directors and Officers performing Executive Functions) Direction No. 3 of 2011 when appointing new Directors.

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 withArticle 70 of the Company’s Articles of Association provides that Directors appointed shall be subject to election by shareholders at the first AGM.

4.11 If a Director resigns or is removed from office, the Board shall announce to the shareholders and notify the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka, regarding the resignation of the Director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant Director’s disagreement with the Board, if any.

Complied withDirectors’ resignation and the reason for such resignation are duly informed to the Central Bank of Sri Lanka (CBSL) and Colombo Stock Exchange (CSE).

The Board announces such situations to the shareholders through its Annual Report.



Direction No.



5 CRITERIA TO ASSESS THE FITNESS AND PROPRIETY OF DIRECTORS

5.1 Subject to the transitional provisions contained herein, a person over the age of 70* years shall not serve as a Director of a finance company.

*Extension of Age limit to 75 years subject to the 9 year rule and approval by the Monetary Board under Direction No. 5 of 2020

Complied withThe Board of Directors have been assessed as fit and proper in terms of the Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No. 3 of 2011.

The age of the current Directors is within the period permitted under this direction.

5.2 A director of a finance company shall not hold office as a director or any other equivalent position in more than 20 companies/societies/bodies corporate, including associate companies and subsidiaries of the finance company.

Complied withNo Director holds directorships of more than 20 companies/ entities/ institutions inclusive of subsidiaries or associate companies.

6 DELEGATION OF FUNCTIONS

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 withThe Board has established a procedure under which powers have been delegated to the Director/CEO as sanctioned by the Company’s Articles of Association.

Article 77 of the Company’s Articles of Association empowers the Board to delegate its powers to a Committee of Directors or to a Director or employee upon such terms and conditions and with such restrictions as the Board may think fit.

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 withThe delegated powers are reviewed periodically by the Board and a process to review the delegation process has been approved by the Board.

7 THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER

7.1 The roles of Chairman and Chief Executive Officer shall be separated and shall not be performed by the one and the same person.

Complied withThe roles of Chairman and CEO are separate and held by two individuals appointed by the Board.

7.2 The Chairman shall be a Non-Executive Director. In the case where the Chairman is not an Independent Non-Executive 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’s Annual Report.

Complied withThe Chairman is an Independent Non-Executive director.

7.3 The Board shall disclose in its Corporate Governance Report, which shall be an integral part of its Annual Report, the name 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 withThe Company as a practice discloses relationships in the Annual Corporate Governance Report.

There is no financial, business, family or other relationship between the Chairman and the CEO.

There is no financial, business, family or other material relationship between any other members of the Board.

A process has been developed for Directors to disclose any relationships between the Chairman and the CEO and or between any other Board Member.


Direction No.



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 issues are discussed by the Board in a timely manner.

Complied withThe Chairman is responsible to lead, direct and manage the Board to ensure that it operates effectively and fully discharges its legal & regulatory requirements.

7.5 The Chairman shall be primarily responsible for the preparation of the agenda for each Board meeting. The Chairman may delegate the function of preparing the agenda to the Company Secretary.

Complied withThe Chairman has delegated this function to the Company Secretary. This has been included in the ‘Policy on Board’s relationship with the Company Secretary’ approved by the Board.

7.6 The Chairman shall ensure that all Directors are informed adequately and in a timely manner of the issues arising at each Board meeting.

Complied withThe Chairman ensures that all Directors are properly briefed on issues arising at Board Meetings by submission of the agenda and board papers with sufficient time prior to meetings.

Further, minutes of previous month’s Board Meeting are distributed to the Board Members and tabled at the next Board Meeting for review and approval.

7.7 The Chairman shall encourage each Director 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 withThe Chairman invites all directors to contribute to the deliberations of the Board in all its decision making.

7.8 The Chairman shall facilitate the effective contribution of Non-Executive Directors in particular and ensure constructive relationships between Executive and Non- Executive Directors.

Complied withThe Company’s annual self-evaluation process assesses the contribution of Non-Executive Directors. Records of the same are maintained by Company Secretaries and areas assessed indicate that standards required are met.

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 withThe Chairman is not engaged in activities involving direct 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 withA Board approved communication policy covers this aspect.

The Annual General Meeting of the Company is the main forum at which the Board maintains effective communication with shareholders.

Periodic announcements made to the Colombo Stock Exchange also contributes towards this purpose.

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 withThe Chief Executive Officer functions as the apex executive in charge of the day-to-day management of the Company’s operations and business.



Direction No.



8 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 the annual general meeting of the Company.

Complied withThe Company has established the following committees:• Board Audit Committee • Integrated Risk Management Committee• Remuneration Committee• Related Party Transaction Review Committee • Nomination Committee

Reports of these committees have been submitted to the main Board for their review.

Please refer the Reports on pages 55 to 63.

8.2 Audit Committee Please refer page 58 for the Committee Report

a. The chairman of the committee shall be a Non-Executive Director who possesses qualifications and experience in accountancy and/or audit.

Mr. P D J Fernando, Independent Non-Executive Director, has been appointed as the Chairman of the Audit Committee by the Board.

His qualifications are as follows:• MSc in Statistics: University of Birmingham, England• BSc (2nd Class Upper Div): University of Peradeniya, Sri Lanka• Central Bank of Sri Lanka: Deputy Governor – 2010 to 2011• Central Bank of Sri Lanka: Assistant Governor – 2004 to 2009

b. The Board members appointed to the committee shall be Non-Executive Directors.

Complied withThe remaining members of the Committee are:• Mr. L Jayaratne, Independent Non-Executive Director• Mr. U H E Silva, Independent Non-Executive Director• Mr. T Sanakan, Independent Non-Executive Director

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 an 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 withA formal Agenda for Audit Committee meetings including items prescribed by the Direction is followed for the conduct of Audit Committee meetings.

The implementation of CBSL guidelines and relevant accounting standards; and the evaluation of the service period, fees and rotation of External Auditors are carried out by the Audit Committee in consultation with the Head of Finance.


Direction No.



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 withThe external Auditors are independent as they are not engaged in providing any other service to the Company and report direct to the Audit Committee of the Board.

Further, the Auditor’s Engagement Letter submitted to the committee evidence the External Auditor’s independence, and that the audit is carried out in accordance with SLAuS.

e. The committee shall develop and implement a policy with the approval of the Board 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 auditor 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 auditor, pose any threat to the objectivity and/or independence of the external auditor.

Complied withThe Board has approved a specific procedure to engage External Auditors for non-audit services.

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 Directions issued under the Act and the Management’s internal controls over financial reporting;

(ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and

(iii) The co-ordination between auditors where more than one auditor is involved

Complied withBefore the commencement of the audit, the Board Audit Committee met with the External Auditors to discuss and finalize the nature and scope of the audit.



Direction No.



g. The committee shall review the financial information of the finance company, in order to monitor the integrity of the Financial Statements of the finance company,

Its Annual Report, accounts and periodical reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the finance company’s Annual Report and accounts and periodical 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 withThe Committee has a process to review financial information of the Company when the quarterly and annual audited Financial Statements and the reports including accounting policies and changes to policies, significant assumptions/ judgments prepared for disclosure are presented to the Committee.

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 withOut of five meetings held during the year, the Committee met External Auditors at three meetings.

On two occasions, the Auditors met the Committee in the absence of the Executive Management.

i. The committee shall review the external auditor’s management letter and the Management’s response thereto.

Complied withThe management letter for 2019/20 has been reviewed by the Audit Committee.

j. The 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;

Complied with

The Committee has considered the scope of the internal audit function and noted the adequacy of resources and that necessary authority had been allocated to carry out its work.

The Audit Plan for 2019/20 was tabled by the Head of Internal Audit and discussed at a Committee meeting and results of the internal audit process has been reviewed and appropriate actions obtained where necessary.

An overall assessment of performance of the senior staff members and the Head of Internal Audit for the year 2019/20 has been carried out by the Committee.


Direction No.



(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 apprised 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;

No such situation has arisen during the year.

No such situation has arisen during the year.

The Committee is satisfied that the Internal Audit function is performed with independence, impartiality and proficiency.

The Internal Auditor reports direct to the Board Audit Committee.

k. The committee shall consider the major findings of internal investigations and management’s responses thereto;

Complied withEvery meeting the Committee consider the major findings of internal investigations and management responses if there’s any.

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 least once in six months, the committee shall meet with the external auditors without the Executive Directors being present.

Complied withThe Committee has had three meetings with the External Auditors during the year and on two such occasions, met the BAC without the presence of the Executive Directors and the management.

m. The committee shall have:

(i) explicit authority to investigate into any matter 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 withThe Board approved Terms of Reference of the Audit Committee ensures that it has the authority for points (i) to (iv) as required by the direction.

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 withDuring the year 2019/20, the Committee has held five meetings and conclusions of such meetings have been recorded by the Company Secretary in the minutes of the relevant meetings.

o. The Board shall, in the Annual Report, disclose in an informative way,

(i) details of the activities of the audit committee;(ii) the number of audit committee meetings held in the year;

and(iii) details of attendance of each individual member at such

meetings.

Complied withPlease refer Report on page 58.

p. The secretary to 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 withThe Company Secretary records and maintains detailed minutes of every committee meeting properly.



Direction No.



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 finance company’s relations with the external auditor.

Complied withA whistle-blowing policy has been introduced and the number of the related “hot line” has been publicised to all Company employees. This was done to enhance accountability, so that deliberate deviations from controls and/or processes and procedures could be highlighted by any employee and thus addressed promptly.

The related policy is periodically reviewed and strengthened to cover the method of reporting any matters investigated to the Board Audit Committee. This policy was last reviewed in July 2020.

8.3 Integrated Risk Management Committee Please refer page 60 for the Committee Report

a. The committee shall consist of at least one Non-Executive Director, CEO 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 closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the committee.

Complied withThe Integrated Risk Management Committee comprises:Mr. L Jayaratne - Committee Chairman, Independent Non-Executive DirectorMr. P D J Fernando - Independent Non-Executive DirectorMr. U H E Silva - Independent Non-Executive DirectorMr. D M D K Thilakaratne - Executive Director/CEO Mrs. C Rodrigo - Senior Manager - Enterprise Risk ManagementMr. N Weerapana - Head of RecoveriesMrs. R.R.D.D Punsara - Head of FinanceMr. U Samarasinghe - Head of Credit Risk ManagementMr. O de Silva - Head of Treasury Mr. P Karandagolla - Head of Channels Mr. T Indrapala - Head of OperationsMr. T Kaushalya - Head of Savings and FDsMr. S Amarasekera - Head of ITMr. R Hewage - Compliance officer

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.

Complied withAs delegated by the Committee, Senior Manager-ERM assesses risks which have been identified by Heads of Divisions on a monthly basis and summarised and submitted to the quarterly Committee meetings.

ERM has set up number of risk indicators and stress testing under different risk categories as follows.• Liquidity Risk• Operational Risk• Strategic Risk• Credit Risk• Business Risk• Profitability Risk


Direction No.



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

Complied withDuring the year, the Committee monitored the activities of the ALCO and the Credit Committee through direct reports provided to the IRMC and minutes of ALCO meetings which are tabled at the quarterly IRMC meetings.

Matters reported by the ALCO include:

• Funding Gap analysed through Maturity Gap Analysis• Foreign Currency Position• Inter-company Exposures• Cost of Funds• Investments• Borrowings

The lending rates are also periodically reviewed by the ALCO in line with regulatory requirements and market trends. Credit facilities are approved based on rates decided by the ALCO within the delegated authority limits.

Treasury dealer limits have already been established and approved by the Board. Furthermore, a new treasury management system has been implemented which would cover limit for total Net Open Position (NOP) USD/LKR intraday and overnight limits; limits for Total Net Open Position of other currencies; Aggregate Gap Limits (AGL); Loss limits for FX operations; Loss Limits on marked-to-market (MtM) and counter party limits.

During the Year the Committee also reviewed the activities of the Credit Committee through periodic reports provided by the Head of Credit and ERM and made recommendations to revise procedures and policy for better credit governance.

d. The committee shall take prompt corrective action to mitigate the effects of 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.

Complied withDecisions taken at Committee Meetings are followed up by the ERM team. All reported risks are constantly monitored and remedial corrective action is taken if an adverse movement of the risk is evident.

This process was further strengthened by establishing key risk indicators and risk appetite limits for credit, market, liquidity and operations. These are presently monitored by ERM, and those which are not within the specific limits are reported to the Committee for necessary action. Monthly risk reports are also provided to the Board on a monthly basis by ERM.

e. The committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans.

Complied withFour meetings were held during the financial year 2019/20.

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 Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.

Complied withSpecific risks and limits are identified by the IRMC and decisions are taken collectively.

Moreover, a formal documented disciplinary action procedure involving Internal Audit & HR is in place.



Direction No.



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 withThe Senior Manager-ERM submits a summary report to the Members of the Board after the Committee meeting. This includes the risks discussed at the meeting, mitigation actions proposed by ERM and the responses received from the risk owners. Further, approved Committee minutes are tabled at the subsequent Board Meeting seeking the Board’s views and specific direction.

h. The committee shall establish a compliance function to assess the finance company’s compliance with laws, regulations, directions, rules, 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

Complied withA Compliance Officer has been appointed by the Board. He monitors compliance of CBSL rules, regulations and directions issued under the Finance Business Act and submits a monthly and quarterly compliance report to the Board and the IRMC respectively for their review.

Monitoring compliance of other applicable laws, internal controls and approved policies on all areas of business operations is carried out by the ERM Division under the supervision of the Senior Manager - ERM.

9 RELATED PARTY TRANSACTIONS

9.1 The following shall be in addition to the provisions contained in the Finance Companies (Lending) Direction, No. 1 of 2007 and the Finance Companies (Business Transactions with Directors and their Relatives) Direction, No. 2 of 2007 or Such other directions that shall repeal and replace the said directions from time to time.

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) A subsidiary of the finance company;b) Any associate company of the finance company;c) A director of the finance company;d) A key management personnel of the finance company;e) A relative of a director or a key management personnel of

the finance company;f) A shareholder who 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

a relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance company, has substantial interest.

Complied withA Board approved process is in place to ensure that the Company does not engage in related party transactions as defined in this direction and to enable Directors to take measures to avoid a conflict of interest.

Transactions with related parties are made with the sanction of the Board subject to such transactions being in the normal course of business.

Further, Directors are individually requested to declare their transactions with the Company at each Board Meeting and in the Annual Declaration.

A Board approved procedure is in place to ensure that the Directors and the CEO make relevant disclosures in a timely manner, in the event they make an acquisition or disposal of shares in the entity, to facilitate disclosure.

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.

Complied withThe Board appointed a Related Party Transaction Review Committee comprising the following membership:

Mr. U H E Silva - Committee Chairman/Independent Non- Executive DirectorMr. L Jayaratne - Independent Non-Executive DirectorMr. T Sanakan - Independent Non-Executive DirectorMr. D M D K Thilakaratne – Executive Director/CEO

The following personnel are invited to participate at these meetings and recommend such facilities:Mr. P D J Fernando - Independent Non-Executive DirectorMrs. R.R.D.D Punsara - Head of Finance Mr. O de Silva – Head of Treasury Mr. U Samarasinghe – Head of Credit Risk Management


Direction No.



The Committee was formed in order to adhere to the Code of BestPractice on Related Party Transactions (RPTs) issued by the Securities& Exchange Commission of Sri Lanka.During the financial year, the Committee has held four meetings.

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 five 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.

Complied withThe Directors confirm that any related party transaction entered into is compliant with the relevant rules of the Code of Best Practice on Related Party Transactions issued by The Securities & Exchange Commission of Sri Lanka. Where necessary, disclosures are made on the Colombo Stock Exchange.

The Company will further strengthen the favourable treatment monitoring mechanism by implementing an on-line system.

For further details, please refer reporting pages 136 and 138.

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 withThe Financial Statements are prepared in accordance with the Sri Lanka Accounting Standards (SLFRSs/LKASs) and formats prescribed by the regulators.

Annual Financial Statements are disclosed in the Annual Report; biannual (unaudited) Financial Statements are published in newspapers in all three languages (Dinamina/ Daily Mirror/Thinakaran News Papers) and the quarterly statements are posted on the CSE website.

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.

Complied withPlease refer the Directors’ Report on pages 55 to 57.



Direction No.



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.

Complied withPlease refer the Directors’ Statement on Internal Controls on Page 64 and 65

c. The external auditor’s certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after 31st March 2010.

Complied withThe Company has obtained a certification on the effectiveness of the internal controls over financial reporting from M/s KPMG, Chartered Accountants.

Please refer page 66 for the report.

d. Details of directors, including names, transactions with the finance company.

Complied withDirectors’ names and details are given in pages 8 and 9.Transactions with Directors during the year are as follows.• Remuneration paid - Rs. 24,929,000/-• Accommodations granted - Nil • Deposits with the Company - Rs. 107,000,000/-• Interest for the year - Rs. 25,159,820/10

e. Fees/remuneration paid by the finance company to the Directors in aggregate, in the Annual Reports published after 01st January 2010.

Complied withRemuneration paid amounted to - Rs. 24,929,000/-

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.

Complied withNet accommodations granted to each category of related parties as a percentage of capital funds of the Company at the year-end was 11.47%. (Disclosed on pages 136 and 137)

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.

Complied with• Remuneration paid - Rs. 33,607,354/-• Accommodations granted - Nil• Deposits with the Company - Rs. 6,381,263/89• Interest for the year - Rs. 656,638/71

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.

Complied withStatus of compliance with prudential requirements, regulations and laws are in the Directors’ Report set out on pages 55 to 57.

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.

Complied withThere were no significant supervisory concerns/lapses in the Company’s risk management and compliance with this direction to be directed by the Monetary Board to be disclosed to the public.

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 01st January 2011.

Complied withThe Company has obtained a report on factual findings from the External Auditors on the Company’s level of compliance with the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board.


Sec. No. Rules of the Colombo Stock Exchange CLC’s Level of Compliance

7.10 Corporate Governance Statement confirming that as at the date of the Annual Report that the Company is in compliance with these rules.

The Company is in compliance with the listing rules of the Colombo Stock Exchange, except for the requirements relating to the Minimum Public Float.

7.10.1 Non-Executive DirectorsThe Board of Directors of a listed entity shall include at least: two Non-Executive Directors; or such number of Non-Executive Directors equivalent to one-third of the total number of Directors whichever is higher.

Complied withAs at 31st March 2020 the Board comprised five directors of whom four were Non-Executive Directors.

7.10.2 Independent DirectorsWhere the Constitution of the Board of Directors includes only two Non-Executive Directors in terms of 7.10.1, both such Non-Executive Directors shall be independent. In all other instances two or 1/3rd of the no Executive Directors appointed to the Board, whichever is higher shall be independent.

Complied withAs at 31st March 2020 the Board comprised four Independent Directors from whom signed declarations of independence were obtained.

7.10.3-4

a.

b.

c.

d.

Disclosures Relating to DirectorsThe Board shall make a determination annually as to the independence or non-independence of each director based on such declaration and other information available to the board and shall set out in the annual report the names of directors determined to be ‘independent’.

In the event a director does not qualify as ‘independent’ against any of the criteria set out below but if the board, taking account all the circumstances, is of the opinion that the director is nevertheless ‘independent’, the board shall specify the criteria not met and the basis of its determination in the annual report.

In addition to disclosures relating to the independence of a director set out above, the board shall publish in its annual report a brief resume of each director on its board which includes information on the nature of his/her expertise in relevant functional areas.

Upon appointment of a new director to its board, the Entity shall forthwith provide to the Exchange a brief resume of such director for dissemination to the public. Such resume shall include information on the matters itemized in paragraphs (a), (b) and (c) above.

Complied with

Declarations of Independence from the four directors were assessed by the full Board.

The Board has reviewed and satisfied itself of the independent status of these non-executive directors whose names are disclosed in the Directors Report on page 55

Please refer directors’ profiles on pages 8 and 9

The Company complies with this requirement, in the event a new Director is appointed to the Board.

7.10.5

(a)

Remuneration CommitteeCompositionShall comprise of a minimum of two Independent Non-Executive Directors or of Non-Executive Directors a majority of whom shall be independent, which ever shall be higher.

Complied withAs at 31st March 2020 the Committee comprised two Independent Non-Executive Directors.

(b) Functions The Remuneration Committee shall recommend the remuneration payable to the executive directors and Chief Executive Officer of the Listed Entity and/or equivalent position thereof, to the board of the Listed Entity which will make the final determination upon consideration of such recommendations.

The Committee periodically reviews Board remuneration and makes recommendations to the Board.




(c) Disclosure in the Annual ReportThe annual report should set out the names of directors (or persons in the parent company’s committee in the case of a group company) comprising the remuneration committee, contain a statement of the remuneration policy and set out the aggregate remuneration paid to executive and non-executive directors.

The Committee comprises Independent Non-Executive Directors, Mr P D J Fernando and Mr L Jayaratne.

The Committee is guided by the Board approved Remuneration Policy.

The aggregate remuneration paid to executive and non-executive directors is disclosed in the Directors Report on page 55

7.10.6(a)

(b)

(c)

Audit CommitteeCompositionShall comprise of a minimum of two independent Non-Executive Directors or of Non-Executive Directors a majority of whom shall be independent, which ever shall be higher.

FunctionsOverseeing of the preparation, presentation and adequacy of disclosures in the financial statements of a Listed Entity, in accordance with Sri Lanka Accounting Standards.

Overseeing of the Entity’s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements.

Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate, to meet the requirements of the Sri Lanka Auditing Standards.

Assessment of the independence and performance of the Entity’s external auditors.

To make recommendations to the board pertaining to appointment, re-appointment and removal of external auditors and to approve the remuneration and terms of engagement of external auditors.

Disclosure in the Annual ReportThe names of the directors (or persons in the parent company’s committee in the case of a group company) comprising the audit committee should be disclosed in the annual report.

The committee shall make a determination of the independence of the auditors and shall disclose the basis for such determination in the annual report.

The annual report shall contain a report by the audit committee, setting out the manner of compliance by the Entity in relation to the above, during the period to which the annual report relates.

Complied with

As at 31st March 2020 the Committee comprised Four Independent Non-Executive Directors.

The Committee is guided by a board approved Audit Committee Charter which includes the functions of those listed here.

The Committee comprises Independent Non Executive Directors Mr P D J Fernando, Mr L Jayaratne, Mr U H E Silva and Mr T Sanakan, while Mr Fernando serves as the Committee Chairman.

The Committee has made this determination. Please refer the Committee report on page 58



7.13.1 (b) Minimum Public Holding RequirementDisclosure in terms of rule 7.13.02 of the Listing Rules of the Colombo Stock Exchange (‘CSE”)

Not CompliedIn accordance with the requirements of the above rule, we provide below the following details as at 31st March 2020:

The Company is not compliant with the Minimum Public Holding Requirement stipulated in CSE Rule 7.13.1 (b). Please refer Directors Report on Page no. 56 for more details.

The Public Holding percentage is 0.45%.

The number of Public Shareholders are 1,073.

The Float Adjusted Market Capitalization is Rs.52mn.

The Company has been transferred to the Second Board with effect from 15th November 2019.

9.2.2-9.2.4 Related Party Transactions Review CommitteeThe Committee should comprise a combination of Non-Executive Directors and Independent Non-Executive Directors. The composition of the Committee may also include Executive Directors, at the option of the Listed Entity. One Independent Non-Executive Director shall be appointed as Chairman of the Committee.

Disclosures in the Annual Reporta) Non-recurrent Related Party Transactions if aggregate

value exceeds 10% of the equity or 5% Total assets whichever is lower.

b) Recurrent Related Party Transactions – If aggregate value exceeds 10 % Gross/income as in the latest audited accounts.

c) The Annual report shall contain a Report of the Related Party Transactions Review Committee in the prescribed manner.

d) A declaration by the Board of Directors as an affirmative statement of the compliance with the rules pertaining to related party transactions:

Complied with As at 31st March 2020, the Committee comprised three Independent Non-Executive Directors, one of whom serves as the Chairman and one Executive director.

Functions of the Committee and details of meetings held are included in the Committee Report on page 62

a) Please refer note No. 42.3 of page No. 138

b) Please refer note No. 42.4 of page No. 138

c) Please refer Committee Report on page No. 62

d) Please refer the Directors Report on pages 55 to 57



Vision Mission

Board of Directors

Board Sub Committees

Management Committees

Inputs

Governance

RPTRC

EMC

Capital Management

Portfolio Management

BU Strategy

Product and Service Solutions

Customer Relationships IT

BAC

ALCO

IRMC

ECC

NC

ITSC

Values

Financial Capital

Human Capital

Intellectual Capital

Corporate Governance

& Operational Model - CLC


MEMBER ATTENDANCE AT MEETINGSBOARD MEETINGS

Name of the Director IN NI EX NEX Date of appointment

Meeting dates Total

29/0

4/20

19

24/0

5/20

19

24/0

6/20

19

29/0

7/20

19

29/0

8/20

19

30/0

9/20

19

30/1

0/20

19

25/1

1/20

19

16/1

2/20

19

27/0

1/20

20

11/0

2/20

20

18/0

3/20

20 12

Mr. P D J Fernando 30/03/2012 12

Mr. L Jayaratne 22/03/2017 12

Mr. U H E Silva 09/10/2017 12

Mr. T Sanakan 23/05/2018 - 11

Mr. D M D K Thilakaratne 06/03/2012 12

EX Executive Director NEX Non-Executive DirectorIN Independent Director NI Non-Independent Director

AUDIT COMMITTEE MEETINGS

Name of the Director Meeting Dates Total05

24/05/2019 23/07/2019 19/09/2019 28/10/2019 11/02/2020

Mr. P D J Fernando 05

Mr. L Jayaratne 05

Mr. U H E Silva 05

Mr. T Sanakan 05

Mr. D M D K Thilakaratne – by invitation 05

Mrs. N Kariyawasam (HOF r.w.e.f 31.10.2019) – by invitation - 04

Mrs. R.R.D.D Punsara (HOF a.w.e.f 01.06.2020) – by invitation - - 03

REMUNERATION COMMITTEE MEETINGS

Name of the Director Meeting Date18/03/2020

Total01


Mr. L Jayaratne 01



INTEGRATED RISK MANAGEMENT COMMITTEE MEETINGS

Name of the Director/ Committee Member Meeting Dates Total04 16/05/2019 07/08/2019 13/11/2019 05/03/2020

Mr. L Jayaratne 04

Mr. U H E Silva 04


Mr. D M D K Thilakaratne - 03

Mrs. N Kariyawasam (r.w.e.f. 31.10.2019) - - 02

Mrs. R.R.D.D Punsara - - 02

Mr. N Weerapana 04

Mr. T Indrapala - 03

Mr. U Samarasinghe - 03

Mr. O de Silva - 03

Mr. P Karandagolla - 03

Mr. T Kaushalya 04

Mr. S Amarasekera - - 02

Mrs. C Rodrigo 04

Mr. R Hewage 04

Mr. T Sanakan - by invitation 04

NOMINATION COMMITTEE MEETINGS

Name of the Director Meeting Dates18/03/2020

Total01


Mr. L Jayaratne 01

RELATED PARTY TRANSACTION REVIEW COMMITTEE MEETINGS

Name of the Director Meeting Dates Total0424/05/2019 23/07/2019 28/10/2019 11/02/2020

Mr. U H E Silva 04

Mr. L Jayaratne 04

Mr. T Sanakan 04

Mr. D M D K Thilakaratne 04

Mr. P D J Fernando - by invitation 04


ENTERPRISE RISK MANAGEMENT

Commercial Leasing & Finance PLC (CLC) comes under the financial sector of LOLC Group and requires a high degree of regulatory compliance with regard to risk management. Risk management and the internal audit functions at CLC is an independent function with the enterprise risk management unit having its reporting line to the Board of Management via the integrated Risk Management Committee (IRMC) and the Board Audit Committees (BAC) of CLC.

IRMC & BAC are board level subcommittees headed by Non-Executive Independent Directors. IRMC reviews the Company’s risk management policy and framework, which covers all the major risks; namely financial risk, Operational risks, and business risk, before proposing them to the Board of Directors for approval. IRMC assists in formulating risk management strategies and framework in compliance with the Company’s risk management policy. The Committee assess, monitor and control risks at the appropriate level in accordance with the risk appetite of the company. Further IRMC assist to review the adequacy and effectiveness of risk management policy and system as well as compliance with the established policy. The IRMC reports at least quarterly to the Board of Directors on the risk management, operation, changes and areas of improvement to ensure the compliance of the Company’s policy and achievement of strategy.

The Board Audit Committee facilitates oversight of the financial reporting process, the audit process and compliance of the company's system of internal controls to the prevailing laws and regulations.

The above risk governance process allows the Board of Management to have direct oversight over the enterprise risk management division and ensures they evaluated the organisational risks and internal controls in an independent and impartial manner. Thereby the board can reach a high level of confidence on the internal controls and the risk governance structures by evaluating their reliability, consistency and effectiveness.

The Annual Audit plan and the risk management plans are approved by the Audit Committee and the IRMC respectively, ensuring the adequacy of the scope and monitors the progress of the same on a quarterly basis. The human capital requirement to fulfil the annual plan is evaluated and managed.

The risk governance structures at CLC consist of Board of Directors, IRMC & BAC which are sub committees of the board, Executive Credit Committee, ALCO and IT Steering Committee which are Executive committees and Enterprise Risk Management Division. The Enterprise Risk Management Department (ERM) consists of Risk Management, Internal Audit and IS Audit functions. Risk management focuses on the probable risks, its impact and mitigation strategies while the internal audit function focuses on the adequacy, effectiveness, consistency and the reliability of the internal control framework in place to manage the risks. The information systems audit functions play a supporting role to both the internal audit and the risk management in evaluating the information and cyber related risks to the organisation. The synergy between the risk and audit functions ensures efficient deployment of resources based on risk factors and that all required risk mitigation structures are working as intended.

Risk Governance Structure; Commercial Leasing & Finance PLC

Board of Directors

Board Sub Committees

Executive Credit

Committee

Integrated Risk Management Committee

ALCO Board Audit Committee

IT Steering Committee

CEO & Executive Committees

Enterprise Risk Mgt Division


The risk management function identifies risks with a reasonable probability to affect the realisation of objectives. The risk identification takes place at different levels of the organisation, mainly at the process owners level and by focused risk assessments carried out by the risk management function. This is supplemented by the risks identified by the audit function in its reviews. To strengthen the above process compulsory reporting lines are established from each business and service silo to the ERM department to which all units reports on a monthly basis of perceived risks covering a broader entity level risk spectrum. These reports are further analysed by ERM for impact and reported to the board on a monthly basis. Any material risks which are identified are immediately informed to the CEO and the respective risk owners by way of risk information escalations, so mitigation action can be taken promptly. In addition to the aforesaid quarterly reporting, the Integrated Risk Management Committee (IRMC) focuses on emerging material risks and identified monitored risks against key risk indicators defined by the Board and other risk indicators monitored by ERM for potential adverse movements.

Integrated Risk Management Committee (IRMC) evaluates the possible impacts and in line with the mitigation action proposed by ERM consults risk owners and decide on the best possible risk mitigation strategies and comfortable levels of expected risk. The Board of Management is kept informed of all activities of the IRMC via a Board communication with in seven days of the quarterly IRMC meeting.

We firmly believe on our vision in risk management, “Building an organisational Culture where Protection, Assurance, Reliability, Accountability, Transparency and Confidentiality are treasured and lasting values”, and have identified that creating awareness of risk and response at all levels of staff is the key to a successful risk

management programme. In pursuant of this strategy enterprise risk management department engages in a consultative capacity in new product, service developments and business process formulations to ensure that product, process and service risks are adequately addressed. In addition, ERM conducts in house training for staff on risk and controls.

A Risk based auditing approach is practiced when carrying out Branch Audits, Process Audits and Continuous audits. ERM auditors are based in the branches and review the branches as well as engage in field reviews of Micro-finance operation. In addition, all these audits are supported by IT audits in reviewing corresponding IT controls supplemented by the planned Information system audits conducted by the IS Audit unit which finally gives a reasonable assurance on adequacy and reliability of IT controls. All new major system developments and deployments also are scrutinised by the IS Audit function for application and general controls.

The availability of the corporate whistle blower hotline facilitates employees to report any irregularity or suspicious activities that they are aware of in respect of the organisation, its activities and employees. This hotline is operated by ERM and any information provided are treated confidentially.

As risk management is a dynamic and evolving function and adaptation to the global trends and economic environment is essential. We firmly believe that in order to adopt to the volatile business environment updating and maintaining of diverse skills and knowledge covering all aspects of CLC is a pre-requisite.

ERM staff are trained both internally and externally to enable effective risk management within the organisation. This has accelerated the risk management maturity, improvement in the team’s ability to respond to risks as well as the effective use of risk management tools with elevated confidence.

RISK PROFILE The following is based on the perceived risk and is a high level categorisation used only for the illustration purposes of this report.

Risk Levels Risk Score Very High 5 High 4Medium 3 Low 2Very Low 1


BUSINESS RISKS

Legal Risk

Systemic Risk

Image Risk

Industry Risk Policy Risk

Financial Infrastructure Risk

5

4

3

2

1

0

FINANCIAL RISKS

Currency Risk

Market Risk

Liquidity Risk

Credit Risk

Capital Adequacy Risk

Profitability& Income Risk

Asset & Liability Risk

Interest Rate Risk

5

4

3

2

1

0

Technology Risk

Business Strategy Risk

Internal Systems &Operational Risk

Mismanagement &Fraud Risk

OPERATIONAL RISKS

5

4

3

2

1

0

EVENT RISKS

Disaster Management & Business Risk

Political Risk

Contagion Risk

Exogenous Risk

543210

ENTERPRISE RISK MANAGEMENT


REPORT OF THE BOARD OF DIRECTORS

The Directors of Commercial Leasing & Finance PLC (CLC) have pleasure in presenting their Annual Report together with the Audited Financial Statements for the year ended 31st March 2020.

PRINCIPAL ACTIVITIES AND NATURE OF OPERATIONSCLC is a Licensed Finance Company in terms of the Finance Business Act No. 42 of 2011. The Company is also a registered finance leasing establishment in terms of the Finance Leasing Act No. 56 of 2000.

During the year the principal activities of the Company comprised provision of leasing, loans, receivable financing, mobilising of fixed and savings deposits, Islamic financing, micro financing and gold loans.

MARKETS SERVEDThe Company operates in all provinces of Sri Lanka with the largest concentration of branches being in Western and North Central Provinces.

DIRECTORATEThe Directors during the year under review were as follows:

1. P D J Fernando Chairman/ Independent Non-Executive Director

2. L Jayaratne Independent Non- Executive Director

3. U H E Silva Independent Non- Executive Director

4. T Sanakan Independent Non- Executive Director

5. D M D K Thilakaratne

Executive Director/ CEO

RECOMMENDATIONS FOR RE-ELECTION OF DIRECTORSIn terms of Article 75 of the Articles of Association Mr L Jayaratne and Mr T Sanakan retire by rotation and being eligible offer themselves for re-election.

The Board recommends their re-election. The approval of the Central Bank of Sri Lanka (CBSL) has been obtained for these re-elections.

DIRECTORS INTERESTS IN CONTRACTSThe Directors have made the declarations required by the Companies Act No. 7 of 2007. These have been noted by the Board, recorded in the Minutes and entered into the Interest Register which is maintained by the Company.

Lists of companies on which these Directors serve have been included on page 57.

DIRECTORS’ REMUNERATIONThe Company paid Rs. 24,929,000/- as Directors’ remuneration for the financial year ended 31st March 2020.

The Company has a Board approved Remuneration Policy. This policy stipulates that remuneration should be linked to competence and contribution, while serving to incentivise and motivate. This policy has been taken into account when determining remuneration for both staff and Directors.

DIRECTORS SHAREHOLDING

Directors Name As at 31.03.2020

As at 31.03.2019

1. Mr. P D J Fernando

Nil Nil

2. Mr. L Jayaratne Nil Nil

3. Mr. U H E Silva Nil Nil

4. Mr. T Sanakan Nil Nil

5. Mr. D M D K Thilakaratne

Nil Ni

STATED CAPITAL AND DEBENTURESThe stated capital of the Company is Rs. 1,425,946,629/- divided into 6,377,711,170 shares. The details of the Debentures in issue as at 31st March 2020 are set out in Note 31.3 to the Financial Statements on page 129.

MEETINGS OF THE BOARD OF DIRECTORSTwelve regular monthly Board meetings were held during the year. A schedule of Directors’ attendance at Board Meetings and Sub Committee Meetings has been included on pages 50 and 51.

CORPORATE GOVERNANCECLC is governed by the requirements of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 and the Listing Rules of the Colombo Stock Exchange and subsequent amendments thereto. The manner in which CLC ensures adherence with the above requirements has been disclosed on pages 25 to 51.

BOARD SUB COMMITTEESIn compliance with regulatory guidelines and also with best practices, the Board has formed the following sub committees:

• The Audit Committee

• The Integrated Risk Management Committee

• The Remuneration Committee

• The Related Party Transaction Review Committee

• The Nomination Committee

These Committees assist the Board with its role of oversight of the Company’s performance and conformance. Minutes of the meetings of these Committees are tabled at the next Board meeting, enabling the Board to benefit from the focused review of these Committees on the areas and issues within their purview. These subcommittees have met quarterly or as and when necessary.

The Reports of these Committees can be found on pages 55 to 63.

The Company has the following management level Committees to manage matters relating to credit, liquidity, collections and operational level planning and risk management:

• Credit Committee

• Asset Liability Committee

• Executive Management Committee

COMPLIANCE WITH LAWS AND REGULATIONSThe Company has not engaged in any activity that contravenes any applicable law or regulation, and to the best of the knowledge


of the Directors, the Company has been in compliance with all prudential requirements, regulations and laws.

MINIMUM PUBLIC FLOAT RULES OF COLOMBO STOCK EXCHANGEThe Company is compliant with the Listing Rules of the Colombo Stock Exchange (CSE) with the exception of the requirements relating to the Public Float under rule 7.13.1.b. Please refer page 48 for further details.

Consequently, the Company was transferred to the Watch List in July 2018 and thereafter to the Second Board of the CSE on 15th November 2019.

Having evaluated available options, the Board of Directors propose to list debt securities instead of equity securities subject to requisite regulatory approvals, to ensure that the Company is not in violation of the Listing Rules of the CSE while complying with requirements of the CBSL.

ASSOCIATE COMPANIESLOLC DEVELOPMENT FINANCE PLCThe Company holds 44.34% of the issued share capital of LOLC Development Finance PLC (LODF) as at 31st March 2020. LODF caters to the lowest end of the micro lending segment in the country. LODF has presently enhanced its micro portfolio to include individual customised solutions such as SME loans, home improvement loans and leasing.

COMMERCIAL INSURANCE BROKERS (PRIVATE) LIMITED The Company holds 40% of the equity of Commercial Insurance Brokers (Private) Limited (CIB). Mr D M D K Thilakaratne and Mr N Weerapana have been nominated to its Board by the Company. During the past 32 years CIB has been engaged in the business of life and general insurance. It is one of the premier insurance broking firms in the country.

EVENTS AFTER THE REPORTING DATENo circumstances have arisen since the reporting date that would require disclosure.

HUMAN RESOURCESThe total staff strength of the Company as at end March 2020 was 1,407 (2019 – 1,348).

No material issues pertaining to employees or industrial relations of the Company occurred during the year under review which required disclosure under Rule 7.6 (Vii) of the Listing Rules of the CSE.

GOING CONCERNThe Directors after making necessary inquiries have the expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Therefore, the going concern basis has been adopted in the preparation of the Financial Statements.

FINANCIAL STATEMENTS & AUDITOR’S REPORT AND DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTINGThe Financial Statements and the Auditor’s Report are given on pages 69 to 157.

The Directors are responsible for the preparation of Financial Statements of the Company to reflect a true and fair view of the state of its affairs. The Directors are of the view that the financials have been prepared in accordance with the requirements of the Sri Lanka Accounting Standards, the Companies Act, No. 7 of 2007, the Finance Business Act, No. 42 of 2011 and all relevant directions of the Central Bank of Sri Lanka.

SIGNIFICANT ACCOUNTING POLICIESThe Accounting Policies adopted in the preparation of the Financial Statements and any changes thereof where applicable have been included in the Notes to the Financial Statements on pages 84 to 157.

TRANSACTIONS WITH RELATED PARTIESIn terms of LKAS 24, the Directors have disclosed transactions which are classified as related party transactions.

The aggregate value of transactions as defined in LKAS 24 with the Company are set out in Note 42.3 on page 138.

The Board confirms that the Company has not engaged in transactions with any related party in a manner that would grant such party more favourable treatment than that offered to other clients of the Company.

The Directors declare that the Company is in compliance with Section 9 of the Listing Rules of the Colombo Stock Exchange pertaining to Related Party Transactions during the financial year ended 31st March 2020.

INTERNAL CONTROLSThe Enterprise Risk Management Division regularly reviews all aspects of operations, including controls, and compliance with relevant regulations. These reports are taken up for discussion by the Audit Committee or the Integrated Risk Management Committee as appropriate.

The Board could also seek the support of the external auditors to review and advise on any improvements needed to existing controls.

The Risk Management Report is on pages 52 to 54.

STATUTORY PAYMENTSFor the year under review, all known statutory payments have been made and all retirement gratuities have been provided for. Further, all management fees and payments to related parties for the year under review have been reflected in the accounts.

AUDITORSM/s KPMG, the Auditors of the company retire and offer themselves for reappointment. The Board recommends their re-appointment for the year 2020/2021 at a fee to be decided upon by the Board.

Auditor’s remuneration is given in the Audited financial statements on page 104.

As far as the Directors are aware, the Auditors do not have any other relationship with the Company or any of its subsidiaries nor do they have any interest in contracts with the Company or any of its subsidiaries.

REPORT OF THE BOARD OF DIRECTORS


ANNUAL GENERAL MEETINGThe 28th Annual General Meeting of the Company will be held on Monday, 30th November 2020 at 10.00 a.m. as an on-line audio-visual meeting with arrangements for the on-line meeting platform made at the L O L C Holdings PLC, No.100/1, Sri Jayawardenapura Mawatha, Rajagiriya.

For and on behalf of the Board of Directors of Commercial Leasing & Finance PLC.

D M D K ThilakaratneDirector/ CEO

P D J FernandoChairman

30th June 2020Colombo 04

Name Directorships held

P D J Fernando Chairman:Commercial Leasing & Finance PLCGolden Key Credit Card Company

Deputy Chairman:Union Bank of Colombo PLC

Director:Ambeon Capital PLC Golden Key Hospitals LtdThomas Cook Travels Sri Lanka Imperial Institute of Higher Education (Pvt) LtdMillennium Information Technologies (Pvt) Ltd

L Jayaratne Director:Commercial Leasing & Finance PLC

U H E Silva Director:Commercial Leasing & Finance PLC

T Sanakan Director:Commercial Leasing & Finance PLCAssociated Battery Manufactures (Ceylon) Ltd Browns Pharma LtdBrowns Pharmaceuticals Ltd Browns Health Care Negombo (Pvt) LtdBrowns Leisure (Pvt) LtdSnowcem Products Lanka (Pvt) LtdKlevenberg (Pvt) Ltd

D M D K Thilakaratne Director:Commercial Leasing & Finance PLC Seylan Bank PLCCredit Information Bureau of Sri Lanka (CRIB)Commercial Insurance Brokers (Pvt) Ltd Commercial Factors (Pvt) LtdLOLC Myanmar Micro Finance Company LimitedPrasac Microfinance Institution Limited, Cambodia (r.w.e.f. 10.04.2020)


REPORT OF THE AUDIT COMMITTEE

COMPOSITIONThe Audit Committee was established for the purpose of assisting the Board in fulfilling their responsibilities relating to financial governance. The Committee comprises the following members:

Mr. P D J Fernando Committee Chairman/ Independent Non-Executive Director

Mr. L Jayaratne Independent Non-Executive Director

Mr. U H E Silva Independent Non-Executive Director

Mr. T Sanakan Independent Non-Executive Director

The Audit Committee Chairman counts thirty five years’ experience at the Central Bank where he rose to the position of the Deputy Governor. He was the Deputy Governor of the Central Bank in 2010-2011, in charge of the Financial System Stability and the Corporate Services clusters. Mr. Fernando has extensive experience and expertise in the fields of Banking and the Financial Sector, particularly at the policy making levels in financial regulation and supervision, Information technology, national accounting, macro-economic analysis and statistics. At the Central Bank, he was the Chairman of the Financial Stability Committee, member of the Monetary Policy Committee, member of the Risk Management Committee and Chairman of the National Payment Council. He also functioned as the Secretary to the Monetary Board during 2008/2009. He was an ex- officio board member in several regulatory organisations namely the Securities and Exchange Commission, the Insurance Board of Sri Lanka, the Chairman of the Credit Information Bureau, Institute of Bankers–Sri Lanka and has also served as a Board Member at Employees’ Trust Fund, Lanka Clear (Pvt) Ltd and Lanka Financial Services Bureau.

TERMS OF REFERENCEThe Audit Committee is governed by the Audit Charter which defines its Terms of Reference. The composition of the Committee meets the requirements set out in the Finance Companies Corporate Governance Direction No. 3 of 2008 and the Listing Rules of Colombo Stock Exchange. The Committee Charter was last reviewed and revised by the Board in July 2020.

The Committee has been mandated to ensure that a sound Financial Reporting System is established by reviewing the appropriateness of procedures in place for the identification, evaluation and management of business risks ensuring that internal controls relating to all areas of operations including Human Resources and IT, enhance good governance while not impeding business, seeking assurance that agreed control systems are in place and operating efficiently and are regularly monitored to ensure that appropriate controls are put in place prior to the implementation of significant business changes, facilitating monitoring of the changes reviewing internal and external audit functions and ensuring compliance with applicable laws, regulations, listing rules and established policies of the Company.

INTERNAL AUDITThe internal audit provides independent and objective assurance in respect of the adequacy of the design and operative effectiveness of the framework for risk management, internal control governance process across the Company, focusing on areas of greatest risk using a risk based approach. The Executive Management is responsible for ensuring that recommendations made by the Internal Audit are implemented within an appropriate and agreed time table.

ACTIVITIES OF THE COMMITTEEDuring the year the Committee reviewed interim and annual financial statements prior to publication, checking and recommending changes in accounting policies, significant estimates and judgments made by the management, compliance with relevant accounting standards/regulatory requirements, and issues arising from internal and external audit.

Effectiveness of the Company’s internal controls was evaluated through reports provided by the Management, and by the Internal and External Auditors. The Committee is satisfied that an effective system of internal control is in place to provide the assurance on safeguarding the assets and the integrity of financial reporting. On behalf of the Audit Committee, the Internal Auditor performs a comprehensive exercise that entails reviewing of all aspects of MIS including operational and regulatory risks.

The Committee addressed the External Auditor’s findings reported in the Management Letter relating to the previous financial year’s (2018/19) audit.

The Committee reviewed the independence and objectivity of the External Auditors, M/s KPMG, Chartered Accountants and has received a declaration confirming that they do not have any relationship or interest in the Company as required by the Companies Act No. 7 of 2007. The Audit Committee has determined that the External Auditors are in fact independent as:

- they are not engaged in providing any non audit services to the Company; and

- the fees charged for audit assignments are not significant to impair their judgement/independence.

In accordance with good governance initiatives, Audit Partner rotation is practiced every 5 years and the need for Auditor rotation is considered every 7 years.


The Committee meets quarterly; and additional meetings are held as and when a need arises. The CEO and the Head of Finance were present at all five meetings. The Audit Partner was invited to attend three such meetings and on two occasions the auditors were able to meet with the Audit Committee members without the presence of the other Directors and members of the Management.

MEETINGSFive meetings were held during the year and the members’ attendance at Audit Committee meetings is provided on page 50. Minutes of such meetings which include details of matters discussed are reported regularly at Board meetings.

P D J FernandoChairmanAudit Committee

Colombo30th June 2020


REPORT OF THE INTEGRATED RISK MANAGEMENT COMMITTEE

COMPOSITIONThe Integrated Risk Management Committee (IRMC) was established to assist the Board in performing its oversight function in relation to the risk management framework of the Company. The Committee comprises the following members:

Mr. L Jayaratne Committee Chairman/ Independent Non-Executive Director

Mr. P D J Fernando Independent Non-Executive Director

Mr. U H E Silva Independent Non-Executive Director

Mr. D M D K Thilakaratne Executive Director/CEO

Mrs. C Rodrigo Senior Manager-Enterprise Risk Management

Mr. N Weerapana Head of Recoveries

Mrs. R.R.D.D Punsara Head of Finance

Mr. U Samarasinghe Head of Credit Risk Management

Mr. P Karandagolla Head of Channels

Mr. O De Silva Head of Treasury

Mr. T Indrapala Head of Operations

Mr. T Kaushalya Head of Savings & FDs

Mr. S Amarasekera Head of IT

Mr. R Hewage Compliance officer

TERMS OF REFERENCEThe IRMC has adopted the provisions of Section 8 (3) of the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board of the Central Bank of Sri Lanka as its Terms of Reference (TOR). In November 2019, the IRMC revamped the provisions therein in order to strengthen its adequacy and effectiveness. The composition and the scope of work of the Committee are in conformity with its TOR.

ACTIVITIES OF THE COMMITTEEThe Committee is responsible for identifying, assessing and managing broad risk categories, i.e., credit, market, liquidity, operational and strategic risks through risk indicators reviewing 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 taking prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the Company’s policies taking appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions; and establishing a compliance function to assess the Finance Company’s compliance with laws, regulations, directions, rules, regulatory guidelines, internal controls and approved policies on all areas of business operations.

The Committee works closely with the key management personnel and the Board in fulfilling its duties in risk management. Credit, operational, market and liquidity risks were monitored by Divisional Heads and reported to ERM on a monthly basis. These risks were then reviewed and assessed monthly by the Senior Manager - ERM and summarised reports were submitted to the Board Monthly and quarterly to the Committee for concurrence and/or specific directions in order to ensure that the risks are managed appropriately. As delegated by the Committee, the Senior Manager ERM submitted a risk assessment report to the Board, subsequent to each meeting within a week of each meeting, stating the risk mitigation actions pursued and seeking the Board’s

views. In addition, proceedings of meetings were also tabled at a subsequent meeting of the Board. During the year, the Committee met four times on a quarterly basis.

The attendance of members at meetings is stated on page 51.

L JayaratneChairmanIntegrated Risk Management Committee



REPORT OF THE REMUNERATION COMMITTEE

COMPOSITIONThe Remuneration Committee was established to assist the Board in evaluating and recommending remuneration for Board members. The Committee comprises the following members:

Mr. P D J Fernando Committee Chairman/ Independent Non- Executive Director

Mr. L Jayaratne Independent Non-Executive Director

TERMS OF REFERENCEThe Remuneration Committee is governed by its Remuneration Policy which has vested it with powers to evaluate, assess and recommend to the Board for approval any fee, remuneration and ex-gratia to be paid out to its Directors including the Chief Executive Officer based on the need of the Company to be competitive, the need to attract motivate and retain talent and the need to encourage and reward high levels of performance and achievement of corporate goals and objectives. The Remuneration policy was last reviewed in January 2020.

ACTIVITIES OF THE COMMITTEEThe Committee is responsible for determining the remuneration policy relating to the Director/CEO periodically evaluating the performance of the Director/CEO against the set targets and goals and determining the basis for revising remuneration, benefits and other payments of performance based incentives; determining the Remuneration Policy relating to Executive and Non- Executive Directors and recommending these to the Board for adoption. All independent Directors receive a fee for attending Board meetings and Committee meetings. They do not receive any performance or incentive payments. Directors’ emoluments have been disclosed on page 136 of the Annual Report.

The Committee considered the training needs and related budgets; market surveys and staff compensation; appraisal process and its link to compensation and promotion; and staff satisfaction surveys etcetera, during the year.

One Remuneration Committee meeting was held during the year under review and the members’ attendance at this meeting is provided on page 50. Proceedings of the meeting was also tabled at a subsequent meeting of the Board.

P D J FernandoChairmanRemuneration Committee



REPORT OF THE RELATED PARTY TRANSACTION REVIEW COMMITTEE

COMPOSITIONThe Related Party Transaction Review Committee was formed to comply with the related rules of the Colombo Stock Exchange. The Committee Comprises the following Members:

Mr. U H E Silva Committee Chairman/ Independent Non - Executive Director

Mr. L Jayaratne Independent Non - Executive Director

Mr. T Sanakan Independent Non - Executive Director

Mr. D M D K Thilakaratne

Executive Director/ CEO

TERMS OF REFERENCEThe Committee is governed by its Terms of Reference (TOR) which encompass the requirements stipulated under the Code of Best Practice on Related Party Transactions (RPTs) issued by the Securities and Exchange Commission of Sri Lanka; and Section 9 of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka (CBSL). The TOR was reviewed last in March 2019.

ACTIVITIES OF THE COMMITTEE BASED ON POLICIES AND PROCEDURESOn behalf of the Board, the Committee has established operational procedures consistent with its business model to ensure that all related party transactions of the Company are carried out in compliance with the provisions in its TOR and the Directions issued to Finance Companies by CBSL on Lending/Single Borrower Limits. The Committee also reviews these policies and procedures on an annual basis or when need arises.

Furthermore, the Company has implemented a system that enables the Company to capture and retrieve data on RPTs. This system generates comprehensive reports for management review and for quarterly review of the Committee reflecting all related party

transactions including expenses, income, lending and amounts outstanding.

The Committee has reviewed quarterly all recurrent and non-recurrent RPTs of the Company and was satisfied that such transactions had been carried out at market rates; and where applicable, the regulations of the CBSL, the guidelines of the CSE and the Sri Lanka Accounting Standards had been complied with in relation to approvals/reporting/ disclosure.

In its review, the Committee considers the nature of the transaction, terms, conditions, value aggregate value of transactions with related parties during the year and the statement of compliance signed off by KMPs in order to determine whether they are carried out at arm’s length. Reviewing and approval of RPTs are either at its quarterly meetings with a majority of the members present to form a quorum or by circulation consented to by a majority.

The Committee in discharging its functions ensures that all transactions are in the best interests of the Company; are in compliance with the directions of the CBSL and CSE whilst maintaining fairness and transparency.

During the year, the company did not have any related party transactions which required the approval of the shareholders or immediate market disclosure under the Listing Rules. The related party transactions and details are disclosed in note no. 42 on pages 136 to 138 of the financial statements.

A declaration by the Board of Directors as an affirmative statement of the Compliance with the Listing Rules pertaining to related party transactions is given on page 56 of this report

MEETINGSThe Committee held four meetings during the financial year. Information on the attendance of these meetings by the members of the Committee is given on page 51. The activities

and views of the Committee have been communicated to the Board of Directors quarterly through verbal briefings, and by tabling the minutes of the Committee’s meetings.

U H E SilvaChairmanRelated Party Transaction Review Committee



REPORT OF THE NOMINATION COMMITTEE

COMPOSITIONThe Nomination Committee has been set up to assist the Board in assessing the skills required and recommending nominees for election to the Board and its Sub- Committees to effectively discharge their duties and responsibilities. The Committee comprises the following members:

Mr. P D J Fernando Committee Chairman/ Independent Non- Executive Director

Mr. L Jayaratne Independent Non- Executive Director

TERMS OF REFERENCEThe Committee is governed by its Charter which defines its terms of reference. The Committee is responsible for assisting the Board in identifying qualified individuals to become Board members and determining the composition of the Board of Directors and its Sub-Committees; oversight of the evaluation of the Board and its Committees, as well as Senior Management of the Company, including succession planning; annually review the composition of each Sub-Committee and present recommendations/nominations for committee memberships to the Board; maintain records and minutes of meetings and activities of the Committee; perform any other activities consistent with this Charter. The Committee Charter was last reviewed in May 2020.

ACTIVITIES OF THE COMMITTEEDuring the year, the Committee assessed the composition of the Board and its Sub- Committees in terms of the requirements of the relevant regulations of the Central Bank of Sri Lanka and the Colombo Stock Exchange. Proceedings of meetings were also tabled at a subsequent meeting of the Board. One Committee meeting was held during the year under review and proceedings of the meeting were reported to the Board. Attendance of the Committee Members at meetings is on page 51.

P D J FernandoChairmanNomination Committee



DIRECTORS’ STATEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

RESPONSIBILITYIn line with the Finance Business Act No. 42 of 2011; Finance Companies (Corporate Governance) Direction No.03 of 2008; the Board of Directors presents this Report on Internal Control.

The Management is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for internal controls necessary to enable the preparation of financial statements that are free from misstatement whether due to fraud or error.

The Board of Directors (Board) is responsible for the adequacy and effectiveness of the internal control mechanism in place at Commercial Leasing and Finance PLC (‘the Company’). However, such a system is designed to manage the Company’s key areas of risk within an acceptable risk profile, to achieve the policies and business objectives of the Company. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud.

The Board has established an ongoing process for identifying, recording, evaluating and managing the significant risks faced by the Company and this process includes enhancing the system of internal controls as and when there are changes to the business environment or regulatory guidelines. The process is regularly reviewed by the Board and Board appointed sub committees.

The Board is of the view that the system of internal controls 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 and 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 is continuously in the process of enhancing

the documentation of the system of Internal Control over 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 Auditors of the Company for suitability of design and effectiveness on an ongoing basis.

Key features of the process adopted in applying and reviewing the Design and Effectiveness of Internal Control System on Financial ReportingThe key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following:

• The Board is assisted by the Board Sub Committees established by the board in ensuring the effectiveness of Company’s daily operations and that the Company’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved as required.

• The Internal Audit function of the Company checks for compliance with policies and procedures and the effectiveness of the internal control systems on an ongoing basis using samples and rotational procedures and highlight significant findings in respect of any non-compliance. Audits are carried out on all units and branches in accordance with the Annual Audit Plan recommended by Board Audit Committee and approved by the Board of Directors. The frequency of audit is determined by the level of risk assessed. Findings of the internal audit are submitted to the Board Audit Committee for review at their periodic meetings.

• The Board Audit Committee of the Company reviews internal control issues identified by the Internal Audit Division, regulatory authorities and management, and evaluates the adequacy and effectiveness of the risk management and internal control systems. They also review

the internal audit functions with particular emphasis on the scope of audits and quality of internal audits. The Minutes of the Board Audit Committee meetings are tabled at the meetings of the Board of Directors of the Company. Further, details of the activities undertaken by the Board Audit Committee of the Company are set out in the ‘Board Audit Committee Report’ which appears on pages 58 and 59.

• In assessing the internal control system, identified officers of the Company continued to review and update all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Company. The Internal Audit Department continued to verify the suitability of design and effectiveness of these procedures and controls on an ongoing basis.

• On 1st April 2019, the Company adopted SLFRS-16 which requires the recognition of right-of-use asset and the corresponding lease liability at the date of transition . The Company has reviewed all lease agreements existed and has quantified the impact on Financial Statements using a spreadsheet application. Necessary adjustments were incorporated in the financial statements for the year ended 31st March 2020. Formal policies and procedures relating to identifying applicable lease contracts, updating the database and testing the process by the internal audit is not implemented as at the date of this report and will be addressed on an ongoing basis from the ensuing financial year.

• The Company adopted SLFRS-9 –“Financial Instruments” with effect from 1st April 2018. SLFRS 9 replaced the “incurred loss” model as per LKAS 39 with the “expected credit loss” model. This new methodology had a significant impact on the Company's methodology on calculating the impairment losses for loans and advances existed as at the date of transition. The Company ensured that all required adjustment are made to the impairment calculation methodology of the Company with the implementation of SLFRS 9.


• The Board continuously monitored SLFRS 9 implementation process after a comprehensive assessment of the gaps and expected impact to the Financial Statements as a result of adopting SLFRS 9. The Board ensured the models developed to calculate the impairment provisions due to adoption of SLFRS 9 have been adequately tested and calibrated. All required adjustments as per SLFRS 9 are made with the necessary disclosures in the annual Financial Statements for the year ended 31st March 2020.

The Company continued to quantify the impairment provision as at 31st March 2020 based on the spread sheet application. However, the Company is in the process of automating the impairment calculation and expect to complete within the next financial year. The Company has commenced the documentation of procedures and policies relating to the quantification of impairment provision as per SLFRS 9 and expects to complete the same during the ensuing financial year.

• The comments made by the External Auditors in connection with internal control system during the financial year 2019/2020 were taken into consideration and appropriate steps taken to incorporate them where appropriate during the ensuing year.

CONFIRMATIONBased on the above processes, the Board of Directors confirm 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 has been done in accordance with the Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

REVIEW OF THE STATEMENT BY EXTERNAL AUDITORSThe External Auditors have reviewed the above Directors’ Statement on Internal Controls included in the Annual Report of the Company for the year ended 31st March 2020 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system over financial reporting of the Company.

By order of the Board.

Priyantha FernandoChairman

Krishan ThilakaratneDirector/CEO


AUDITORS’ ASSURANCE REPORT ON THE DIRECTORS’ STATEMENT ON INTERNAL CONTROL

THE BOARD OF DIRECTORS OF COMMERCIAL LEASING AND FINANCE PLC

REPORT ON THE DIRECTORS’ STATEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGWe were engaged by the Board of Directors of Commercial Leasing and Finance PLC (“the Company”) to provide assurance on the Directors’ Statement on Internal Control over financial reporting (“the Statement”) included in pages 64 to 65 of the annual report for the year ended 31st March 2020.

MANAGEMENT’S RESPONSIBILITYManagement is responsible for the preparation and presentation of the Statement in accordance with the “Guidance for Directors of Licensed Finance Companies on the Directors’ Statement on Internal Control” issued in compliance with the section 10 (2) (b) of the Finance Companies Direction no. 3 of 2008, by the Institute of Chartered Accountants of Sri Lanka.

OUR INDEPENDENCE AND QUALITY CONTROLWe have complied with the independence and other ethical requirement of the Code of Ethics for Professional Accountants issued by the Institute of Chartered Accountants of Sri Lanka, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

The firm applies Sri Lanka Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

AUDITORS’ RESPONSIBILITIES Our responsibility is to assess whether the Statement is both supported by the documentation prepared by or for directors and appropriately reflects the process the directors have adopted in reviewing the design and effectiveness of the internal control of the Company.

We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE) 3051, Assurance Report for License Finance Companies and Finance Leasing Companies on Directors’ Statement on Internal Control, issued by the Institute of Chartered Accountants of Sri Lanka.

This standard requires that the auditors plan and perform procedures to obtain limited assurance about whether Management has prepared, in all material respects, the Statement on Internal Control.

For purposes of this engagement, we are not responsible for updating or reissuing any reports, nor have we, in the course of this engagement, performed an audit or review of the financial information.

SUMMARY OF WORK PERFORMEDOur engagement has been conducted to assess whether the Statement is both supported by the documentation prepared by or for directors and appropriately reflects the process the directors have adopted in reviewing the system of internal control of the Company.

To achieve this objective, appropriate evidence has been obtained by performing the following procedures:

(a) Enquired the Directors to obtain an understanding of the process defined by the Board of Directors for their review of the design and effectiveness of internal control and compared their understanding to the Statement made by the Directors in the Annual Report.

(b) Reviewed the documentation prepared by the Management to support their Statement made.

(c) Related the Statement made by the Directors to our knowledge of the Company obtained during the audit of the Financial Statements.

(c) Reviewed the minutes of the meetings of the Board of Directors and of relevant Board Committees.

(e) Considered whether the Directors’ Statement on Internal Control covers the year under review and that adequate processes are in place to identify any significant matters arising.

(f) Obtained written representations from Directors on matters material to the Statement on Internal Control where other sufficient appropriate audit evidence cannot reasonably be expected to exist.

SLSAE 3051 does not require us to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Company’s risk and control procedures. SLSAE 3051 also does not require us to consider whether the processes described to deal with material internal control aspects of any significant problems disclosed in the annual report will, in fact, remedy the problems.

The procedures selected depend on the auditor’s judgment, having regard to the auditor’s understanding of the nature of the Company, the event or transaction in respect of which the Statement has been prepared.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.

AUDITOR’S CONCLUSIONBased on the procedures performed, nothing has come to our attention that causes us to believe that the Statement included in the annual report is inconsistent with our understanding of the process the Board of Directors have adopted in the review of the design and effectiveness of Internal Control over financial reporting of the Company.

Chartered Accountants Colombo30th June 2020


The financial statements are prepared in compliance with the Sri Lankan Financial Reporting Standards (SLFRS/LKAS) issued by the institute of Chartered accountant of Sri Lanka, the requirements of the Companies Act No.7 of 2007, the Finance Business Act No.42 of 2011 and the Listing Rules of the Colombo Stock Exchange.

Accordingly, the Company has prepared financial statements which comply with SLFRSs/ LKASs and related interpretations applicable for period ended 31 March 2020, together with the comparative period data as at and for the year ended 31 March 2019, as described in the accounting policies.

We accept responsibility for the integrity and accuracy of these financial statements. Significant accounting policies have been applied consistently. Application of significant accounting policies and estimates that involve a high degree of judgment and complexity were discussed with the Audit Committee and the external auditors. Estimate and judgment relating to the financial statements were made on a prudent and reasonable basis, in order to ensure that the financial statements are true and fair. To ensure this, our internal auditors have conducted periodic audits to provide reasonable assurance that the established policies and procedures of the company were consistently followed.

We confirm that to the best of our knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial position, results of operations and cash flows of the company as of, and for, the periods presented in this annual report.

We are responsible for establishing and maintaining internal controls and procedures. We have designed such controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the company is made known to us and for safeguarding the company’s assets and preventing and detecting fraud and error. We have evaluated the effectiveness of the company’s internal controls and procedures and are satisfied that the controls and procedures were effective as of the end of the period covered by this annual report. We confirm, based on our evaluations that there were no significant deficiencies and material weaknesses in the design or operation of internal controls and any fraud that involves management or other employees.

CHIEF EXECUTIVE OFFICER’S AND HEAD OF FINANCE’S RESPONSIBILITY STATEMENT

The financial statements were audited by Messrs. KPMG, Chartered Accountants, the Independent Auditors. The Audit Committee pre - approves the audit and non-audit services provided by KPMG in order to ensure that the provision of such services does not impair KPMG’s independence and objectivity. The Audit Committee also reviews the external audit plan and the management letters and follows up on any issues raised during the statutory audit. The Audit Committee also meets with the external and internal auditors to review the effectiveness of the audit.

We confirm that the Company has complied with all applicable laws and regulations and guidelines and that there are no material litigations that are pending against the company other than those arising in the normal course of conducting business.

R.R.D.D PunsaraHead of Finance

Krishan ThilakaratneDirector / CEO

30 June 2020


DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING

The Directors confirm that the Company’s Financial Statements for the year ended 31st March 2020, are prepared and presented in conformity with the requirements of the Sri Lanka Accounting Standards, the Regulations and Directions of the Central Bank of Sri Lanka, the Listing Rules of the Colombo Stock Exchange and the Companies Act No. 07 of 2007. They believe that the Financial Statements present a true and fair view of the state of the affairs of the Company as at the end of the financial year. The Financial Statements comprise the Statement of Financial Position as at 31st of March 2020, the Statement of Comprehensive Income, Statement of Changes in Equity and the Cash Flow Statement for the year then ended and notes thereto.

The Directors also accept responsibility for the integrity and accuracy of the Financial Statements presented and confirm that appropriate accounting policies have been selected and applied and reasonable and prudent judgment has been exercised so as to accurately report transactions. The Directors have taken reasonable steps to safeguard the assets of the Company, to prevent, deter and detect fraud, and to ensure the integrity, accuracy and safeguarding of operational and financial records.

The Directors confirm that to the best of their knowledge, all statutory payments due in respect of the Company as at the reporting date have been paid for, or where relevant, provided for.

The External Auditors, Messrs KPMG, were provided with the opportunity to make appropriate inspections of financial records, minutes and other documents to enable them to form an opinion of the Financial Statements. The Report of the Auditors is set out on pages 70 to 73.

Mr. Priyantha FernandoChairman30th June 2020


FINANCIAL CALENDER

FINANCIAL CALENDER 2019/202019/2020 Annual Report & Audited Financial Statements was signed on 30th June 2020 28th Annual General Meeting in 30th November 2020

2019/20Colombo Stock Exchange

Newspapers (as required by CBSL)English Sinhala Tamil

Q1 ended 30 June 15 August 2019 N/A N/A N/AQ2 ended 30 September 15 November 2019 29 November 2019 29 November 2019 29 November 2019Q3 ended 31 December 14 February 2020 N/A N/A N/AQ4 ended 31 March 30 June 2020 30 June 2020 30 June 2020 30 June 2020

PROPOSED FINANCIAL CALENDER 2020/212020/2021 Annual Report & Audited Financial Statements to be signed on 30th June 202129th Annual General Meeting to be held on Before 30th September 2021

2020/21 to be submitted on or beforeColombo Stock Exchange

Newspapers (as required by CBSL)English Sinhala Tamil

Q1 ended 30 June 31 August 2020 N/A N/A N/AQ2 ended 30 September 13 November 2020 30 November 2020 30 November 2020 30 November 2020Q3 ended 31 December 15 February 2021 N/A N/A N/AQ4 ended 31 March 31 May 2021 30 June 2021 30 June 2021 30 June 2021

FINANCIAL STATEMENTS


INDEPENDENT AUDITOR’S REPORT

TO THE SHAREHOLDERS OF COMMERCIAL LEASING & FINANCE PLC

Report on the Audit of the Financial Statements

OPINIONWe have audited the financial statements of Commercial Leasing & Finance PLC (“the Company”), which comprise the statement of financial position as at 31st March 2020, and the statement of profit or loss, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies set out on pages 74 to 157 in the Financial Statements.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Company as at 31st March 2020, and of its financial performance and its cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

BASIS FOR OPINIONWe conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by CA Sri Lanka (“Code of Ethics”) and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERSKey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

1. IMPAIRMENT OF RENTAL RECEIVABLES ON LEASES AND HIRE PURCHASES, LOANS AND ADVANCES AND FACTORING RECEIVABLES (Refer to significant accounting policies in note 3.3.7 and explanatory notes in 18.3, 19.1.1 and 19.2.1 to the financial statements).

Risk DescriptionAs disclosed in Notes 18.3, 19.1.1 and 19.2.1 to the financial statements, the Company has recorded impairment provision of Rs. 439 Mn relating to rental receivable on leases and hire purchases, Rs. 1,715 Mn relating to loans and advances and Rs. 641 Mn relating to factoring receivables as at 31st March 2020.

The determination of provision for impairment allowances using the expected credit loss model is subject to a number of key parameters, key assumptions and judgments, including the identification of loss stages, forward-looking probability of default (PD), loss given default (LGD), macroeconomic scenarios including their weighting and judgments over the use of data inputs required. In particular, the determination of the loss allowances is heavily dependent on the external macro environment and the

Company’s internal credit risk management strategy. Management judgement is involved in the selection of those parameters and the application of assumptions. Additionally, the COVID-19 outbreak increases the credit risk and significantly affects the macro economic forecasts and key assumptions and judgments referred to above.

Impairment of rental receivables on leases, hire purchases, loans, advances and factoring receivables was considered to be a key audit matter owing to the significance of the inherent uncertainty and management judgement involved in the estimation of impairment provision relating to rental receivables on leases, hire purchases, loans, advances and factoring receivables.

Our audit procedures included;

• Evaluating the appropriateness of the accounting policies and methodology applied based on the requirements of SLFRS 9 with our business understanding and industry practices.

• Assessing the appropriateness of considering the estimation uncertainties by management pursuant to the COVID 19 outbreak in determining loss allowances, including assessing the appropriateness of the key parameters and assumptions in the expected credit loss model. In particular, we challenged management’s assessment of the likelihood of a severe economic downturn caused by the COVID-19 at the reporting date with reference to the reasonable and supportable information available to management at that date.


• Evaluating the appropriateness and testing the mathematical accuracy of the estimation of provision for impairment.

• Evaluating the completeness, accuracy and relevance of data used for the calculation of impairment provision.

• Evaluating the appropriateness of disclosures made in the financial statements with reference to the requirements of SLFRS 9.

2. VALUATION OF INVESTMENT PROPERTIES(Refer to significant accounting policies in note 3.4 and explanatory note 25 to the financial statements).

Risk DescriptionAs disclosed in Note 25 to the financial statements, fair value of Investment properties of the Company was Rs. 2,768 Mn and fair value gain derived from investment properties for the year ended 31st March 2020 was Rs. 35.2 Mn.

Management’s assessment of the fair value of investment properties is based on valuations performed by qualified independent property valuers in accordance with recognized industry standards.

We identified valuation of investment properties as a key audit matter because the determination of the fair values involves significant judgments and estimation, particularly determining the appropriate valuation methodology to be used, and in estimating the underlying assumptions to be applied. These key assumptions include market comparables used and taking into consideration the differences such as location and size. A change in the key assumptions will have a significant impact on the fair value of investment properties as at the reporting date.


• Assessing the objectivity, independence, competency and qualifications of the external valuers engaged by the Company.

• Evaluating the appropriateness of the valuation techniques used by the external valuers, using our in-house property valuation experts.

• Assessment of key assumptions applied by the external valuers in deriving the fair value of properties and comparing the same with evidence of current market values.

• Assessing the adequacy of disclosures made in relation to the fair value of investment properties in the financial statements, including the description and appropriateness of the inherent degree of subjectivity and key assumptions used in the estimates.

3. MANAGEMENT’S ASSESSMENT OF THE COMPANY’S ABILITY TO CONTINUE AS GOING CONCERN The financial statements have been prepared on a going concern basis. In adopting the going concern basis of preparation of the financial statements, the directors have reviewed the company’s cash flow projections for the next 12 months, prepared by the management. Following the spread of global pandemic COVID 19 in the country, the Company was facing implications including, temporary restrictions in the level of business operations and may have potential implications due to delays in settlements and credit risk.

Note 51 to the Financial Statements describes the impact of COVID-19 outbreak to the current year financial statements and the preliminary assessment carried out by the Board of Directors on the potential future implications of COVID-19 outbreak on the Company’s future prospects, performance and liquidity.

We identified the assessment of going concern as a key audit matter because the management’s assessment referred to above involves consideration of future events and circumstances which are inherently uncertain, and effect of those uncertainties may significantly impact the resulting accounting estimates. Therefore, the assessment requires

the exercise of significant management judgement in assessing future cash inflows and outflows which could be subject to potential management bias.


• Obtaining the Company’s cash flow projections covering a period of not less than twelve months from the reporting period end date and challenging those key assumptions used in preparing the projections.

• Evaluating the sensitivity of the projected available cash by considering downside scenarios together with reasonably plausible changes to the key assumptions and considering whether there were any indicators of management bias in the selection of the assumptions.

• Inspecting the availability of credit facility arrangements for the Company and assessing the implication of these on the Company’s liquidity;

• Assessing disclosures in the financial statements in relation to the going concern basis of accounting with reference to the requirements of the prevailing accounting standards.

4. IT SYSTEMS AND CONTROLS OVER FINANCIAL REPORTINGThe Company’s key financial accounting and reporting processes are highly dependent on the automated controls over the Company’s information systems. Automated accounting procedures and IT environment controls, which include IT governance, controls over programme development and changes, access to programmes and data and IT operations, are required to be designed and to operate effectively to ensure accurate financial reporting.

System calculations including interest calculations and interfaces between business management systems and accounting systems are the significant areas which could result in the financial records being materially misstated.


We identified IT systems and controls over financial reporting as a key audit matter because the Company’s financial accounting and reporting systems are fundamentally reliant on complex IT systems and control processes which are driven by significant transaction volumes caused by the size of the customer base.

We used our own IT specialists to perform audit procedures to assess IT systems and controls over financial reporting, which included

• assessing the design, implementation and operating effectiveness of key internal controls over the continued integrity of all major IT systems fundamental to dealing with the financial data, particularly financial reporting.

• examining the framework of governance over the Company’s IT organisation and the controls over programme development and changes, access to programmes and data and IT operations, including compensating controls where required.

• evaluating the design, implementation and operating effectiveness of the significant accounts related IT process controls by assessing the operating effectiveness of IT application controls, assessing the operating effectiveness of certain automated controls and system calculations which are relevant to the Company’s compliance activities.

• assessing the availability and stability of key operating systems, taking into consideration the rapid development of businesses types and transactions volumes as well as IT projects that have a significant impact on business continuity.

• testing the access rights given to staff by checking them to approved records, and inspecting the reports over the granting and removal of access right.

• testing preventative controls designed to enforce segregation of duties between users within particular systems.

OTHER INFORMATIONManagement is responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTSManagement is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the

Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTSOur objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with SLAuSs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate

INDEPENDENT AUDITOR’S REPORT


in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with

them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTSAs required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company.

CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditor’s report is 3029.

Chartered Accountants Colombo, Sri Lanka 30th June 2020


STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31ST MARCH 2020 2019

Note Rs. Rs.

Interest income 5 12,791,769,739 14,126,491,439

Interest expense 6 (6,159,560,208) (6,696,838,209)

Net interest income 6,632,209,531 7,429,653,230

Net income from other financial instruments measured at fair value through profit or loss 7 742,857,240 (3,459,957)

Other income 8 1,559,348,117 1,753,858,005

Operating expenses

Allowance for impairment and write offs 9 (2,405,741,328) (1,885,550,698)

Direct expenses (274,373,238) (409,861,538)

Premises, equipment and establishment expenses (346,557,288) (417,408,887)

Personnel expenses 11.1 (1,456,287,197) (1,515,141,655)

Depreciation and amortization 10 (291,959,719) (130,407,159)

Other operating expenses (1,482,143,506) (2,031,881,007)

Results from operating activities before value added tax (VAT), nations building tax(NBT)onfinancialservicesanddebtrecoverylevy

2,677,352,612 2,789,800,334

VAT and NBT on financial services and debt recovery levy 12 (747,491,809) (693,417,414)

Results from operating activities 1,929,860,803 2,096,382,920

Share of profit of equity accounted investee, net of tax 24 66,801,415 (54,968,260)

ProfitbeforeTax 1,996,662,218 2,041,414,660

Income tax expense 13 (449,815,833) (843,318,119)

Profitfortheyear 1,546,846,385 1,198,096,541


STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME


Note Rs. Rs.

Profitfortheyear 1,546,846,385 1,198,096,541

Itemsthatwillnotbeclassifiedtoprofitorloss

Actuarial losses on retirement benefit obligation 37.2 (28,325,359) (8,158,451)

Effective portion of changes in fair value of cash flow hedges (54,044,707) 7,459,186

Deferred tax impact on other comprehensive income 36.2.1 23,063,618 (46,169,809)

(59,306,448) (46,869,074)

Itemsthatareormaybereclassifiedsubsequentlytoprofitorloss

Net change in fair value of financial assets measured at FVTOCI (18,792,593) (3,701,143)

Share of other comprehensive income of equity accounted investee 24 (2,838,140) (5,856,005)

Deferred tax impact on other comprehensive income 36.2.1 119,908 (140,444)

(21,510,825) (9,697,592)

Total other comprehensive expense for the year, net of tax (80,817,273) (56,566,666)

Total comprehensive income for the year 1,466,029,112 1,141,529,875

Basic and diluted earnings per share 14 0.24 0.19

Figures in brackets indicate deductions. The notes from pages 84 to 157 form an integral part of these financial statements.


STATEMENT OF FINANCIAL POSITION

AS AT 31ST MARCH 2020 2019

Note Rs. Rs.

Assets

Cash and cash equivalents 15.1 2,134,741,810 2,550,274,316

Financial assets measured at fair value through profit or loss (FVTPL) 16 3,095,092,879 2,826,494,131

Investment securities - Other investments 17 4,051,251,375 6,686,282,569

Financial assets measured at amortised cost - Finance lease receivables and hire purchases 18 12,330,761,190 13,917,880,997

Financial assets measured at amortised cost - loans, advances and factoring receivables 19 41,807,810,054 39,575,067,674

Derivative assets held for risk management 20 107,133,356 311,352,151

Amount due from related companies 21 73,227 -

Current tax assets 22 7,658,883 17,945,394

Other current assets 23 131,076,952 170,594,780

Equity accounted investees 24 1,496,428,631 1,440,865,356

Investment properties 25 2,768,230,000 2,100,080,280

Intangible assets 26 231,656 1,891,327

Property, plant and equipment 27 1,187,869,633 1,205,048,044

Right-to-Use Asset 28 513,314,992 -

Total assets 69,631,674,638 70,803,777,019

Liabilities and Equity

Liabilities

Bank overdraft 15.2 384,978,149 390,069,910

Derivative liabilities held for risk management 29 - 179,560,616

Financial Liabilities measured at Amortised Cost - Deposits from customers 30 24,945,668,954 24,316,106,104

Loans and borrowings-current 31.2 15,158,598,196 9,520,443,043

Loans and borrowings- non current 31.2 7,011,927,399 16,439,664,932

Lease Liability 32 503,116,077 -

Current tax liabilities 33 492,861,741 427,501,928

Amount due to related companies 34 58,372,799 114,050,965

Trade and other payables 35 1,578,513,274 1,245,293,733

Deferred tax liabilities 36 404,635,654 597,568,005

Retirement benefit obligation 37 168,440,266 114,984,766

Total liabilities 50,707,112,509 53,345,244,002


AS AT 31ST MARCH 2020 2019

Note Rs. Rs.

Equity

Stated capital 38 1,425,946,629 1,425,946,629

Reserves 39 2,036,871,898 2,017,114,453

Retained earnings 40 15,461,743,602 14,015,471,935

Total equity 18,924,562,129 17,458,533,017

Total liabilities and equity 69,631,674,638 70,803,777,019

Commitments and contingencies 43 & 44 13,726,527,504 22,101,478,127

Net assets value per share 2.97 2.74

The notes from pages 84 to 157 form an integral part of these financial statements. It is certified that these Financial Statements have been prepared in compliance with the requirements of the Companies Act No. 7 of 2007 and Finance Business Act No. 42 of 2011.

R.R.D.D Punsara Head of Finance The board of directors is responsible for the preparation and presentation of these financial statements. Approved and signed for and on behalf of the Board by;

T.Sanakan D.M.D.K Thilakaratne Director Director/CEO Colombo 30th June 2020


STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31ST MARCH Stated capital

Reserves Retained earnings

Total equity Revaluation

reserve Hedging

reserve FVOCI General

reserve Statutory

reserve fund

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Balance as at 1st April 2018 1,425,946,629 947,882,602 1,106,124 22,567,080 288,079,789 736,135,589 13,084,306,136 16,506,023,949

Impact of adoption of SLFRS 9

Impact of reclassifying financial investment from AFS to FVTPL

- - - - - - 159,157,592 159,157,592

Deferred Tax on Valuation of equity instrument - - - - - - (15,915,759) (15,915,759)

Recognition of SLFRS 9 ECLs including those measured at FVOCI

- - - - - - (461,475,889) (461,475,889)

Deferred tax on Recognition of SLFRS 9 ECLs including those measured at FVOCI

- - - - - - 129,213,249 129,213,249

- - - - - - (189,020,807) (189,020,807)

Adjusted balance as at 1st April 2018 1,425,946,629 947,882,602 1,106,124 22,567,080 288,079,789 736,135,589 12,895,285,329 16,317,003,142

Total comprehensive income for the year

Profit for the year - - - - - - 1,198,096,541 1,198,096,541

Other comprehensive income for the year

Other comprehensive income - - 7,459,186 (3,701,143) - - (8,158,451) (4,400,408)

Share of other comprehensive income from equity accounted investee

- - - - - - (5,856,005) (5,856,005)

Tax on other comprehensive income - (3,380,774) (38,798,333) (140,444) - - (3,990,702) (46,310,253)

Total comprehensive income/ (expense) for the year - (3,380,774) (31,339,147) (3,841,587) - - 1,180,091,383 1,141,529,875

Transactions with owners directly recorded in the equity

Transferred to/(from) during the year (Note 39.1) - - - - - 59,904,777 (59,904,777) -

Balance as at 31st March 2019 1,425,946,629 944,501,828 (30,233,023) 18,725,493 288,079,789 796,040,366 14,015,471,935 17,458,533,017





reserve Hedging


reserve Statutory

reserve fund


Balance as at 1st April 2018 1,425,946,629 947,882,602 1,106,124 22,567,080 288,079,789 736,135,589 13,084,306,136 16,506,023,949

Impact of adoption of SLFRS 9

Impact of reclassifying financial investment from AFS to FVTPL

- - - - - - 159,157,592 159,157,592

Deferred Tax on Valuation of equity instrument - - - - - - (15,915,759) (15,915,759)

Recognition of SLFRS 9 ECLs including those measured at FVOCI

- - - - - - (461,475,889) (461,475,889)

Deferred tax on Recognition of SLFRS 9 ECLs including those measured at FVOCI

- - - - - - 129,213,249 129,213,249

- - - - - - (189,020,807) (189,020,807)

Adjusted balance as at 1st April 2018 1,425,946,629 947,882,602 1,106,124 22,567,080 288,079,789 736,135,589 12,895,285,329 16,317,003,142




Other comprehensive income - - 7,459,186 (3,701,143) - - (8,158,451) (4,400,408)


- - - - - - (5,856,005) (5,856,005)

Tax on other comprehensive income - (3,380,774) (38,798,333) (140,444) - - (3,990,702) (46,310,253)

Total comprehensive income/ (expense) for the year - (3,380,774) (31,339,147) (3,841,587) - - 1,180,091,383 1,141,529,875



Balance as at 31st March 2019 1,425,946,629 944,501,828 (30,233,023) 18,725,493 288,079,789 796,040,366 14,015,471,935 17,458,533,017


STATEMENT OF CHANGES IN EQUITY




reserve Hedging


reserve Statutory

reserve fund


Balance as at 1st April 2019 1,425,946,629 944,501,828 (30,233,023) 18,725,493 288,079,789 796,040,366 14,015,471,935 17,458,533,017




Other comprehensive income - - (54,044,707) (18,792,593) - - (28,325,359) (101,162,659)


- - - - - - (2,838,140) (2,838,140)

Tax on other comprehensive income - - 15,132,518 119,908 - - 7,931,100 23,183,526

Total comprehensive income (expense) for the year - - (38,912,189) (18,672,685) - - 1,523,613,986 1,466,029,112



Balance as at 31st March 2020 1,425,946,629 944,501,828 (69,145,212) 52,808 288,079,789 873,382,685 15,461,743,602 18,924,562,129

The notes from pages 84 to 157 form an integral part of these financial statements.Figures in brackets indicate deductions.





reserve Hedging


reserve Statutory

reserve fund


Balance as at 1st April 2019 1,425,946,629 944,501,828 (30,233,023) 18,725,493 288,079,789 796,040,366 14,015,471,935 17,458,533,017




Other comprehensive income - - (54,044,707) (18,792,593) - - (28,325,359) (101,162,659)


- - - - - - (2,838,140) (2,838,140)

Tax on other comprehensive income - - 15,132,518 119,908 - - 7,931,100 23,183,526

Total comprehensive income (expense) for the year - - (38,912,189) (18,672,685) - - 1,523,613,986 1,466,029,112



Balance as at 31st March 2020 1,425,946,629 944,501,828 (69,145,212) 52,808 288,079,789 873,382,685 15,461,743,602 18,924,562,129



STATEMENT OF CASH FLOWS


Rs. Rs.

Cashflowfromoperatingactivities

Profit before income tax 1,996,662,218 2,041,414,660

Adjustments for:

Profit on disposal of property, plant and equipment 1,669,752 (2,650,000)

Profit on disposal of Investment Property (1,861,000) -

Depreciation and amortization 157,486,923 130,407,159

Amortization of ROU Asset 134,472,796 -

Provision for retirement benefit obligations 35,518,915 21,146,079

Net impairment loss on financial assets 2,405,741,327 1,885,550,698

Change in fair value of investments (742,857,240) 3,459,957

Dividend income (240,800) (7,733,981)

Interest expense 6,094,986,297 6,696,838,209

Finance Cost Amortization of ROU Asset 64,573,910 -

Investment income (544,851,113) (539,089,253)

Adjustment for unamortised finance cost - long term borrowings 9,764,050 48,963,541

Fair value gain on investment property (35,186,676) (114,657,720)

Share of equity accounted investee (66,801,415) 54,968,260

Cashflowsfromoperatingactivitiesbeforeworkingcapitalchanges 9,509,077,944 10,218,617,609

(Increase) / decrease in operating assets and liabilities

Decrease in leases and hire purchase receivables 1,011,407,499 743,816,694

Decrease/(Increase) in advances and other loans receivables (4,273,497,184) 2,162,652,398

Decrease in factoring receivables 210,725,784 1,030,987,924

Decrease/(Increase) in other receivables and related party receivables 134,949,595 90,459,792

Increase/(Decrease) in trade and other payables and related party payables 97,980,757 (553,198,174)

Increase in customer deposits 381,467,290 830,997,225

Cash generated from operations 7,072,111,685 14,524,333,468

Finance cost paid (5,450,926,952) (6,464,430,149)

Income tax paid (554,204,845) (748,457,461)

Retiring Gratuity paid (10,388,774) (3,646,254)

Net cash generated from operating activities 1,056,591,114 7,307,799,604



Rs. Rs.

Cashflowfrominvestmentactivities

Acquisition of property, plant and equipment (141,464,587) (105,843,399)

Acquisition of intangible assets - (17,500)

Net additions to financial Instruments 2,984,891,084 (2,829,450,181)

Acquisition of investment properties (637,902,044) (353,422,560)

Proceeds from the sale of property, plant and equipment 1,146,000 2,650,000

Dividend received from investments 8,640,800 12,893,981

Interest received 650,457,120 355,414,132

Disposal of Investment Property 6,800,000 -

Netcashflowsgeneratedfrom/(usedin)investingactivities 2,872,568,373 (2,917,775,527)

Cashflowfromfinanceactivities

Net cash repayments from short-term interest bearing loans and borrowings 300,000,000 (1,000,000,001)

Proceeds from long-term interest bearing loans and borrowings 4,530,990,982 3,792,058,039

Repayments of long-term interest bearing loans and borrowings (9,026,301,196) (6,045,983,881)

Payment to lease creditor (137,630,018) -

Addition to ROU Asst (35,084,649) -

Addition to Lease liability 28,424,649 -

Netcashflowsusedinfinancingactivities (4,339,600,232) (3,253,925,843)

Net (decrease) / increase in cash and cash equivalents (410,440,745) 1,136,098,234

Cash and cash equivalents at the beginning of the year 2,160,204,406 1,024,106,172

Cash and cash equivalents at the end of the year (Note A) 1,749,763,661 2,160,204,406

Note A

Cash in hand and favourable bank balances 2,134,741,810 2,550,274,316

Unfavourable bank balances used for cash management purposes (384,978,149) (390,069,910)

Cash and cash equivalents at the end of the year 1,749,763,661 2,160,204,406



NOTES TO THE FINANCIAL STATEMENTS

1. CORPORATE INFORMATION1.1 GeneralCommercial Leasing & Finance PLC was incorporated as a Private Limited Company in April 1988 and domiciled in Sri Lanka, in 1992 converted into a Public Limited Company and listed in the Colombo Stock Exchange. In 2008 with the acquisition by LOLC Holdings PLC (formerly known as Lanka Orix Leasing Company PLC), the Company submitted an application to de-list from Colombo Stock Exchange and it was treated as de-listed with effect from July 01, 2009.

Further to Finance Leasing Act No 56 of 2000, on 7th December 2011, the Company has obtained the License to carry on Finance Business under the Finance Business Act No 42 of 2011. The Company re-listed on the Diri Savi Board of the Colombo Stock Exchange in June 2012 in compliance with the CBSL Directions with the divestment of 10% of the stated capital.

The ordinary shares of the Company are presently listed on the second board of the Colombo Stock Exchange (CSE), due to non compliance with minimum public float rules.

The Financial Statements of the Company as at and for the year ended 31st March 2020 comprise of the Company and Company’s interest in associates.

The registered office and the principal place of business of the Company are located at No. 68, Bauddhaloka Mawatha, Colombo 4.

1.2 Parent entity and Ultimate Parent CompanyLOLC Holdings PLC is the ultimate parent of the Company.

1.3 Principal Activities and Nature of OperationsThe principal activities of the Company comprised of leasing, loans, gold loans, factoring, Islamic financing, micro financing and mobilization of public deposits.

Description of the nature of operations and principal activities of associate companies are given on Note 24 to these Financial Statements with any changes to the principal activities during the financial year under review.

1.4 Number of EmployeesThe staff strength of the Company as at 31st March 2020 was 1,407. (31.03.2019 – 1,348).

2. BASIS OF PREPARATION2.1 Statement of ComplianceThe Financial Statements of the Company are prepared in accordance with the Sri Lanka Accounting Standards (LKASs/SLFRSs) laid down by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the requirements of the Companies Act No.7 of 2007. This is the first set of Company Financial statements in which SLFRS 16 – leases have been applied. The related changes to significant accounting policies are disclosed in Note 2.14 to the financial statements.

The presentation of these Financial Statements is also in compliance with the requirements of the Finance Business Act No 42 of 2011

and the listing rules of the Colombo Stock Exchange. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting.

2.2 Presentation of Financial StatementsThe assets and liabilities of the Company presented in the Statement of Financial Position are grouped by nature and listed in-order to reflect their relative liquidity and maturity pattern. An analysis regarding recovery or settlement within twelve months after the reporting date (current) and more than twelve months after the reporting date (non-current) is presented in Note 41 (maturity analysis).

2.3 Basis of Measurement The Financial Statements of the Company has been prepared on the historical cost basis and applied consistently with no adjustments being made for inflationary factors affecting the financial Statements, except for the following material items in the Statement of Financial Position;

Items Basis of measurement Note

Financial Assets measured at fair value through profit or loss

Fair value 16

Financial assets measured at fair value through other comprehensive income.

Fair value 17.1

Financial assets at amortised cost Amortized Cost 18 & 19

Retirement Benefit Obligation Net liability for defined benefit obligations are recognised as the present value of the defined benefit obligation, plus unrecognised actuarial gains, less unrecognised past service cost, and unrecognised actuarial losses.

37

Lands and buildings included in property, plant and equipment

Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation.

27

Investment properties Fair value 25


2.4 Functional and presentation currencyThe functional currency is the currency of the primary economic environment in which the entities of the Company operates. These Financial Statements are presented in Sri Lankan Rupees (LKR), which is the Company’s functional currency and the presentation currency. All financial information has been rounded to the nearest Rupee unless stated otherwise.

2.5UseofSignificantJudgments,Estimates and AssumptionsThe preparation of the financial statements in conformity with SLFRSs/LKASs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results which form the basis of making the judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Information about critical judgments, estimates and assumptions in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are included in the following notes to these Financial Statements.

Critical accounting estimate/judgment Disclosure reference

Classification of financial assets and liabilities 49.6

Fair Value of financial instruments 49.2 & 49.5

Revaluation of property, plant and equipment 27.2

Determination in fair value of Investment properties 25.1

Useful lives of intangible assets 3.5.5

Useful lives of property, plant and equipment 3.6.7

Retirement benefit obligation 37

Deferred tax on undistributed profits of equity accounted investee 3.9.2.1

Write-off policy 3.3.7.6

Impairment losses on financial assets 3.3.7

Impairment of non-financial assets 3.7

Provisions for liabilities, commitments and contingencies 3.24

2.6 Comparative InformationComparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year (refer Note 47). The Company has not restated the comparative information for contracts within the scope of Sri Lanka Accounting Standard – SLFRS 16 on “Leases” (SLFRS 16).

2.7 Materiality, Presentation and AggregationAs per LKAS – 1 “Presentation of Financial Statements”, each material class of similar items are presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately unless they are immaterial.

Notes to the Financial Statements are presented in a systematic manner which ensures the understandability and

comparability of Financial Statements of the Company. Understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

2.8OffsettingFinancial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the International Financial Reporting Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Company.

2.9 RoundingThe amounts in the Financial Statements have been rounded off to the nearest Rupee, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard LKAS 1 on ‘Presentation of Financial Statements’.


2.10 Going Concern The Board of Directors is satisfied that the Company has adequate resources to continue its operations in the foreseeable future and management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern. Therefore, going-concern basis has been adopted in preparing these Financial Statements. (refer note 51.1)

2.11 Directors’ Responsibility for the Financial Statements The Board of Directors is responsible for the preparation and fair presentation of these Financial Statements in accordance with Sri Lanka Accounting Standards and as per the provisions of the Companies Act No. 07 of 2007 and Finance Business Act No. 42 of 2011. This responsibility includes: designing, implementing and maintaining internal controls 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.

The Board of Directors acknowledges their responsibility as set out in the “Annual Report of the Board of Directors on the Affairs of the Company” and “Director’s Responsibility for Financial Reporting”.

These Financial Statements include the following components;

• A Statement of Financial Position providing the information on the financial position of the Company as at the year end;

• A Statement of Profit or Loss providing the information on the financial performance of the Company for the year under review;

• A Statement of Other Comprehensive Income providing the information of the other comprehensive income of the Company;

• A Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Company;

• A Statement of Cash Flows providing the information to the users, on the ability of the Company and the Company to generate cash and cash equivalents and the needs of entities to utilize those cash flows, and

• Notes to the Financial Statements comprising Accounting Policies and other explanatory information.

2.12 Approval of Financial Statements by the Board of DirectorsThe Financial Statements of the Company for the year ended 31st March 2020 (including comparatives) were approved and authorized for issue by the Board of Directors on 30th June 2020.

2.13 Events after the Reporting DateEvents after the Reporting Date are those events, favourable and Unfavourable, that occur between the Reporting date and the date when the Financial Statements are authorised for issue. In this regard, all material and important events that occurred after the reporting period are considered and appropriate disclosures are made where necessary (refer note 46).

2.14 Changes in Accounting PoliciesThe Company has consistently applied the accounting policies as set out in Note 3 to all periods presented in these financial statements except for the changes arising out of transition to SLFRS 16. A number of other standards are also effective from 1st April 201, but they do not have a material effect on the Company’s financial statements.

2.14.1 SLFRS 16 – “Leases”The Company applied the SLFRS 16 using the modified retrospective approach, under which the comparative information presented for the year 2018/19 is not restated. The details

of the changes in accounting policies are described below. Additionally, the disclosure requirements in SLFRS 16 have not generally been applied to comparative information.

2.14.1.1 Definition of a leasePreviously, the Company determined whether an arrangement is or contains a lease under IFRIC 4 – “Determining whether an arrangement contains a lease”. The Company now assess whether a contract is or contains a lease as explained in note 3.8.

On the transition, the Company elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Company applied SLFRS 16 only to contracts that were previously identified as leases.

2.14.1.2 As a lessee As a lessee, the Company leases some branches. The Company previously classified these leases as operating leases under LKAS 17 based on its assessment of whether the lease transferred substantially all the risks and rewards incidental to the ownership of the underlying asset to the Company. Under SLFRS 16, the Company recognizes right-of-use assets and lease liabilities for leases of branches and office premises.

The Company used a number of practical expedients when applying SLFRS 16 to leases previously classified as operating leases under LKAS 17. In particular, the Company

• Did not recognize right-of-use assets and liabilities for leases for which term ends within 12 months of the date of initial application

• Used hindsight when determining the lease term.

On transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate at the date of initial application (i.e, 1st April 2019). The weighted average rate applied is 12.08%



2.14.1.2.1 Impact on TransitionLease liability recognized as at 1st April 2019 is as follows,

Description Rs.

Operating Lease commitments as at 31st March 2019 588,141,156

Discounted using the incremental borrowing rate as at 1st April 2019 445,819,142

Add: Consideration of extension options 101,928,394

Lease liability recognized as at 1st April 2019 547,747,536

The right-of-use asset recognized as at 1st April 2019 is as follows,

Description Rs.

Right-of-use asset measured with reference to the lease liability 547,747,536

Add: Prepaid lease rentals as at 1st April 2019 64,955,603

Right-of-use asset recognized as at 1st April 2019 612,703,139

to exist when the Company holds between twenty and fifty percent of the voting power of another entity.

Associates are accounted for using the equity method (equity accounted investees) and are initially recognized at cost in the terms of Sri Lanka Accounting Standards – LKAS 28 on “Investment in Associates”. The Company’s investment in associate includes goodwill identified on acquisition, net of any accumulated impairment losses.

The Financial Statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases.

Acquisitions of additional stakes of equity accounted investees, until the control is established, are accounted as goodwill within the equity accounted investment if consideration paid is more than the net asset acquired or taken into to profit or loss as gain on bargain purchase if the net asset acquired is more than the consideration paid.

When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. Associate Companies of the Group which have been accounted for under the equity method of accounting are disclosed under Note 24 to these Financial Statements.

3.1.3 Reporting DateThe financial year of equity accounted investees are namely; Commercial Insurance Brokers Limited and LOLC Development Finance PLC previously known as BRAC Lanka PLC ends in 31st December and 31st March respectively.

The difference between the reporting date of the above companies and that of the parent does not exceed three months.

However, for the Company financial reporting purposes; the Financial Statements ending 31st March of the above mentioned associates are considered.

3.2 Foreign currency 3.2.1 Foreign Currency TransactionsTransactions in foreign currencies are translated to the respective functional currency (Sri Lankan Rupees-LKR) at exchange rates at the dates of the transactions.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are re-translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items are the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year.

22.14.1.3 As a LessorThe Company leases out certain property. These were classified as operating leases of investment property.

The Company is not required to make any adjustments on the transition to SLFRS 16 for leases in which it acts as a lessor.

3. SIGNIFICANT ACCOUNTING POLICIESThe accounting policies set out below have been applied consistently to all periods presented in these Financial Statements unless otherwise indicated.

3.1 Basis of Consolidation3.1.1 Business combinationsThe Company’s Financial Statements comprise, Financial Statements of the Company and the proportionate share of the profit or loss and net assets of its Associates in terms of the Sri Lanka Accounting Standard – LKAS 28 on ‘Investments in Associates and Joint Ventures’.

3.1.2 Equity accounted Investees - AssociatesAssociates are those entities in which the Company has significant influence, but not control, over the financial and operating activities. Significant influence is presumed


Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are re-translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on re-translation are recognized in Statement of Profit or Loss.

3.3 Financial Instruments3.3.1 Initial Recognition, Classification and Subsequent Measurement3.3.1.1 Date of recognition All financial assets and liabilities 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.

3.3.1.2 Initial measurement of financial Instruments The classification of financial instruments at initial recognition depends on the purpose and the management’s intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.

3.3.2 Classification and Subsequent Measurement of Financial Instruments On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL.

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

• the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

• the contractual terms of the financial asset give rise on specified dates to cash flows that are Assessment of whether Contractual Cash Flows are Solely Payments of Principal and Interest (“SPPI”).

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: and

• the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment by-investment basis. All other financial assets are classified as measured at FVTPL.

In addition, on initial recognition, the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

3.3.2.1 Business Model AssessmentThe Company makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to Management.

The information considered includes:

• the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether Management’s strategy focuses on

earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;

• how the performance of the portfolio is evaluated and reported to the Company’s Management;

• the risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed;

• how managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and

• the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Company’s stated objective for managing the financial assets is achieved and how cash flows are realised.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

3.3.4 Derivatives recorded at fair value through profit or loss Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position.



Other derivatives If a derivative is not held for trading, and is not designated in a qualifying hedge relationship, then all changes in its fair value are recognised immediately in profit or loss as a component of net income from other financial instruments at FVTPL.

3.3.5 Financial AssetsFinancial assets are within the scope of SLFRS 9 are classified appropriately as Financial assets recognised through profit or loss, Financial assets measured at fair value through other comprehensive income and Financial assets at amortised cost.

All the financial assets are recognized at fair value at its initial recognition.

3.3.5.1 Financial assets measured at - fair value through profit or lossA financial asset is classified at fair value through Profit or Loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through Profit or Loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Upon initial recognition, transaction costs are recognized in Profit or Loss as incurred.

Financial assets at fair value through Profit or Loss are measured at fair value, and subsequent therein are recognized in Profit or Loss.

The Company’s investments in certain equity securities and derivative instruments which are not accounted under hedge accounting are classified under fair value through profit or loss.

3.3.5.2 Financial assets at amortised cost - Loans & receivablesFinancial assets at amortised cost - Loans & receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly

attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Loans and receivables of the Company comprise of the followings,

3.3.5.3 Rental receivables on Finance Leases and Hire purchasesAssets leased to customers which transfer substantially all the risks and rewards associated with ownership other than legal title, are classified as finance leases. Amounts receivable under finance leases are included under “Lease Rentals Receivable”. Leasing balances are stated in the Statement of Financial Position after deduction of initial rentals received, unearned lease income and the provision for impairment.

Assets sold to customers under fixed rate hire agreements, which transfer all risk and rewards as well as the legal title at the end of such contractual period are classified as ‘Hire Purchase Receivable’. Such assets are accounted for in a similar manner as finance leases.

3.3.5.4 Rental receivables on Operating Leases Leases where the Company as the lessor effectively retains substantially all the risk and rewards incidental to the ownership are classified as operating leases. Lease rentals from operating leases are recognized as income on a straight-line basis over the lease term.

3.3.5.5 Advances and Other Loans to CustomersAdvances and other loans to customers comprised of revolving loans, loans with fixed instalments. Revolving loans to customers are reflected in the statement of financial position at amounts disbursed less repayments and allowance for impairment losses. Loans to customers with fixed instalments are stated in the statement of financial position net of possible loan losses and net of interest, which is not accrued to revenue.

After initial measurement, ‘loans and advances’ are subsequently measured at amortised cost using the EIR, less allowance for impairment except when the Company recognises loans and receivables at fair value through profit or loss. 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 Profit or Loss. The losses arising from impairment are recognised in the Statement of Profit or Loss.

3.3.5.6 Financial assets measured at fair value through other comprehensive incomeFinancial assets measured at fair value through other comprehensive income (FVOCI) are non-derivative financial assets that are designated FVOCI and that are not classified in any of the previous categories of financial assets. FVOCI are recognised initially at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition, these are measured at fair value and changes therein, other than impairment losses are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is de-recognised, the cumulative gain or loss in other comprehensive income is transferred to Profit or Loss.

Financial Assets at FVOCI comprise of Treasury bills and investments in unquoted shares.

3.3.5.7 Cash and Cash EquivalentsCash and cash equivalents comprise of cash in hand and cash at banks and other highly liquid financial assets which are held for the purpose of meeting short-term cash commitments with original maturities of less than three months which are subject to insignificant risk of changes in their fair value.

Bank overdrafts that are repayable on demand and form an integral part of the Company cash management are included as a component of cash and cash equivalents for the purpose of the Statement of Cash Flows.


3.3.6 Financial Liabilities The Company initially recognizes debt securities, deposits from customers and loans & borrowings on the date that they are originated. All other financial liabilities are recognized at initially on the trade date, which is the date that the Company becomes party to the contractual provisions of the instruments.

The Company de-recognises a financial liability when its contractual obligations are discharged, cancelled or expired.

The Company classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction cost. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using effective interest rate method.

Other financial liabilities comprise of loans & borrowings, debenture issued, bank overdraft, customer deposits and trade and other payables.

3.3.6.1 Recognition and measurement of financial liabilitiesOn the Company classifies financial liabilities, other than financial guarantees and loan commitments, into one of the following categories:

• Financial liabilities at amortised cost; and

• Financial liabilities at fair value through profit or loss,

A financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue. Subsequent measurement of financial liability is at fair value or amortised cost. The amortised cost of a financial liability is the amount at which the financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference

between the initial amount and the maturity amount.

3.3.6.1.1 Classification and subsequent measurement of financial liabilities The subsequent measurement of financial liabilities depends on their classification.

3.3.6.2 Financial liabilities at amortised costFinancial Liabilities issued by the Company that are not designated at fair value through profit or loss are recognised initially at fair value plus any directly attributable transaction costs, by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Deposit liabilities including savings deposits, current deposits, fixed/time deposits, call deposits, certificates of deposit and debentures are classified as financial liabilities measured at amortised cost.

The EIR amortisation is included in “Interest expense” in the income statement. Gains and losses too are recognised in the income statement when the liabilities are de-recognised as well as through the EIR amortization process.

3.3.6.3 Financial liabilities at fair value through profit or lossFinancial liabilities at fair value through profit or loss include derivative liabilities held for risk management purposes.

3.3.6.4 Deposits and borrowingsDeposits and borrowings are the Company’s resources of funding.

3.3.6.4.1 Loans and borrowingsThese represents refinance borrowings, called money borrowings from financial institutions. Subsequent to initial recognition, deposits and borrowings are measured at their amortised cost using the EIR method. Interest paid/payable on these borrowings is recognised in profit or loss.

3.3.6.4.2 Due to customersThese include non-interest-bearing deposits, savings deposits, term deposits, deposits payable at call and certificates of deposit. Subsequent to initial recognition deposits are measured at their amortised cost using the EIR method, except where the Company designates liabilities at fair value through profit or loss. Interest paid/ payable on these deposits is recognised in profit or loss.

3.3.6.5 Reclassification of Financial Assets and LiabilitiesFinancial assets are not reclassified subsequent to their initial recognition, except and only in those rare circumstances when the Company’s changes its objective of the business model for managing such financial assets. Financial Liabilities are not reclassified as such reclassifications are not permitted by SLFRS 9.

3.3.7 Impairment of Financial Assets 3.3.7.1 Recognition of ECL The Company recognises allowances for Expected Credit Losses (ECL) on the following financial instruments that are not measured at FVTPL:

• financial assets that are debt instruments;

• lease receivables;

• financial guarantee contracts issued; and

• undrawn credit commitments.

No impairment loss is recognised on equity investments.

The Company measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:

• debt investment securities that are determined to have low credit risk at the reporting date; and

• other financial instruments on which credit risk has not increased significantly since their initial recognition.



The Company considers a debt investment security to have low credit risk when its credit risk rating is equivalent to the definition of “investment grade”. The Company does not apply the low credit risk exemption to any other financial instruments. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Financial instruments for which a 12-month ECL is recognised are referred to as “Stage 1 financial instruments”.

Life-time ECL are the ECL that result from all possible default events over the expected life of the financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as “Stage 2 financial instruments”.

3.3.7.2 Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows:

• financial assets that are not credit impaired at the reporting date: as the present value of all cash shortfalls (i.e, the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive);

• financial assets that are credit impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;

• undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Company if the commitment is drawn down and the cash flows that the Company expects to receive; and

• financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Company expects to recover.

3.3.7.3 Credit-Impaired Financial AssetsAt each reporting date, the Company assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as “Stage 3 financial assets”). A financial asset is “credit-impaired” when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Evidence that a financial asset is credit-impaired includes the following observable data: – significant financial difficulty of the borrower or issuer

• a breach of contract such as a default or past due event;

• it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or

• the disappearance of an active market for a security because of financial difficulties.

3.3.7.4 Application of practical expedients in the measurement of ECL for financial assetsDue to uncertainty and lack of sufficient information to make any adjustments to capture the potential impact of COVID 19, based on the “COVID - 19 Pandemic: Guidance Notes on the Implications on Financial Reporting” issued by the institute of chartered accountants of Sri Lanka, the Company considered the Probability of Default (PD), Loss Given Default (LGD) computed as at 29th February 2020 and Economic Factor Adjustment (EFA) used in the computation of ECL as at 31st December 2019 in determining the provision for ECL as at 31st March 2020. Further, appropriate adjustments were made to the statistical models in estimating the probability weighted outcomes of the ECL.

3.3.7.5 Presentation of Allowance for ECL in the Statement of Financial Position Loss allowances for ECL are presented in the Statement of Financial Position as follows:

• financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;

• loan commitments and financial guarantee contracts: as a provision under other liabilities;

• debt instruments measured at FVOCI: no loss allowance is recognised in the Statement of Financial Position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the reserves.

3.3.7.6 Write-offLoans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Company determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.

Recoveries of amounts previously written off are included in “impairment losses on financial instruments” in the Statement of Profit or Loss.

Financial assets that are written off could still be subject to enforcement activities in order to comply with the Company’s procedures for recovery of amounts due.

3.3.8 Derecognition of Financial Assets and Financial Liabilities3.3.8.1 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 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.

3.3.8.2 Financial liabilitiesA financial liability is derecognized 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 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 profit or loss.

3.3.9 Offsetting financial instrumentsFinancial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements; therefore, the related assets and liabilities are presented gross in statement of financial position.

3.3.10 Amortized cost measurementThe amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.

3.3.11 Fair value measurement SLFRS 13 Fair Value Measurement applies to SLFRSs that require or permit fair value measurement or disclosures and provides a single SLFRS framework for measuring fair value and disclosures on fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a 'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.

SLFRS 13, defines fair value, sets out in a single SLFRS a framework for measuring fair value disclosures on fair value measurements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date.

When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and other equity pricing models.

The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the

Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in Statement of Financial position.

3.3.12 Valuation of Financial InstrumentsThe Company measures the fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Level 1 – Quoted market price (unadjusted) in an active market of an identical instrument.

Level 2 – Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices), this category included instruments valued using: quoted market prices in active markets similar instruments; quoted prices for identical or similar instruments in markets are considered less than active: or other valuation techniques where all significant inputs are directly observable from market data.

Level 3 – Valuation techniques use significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation.

This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.



Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Company determines fair values using valuation techniques

Valuation techniques include comparison to similar instruments for which market observable prices exist, other equity pricing models and other valuation models.

The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instruments at the reporting date that would have been determined by market participants acting at arm’s length.

The Company widely recognized valuation models for determining the fair value of common and more simple financial instruments. Observable prices and model inputs are usually available in the market for listed debt and equity securities. Availability of observable market inputs reduces the need of management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets are prone to changes based on specific events and general conditions in the financial markets.

3.3.13 Accounting for Derivative Financial InstrumentsDerivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active markets, or using valuation techniques. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

3.3.14 Hedge accountingThe Company holds derivative financial instruments to hedge its foreign currency risk exposure. On initial designation of the derivative as the hedge instrument, the company formally documents the relationship between the hedging instrument and hedged

item, its risk management objective and its strategy in undertaking the hedge.

The Company’s treasury department documents the assessment, both at hedge inception and on an on-going basis, of whether or not the hedging instruments, primarily forward rate contracts, that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items.

3.3.15 Cash flow hedgeWhen a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

When the hedged item is a non-financial asset, the amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the non-financial item affects profit or loss. In other cases as well, the amount accumulated in equity is reclassified to profit or loss in the same period that the hedged item affects profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the balance in equity is reclassified to profit or loss.

3.3.16 Hedge Effectiveness TestingTo qualify for hedge accounting, at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective and demonstrate actual effectiveness on an on-going basis. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed.

The method adopted by the Company to assess hedge effectiveness is based on its risk management strategy. For expected effectiveness, the hedging instrument must be expected to be highly effective in offsetting changes in cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other in the range of 80% to 125%. The ineffective portion will be recognised immediately in profit or loss. In measuring the effectiveness, the forecasted transaction of entering into another forward contract is also taken into consideration.

3.3.17 Non-Financial ReceivablesOther receivable balances are stated at estimated amounts receivable after providing for impairment.

3.4 Investment Properties3.4.1 Basis of RecognitionInvestment property is the property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes.

3.4.2 Basis of Measurement3.4.2.1 Fair value ModelInvestment properties are initially recognized at cost. Subsequent to initial recognition the investment properties are stated at fair values, which reflect market conditions at the reporting date. Gains or losses arising from changes in fair value are included in the Statement of Profit or Loss in the year in which they arise.

Where Company occupy a significant portion of the investment property of a subsidiary, such investment properties are treated as property, plant and equipment in the Financial Statements, and accounted for as per LKAS 16- Property, Plant and Equipment.

3.4.2.2 De-recognition Investment properties are de-recognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses


on the retirement or disposal of an investment property are recognized in the Statement of Profit or Loss in the year of retirement or disposal.

3.4.2.3 Subsequent Transfers to/from Investment PropertyTransfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner occupation, commencement of an operating lease to another party or completion of construction or development.

Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner occupation or commencement of development with a view to sale.

For a transfer from investment property to owner occupied property or inventories, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. If the property occupied by the Company as an owner occupied property becomes an investment property, the Company, accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

For a transfer from inventories to investment property, any difference between the fair value of the property at that date and its previous carrying amount is recognized in the Statement of Profit or Loss.

3.4.2.4 Determining Fair Value External and independent valuers, having appropriate recognized professional qualifications and recent experience in the location and category of property being valued, values the investment property portfolio as at each reporting date. In financial periods within that period the fair value is determined by the Board of Directors. External valuers are not related parties of the Company.

The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after

proper marketing wherein the parties had each acted knowledgeably.

3.5 Intangible Assets3.5.1 Basis of RecognitionAn intangible asset is recognized if it is probable that future economic benefits that are attributable to the assets will flow to the entity and the cost of the assets can be measured reliably.

3.5.2 Basis of MeasurementIntangible assets acquired separately are measured as initial recognition at cost. Following initial recognition intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful life of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite useful life are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the method for an intangible asset with a definite useful life is reviewed at least at each financial year end. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level.

3.5.3 Subsequent ExpenditureSubsequent expenditure on intangible assets are capitalized only when it increases the future economic benefits embodied these assets. All other expenditure are expensed when incurred.

3.5.4 De-recognitionIntangible assets are de-recognized on disposal or when no future economic benefits are expected from its use. The gain or loss arising from de-recognition of intangible assets are measured as the difference between the net disposal proceeds and the carrying amount of the asset.

3.5.5 AmortizationAmortization is recognized in the Statement of statement of profit or loss on a straight-line basis over the estimated useful life of intangible assets, from the date that they are available for use.

The estimated useful life of each intangible asset is as follows;

Computer Software 5 years License and Fees 20 years

Amortization methods, useful lives and residual values are reviewed at each reporting date and are adjusted as appropriate.

3.6 Property, Plant and Equipment 3.6.1 Basis of Recognition Property, plant and equipment are recognized if it is probable that future economic benefits associated with the asset will flow to the Company and cost of the asset can be reliably measured.

3.6.2 Basis of MeasurementItems of property, plant and equipment are measured at cost/revaluation less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site at which they are located and capitalized borrowing costs.

Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

3.6.3 Cost ModelThe Company applies the cost model to all property, plant and equipment except freehold land and buildings; which records at cost of purchase together with any incidental expenses thereon less any accumulated depreciation and accumulated impairment losses if any.



3.6.4 Revaluation ModelThe Company revalues its land and buildings which are measured at its fair value at the date of revaluation less any subsequent accumulated depreciation and accumulated impairment losses. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.

On revaluation of lands and buildings, any increase in the revaluation amount is credited to the revaluation reserve through other comprehensive income in shareholder’s equity unless it off sets a previous decrease in value of the same asset that was recognized in the Statement of Profit or Loss. A decrease in value is recognized in the Statement of Profit or Loss where it exceeds the increase previously recognized in the revaluation reserve. Upon disposal, any related revaluation reserve is transferred from the revaluation reserve to retained earnings and is not taken into account in arriving at the gain or loss on disposal.

3.6.5 Subsequent Cost Subsequent expenditure is capitalized only when it is probable that the future economic benefits associated with the expenditure will flow to the Company. Ongoing repairs and maintenance are expensed as incurred.

3.6.6 Reclassification to investment propertyWhen the use of a property changes from owner-occupied to investment property, the property is re-measured to fair value and reclassified as investment property. Any gain arising on re-measurement is recognized in Profit or Loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognized and presented in the revaluation reserve in equity. Any loss is recognized immediately in Profit or Loss.

3.6.7 Depreciation Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed

and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately.

Depreciation is recognized in Profit or Loss on a straight-line basis over the estimated useful life of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Lands are not depreciated.

Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is de-recognized.

Depreciation methods, useful life values are assessed at the reporting date. The estimated useful lives for the current year are as follows:

Building 40 years

Furniture & Fittings 05 years

Office Equipment 05 years

Motor Vehicles 04 years

Computers 05 years 3.6.8 De-recognitionAn item of property, plant and equipment is de-recognized upon disposal or when no future economic are expected from its use or disposal.

The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment, and is recognized net within other income/other expenses in the Statement of Profit or Loss. When revalued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings.

3.7 Impairment of Non-financial AssetsThe carrying amounts of the Company’s non-financial assets are reviewed at each reporting date to determine whether there is any

indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognized if the carrying amount of an asset or its related Cash-Generating Unit (CGU) exceeds its estimated recoverable amount.

The Company’s corporate assets do not generate separate cash inflows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

Impairment losses are recognized in Profit or Loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.

An impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

3.8 SLFRS 16 – LeasesThe Company has applied SLFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under LKAS 17 and IFRIC 4. The details of accounting policies under LKAS 17 and IFRIC 4 are disclosed separately.

Policy applicable from 1st April 2019At the inception of a contract, the Company assess whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. To assess whether a contract conveys the right to control


the use of an identified asset, the Company use the definition of a lease in SLFRS 16.

This policy is applied to contracts entered into (or changed) after 1st April 2019.

3.8.1 Company acting as a lesseeAt commencement or modification of a contract that contains a lease component, the Company allocates consideration in the contract to each lease component on the basis of its stand-alone price. However, for lease of branches the Company has elected not to separate non-lease component.

The group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurement of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate.

The company determines its incremental borrowing rate by analysing its borrowings from various external sources and makes certain adjustments to reflect the terms of the lease and type of the lease asset.

Lease payments included in the measurement of lease liability includes

• Fixed payments

• Variable lease payments that depend on an index or rate

• Amount expected to be payable under residual value guarantee

• The exercise price under a purchase option that the Company is reasonably certain to exercise

Lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable or if there is a fixed in substance lease payment.

When the lease liability is remeasured as such, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in the profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Company presents the right-of-use asset and the lease liability as separate line items in the Statement of Financial Position.

Short term leases and leases of low value assetsThe Company elected not to recognize right-of-use assets and lease liabilities for lease of low-value assets and short-term leases. The Company recognizes the lease payments associated with these leases as an expense on the straight-line basis.

3.8.2 The Company acting as a lessor When the Company acts as the lessor, it determines at lease inception whether the lease is a finance lease or an operating lease.

To classify each lease, the Company makes and overall assessment of whether the lease transfers substantially all of risks and rewards incidental to ownership of the underlying asset. If this is the case, lease is a finance lease; if not it is an operating lease.

The Company applies the derecognition and impairment requirements in SLFRS 9 to the net investment in the lease.

Policy applicable before 1st April 2019For contracts entered into prior to 1st April 2019, the Company determined whether the

arrangement was or contained a lease based on the assessment of whether;

• Fulfilment of the arrangement was dependent on the use of a specific asset or assets and;

• The arrangement had conveyed a right to use the asset

3.8.3 Finance Leases - As a LesseeFinance leases that transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance cost in the statement of profit or loss.

Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

3.8.4 Finance Leases - As a LessorWhen the Company is the lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are included in “Rentals receivable on leased assets”. The finance income receivable is recognized in ‘interest income’ over the periods of the leases so as to give a constant rate of return on the net investment in the leases.

3.8.5 Operating Leases - As a LesseeOperating lease payments are recognized as an expense in the statement of profit or loss on a straight-line basis over the lease term. Contingent rent payable is recognized as an expense in the period in which they are incurred.

3.8.6 Operating Leases - As a LessorInitial direct costs incurred in negotiating operating leases are added to the carrying



amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

3.9 Tax expenseTax expense comprises current, deferred tax and other statutory taxes. Income tax and deferred tax expense is recognized in Statement of Profit or Loss except to the extent that it relates to items recognized in the Statement of Other Comprehensive Income or Statement of Changes in equity.

3.9.1 Current tax expenseCurrent tax is the expected tax payable or recoverable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the tax on dividend income.

The provision for income tax is based on the elements of income and expenditure as reported in the Financial Statements and is measured using the tax rates enacted or substantially enacted as at the reporting date.

3.9.2 Deferred taxDeferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

• Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

• Temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

• Taxable temporary differences arising on the initial recognition of goodwill.

• Taxable temporary differences arising on subsidiaries, associates or joint ventures who have not distributed their entire profits to the parent or investor.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are not discounted.

The net increase in the carrying amount of deferred tax liability net of deferred tax asset is recognized as deferred tax expense and conversely any net decrease is recognized as reversal to deferred tax expense, in the Statement of Profit or Loss.

3.9.2.1 Deferred Tax on Undistributed Profits of Equity Accounted InvesteesThe Company does not control its equity accounted investees. It is therefore generally not in a position to control the timing of the reversal of a possible taxable temporary difference relating to the undistributed profits of the equity accounted investees.

The Company calculates deferred tax based on the most likely manner of reversal, taking into account management's intent and the

tax jurisdiction applicable to relevant equity accounted investees.

The management intends to recover the carrying amount of the investment primarily through sale of the investment rather than through dividends. The deferred tax implications are evaluated based on the tax consequences on the sale of investments.

Since the carrying amount is expected to be recovered through a sale transactions which has no tax consequences, no temporary difference arise on the equity accounted investees and no deferred tax is provided.

3.9.3 Withholding Tax on DividendsDividend distributed out of taxable profit of the local companies attracts a 14% deduction at source and is not available for set off against the tax liability of the Company. Withholding tax that arises from the distribution of dividends by the Company is recognized at the same time as the liability to pay the related dividend is recognized.

3.9.4 Economic Service Charge (ESC)As per the provisions of Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, ESC is payable on the liable turnover at specified rates. ESC is deductible from the income tax liability. Any unclaimed amount can be carried forward and set off against the income tax payable in the five subsequent years as per the relevant provision in the Act.

3.9.5 Nation Building Tax (NBT)As per the provisions of the Nation Building Tax Act, No. 9 of 2009 and the subsequent amendments thereto, Nation Building Tax should be payable at the rate of 2% with effect from 1 January 2011 on the liable turnover as per the relevant provisions of the Act. Nation Building Tax was abolished with effect from 1st December 2019.

3.9.6 Value Added Tax on Financial Services (VAT on FS)VAT on Financial Services is calculated in accordance with the amended VAT Act No. 7 of 2003 and subsequent amendments thereto. The base for the computation of VAT


on Financial Services is the accounting profit before income tax adjusted for the economic depreciation and emoluments of employees. VAT on financial services is computed on the prescribed rate of 15%.

The VAT on Financial service is recognized as expense in the period it becomes due.

3.9.7 Crop Insurance Levy (CIL)As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from April 01, 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

3.9.8 Debt Repayment Levy (DRL) on financial servicesAs per the Finance Act No. 35 of 2018, with effect from October 1, 2018, DRL of 7% was introduced on the value addition attributable to the supply of financial services by each financial institution. DRL is chargeable on the same base used for calculation of VAT on financial services as explained in Note 3.9.6 above. Debt Repayment Levy was abolished with effect from 1st January 2020.

3.9.9 Borrowing CostsBorrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets that take a substantial period of time to get ready for its intended use or sale, are capitalized as part of the assets.

Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in Profit or Loss using the effective interest method.

3.9.10 Other Non-Financial Liabilities and ProvisionsLiabilities are recognized in the Statement of Financial Position when there is a present obligation as a result of a past event, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Obligations payable at the demand of the creditor within one year of the reporting date are treated as current liabilities. Liabilities payable after one year from the reporting date are treated as non-current liabilities.

3.9.11 Deposits due from CustomersDeposits include term deposits and certificates of deposits. They are stated in the Statement of Financial Position at amount payable. Interest paid / payable on these deposits based on effective interest rate is charged to the Statement of Profit or Loss.

3.9.12 Deposit Insurance Scheme In terms of the Finance Companies Direction No 2 of 2010 “Insurance of Deposit Liabilities” issued on 27th September 2010, all Registered Finance Companies are required to insure their deposit liabilities in the Deposit Insurance Scheme operated by the Monetary Board in terms of Sri Lanka Deposit Insurance Scheme Regulations No 1 of 2010 issued under Sections 32A to 32E of the Monetary Law Act with effect from 1st October 2010.

Deposits to be insured include time and savings deposit liabilities and exclude the following.

• Deposit liabilities to member institutions

• Deposit liabilities to Government of Sri Lanka

• Deposit liabilities to shareholders, directors, key management personnel and other related parties as defined in Finance Companies Act Direction No 03 of 2008 on Corporate Governance of Registered Finance Companies

• Deposit liabilities held as collateral against any accommodation granted

• Deposit liabilities falling within the meaning of dormant deposits in terms of the Finance Companies Act, funds of which have been transferred to Central Bank of Sri Lanka

Registered Finance Companies are required to pay a premium of 0.15% on eligible deposit liabilities as at end of the month to be payable within a period of 15 days from the end of the respective month.

3.10 Debt Securities IssuedThese represent the funds borrowed by the Company for long-term funding requirements. Subsequent to initial recognition debt

securities issued are measured at their amortised cost using the effective interest method, except where the Company designates debt securities issued at fair value through profit or loss. Interest paid/payable is recognised in profit or loss.

3.11 Other LiabilitiesOther liabilities are recorded at amounts expected to be payable at the Reporting date.

3.12EmployeeBenefits3.12.1 Defined Contribution Plans A Defined Contribution Plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to Defined Contribution Plans are recognized as an employee benefit expense in the Statement of Profit or Loss in the periods during which services are rendered by employees.

3.12.1.1 Employees’ Provident Fund (EPF)The Company and employees contribute 12% and 8% respectively on the salary of each employee to the above mentioned funds.

3.12.1.2 Employees’ Trust Fund (ETF)The Company contributes 3% of the salary of each employee to the Employees’ Trust Fund.

3.12.2 Retirement Benefits Plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company's net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognised past service costs are deducted.

The calculation is performed every three years by a qualified actuary using the projected unit credit method. For the purpose of determining the charge for any period before the next regular actuarial valuation falls due, an approximate estimate provided by the qualified actuary is used.



When the benefits of a plan are improved, the portion of the increased benefit related to past service by employees is recognized in Profit or Loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in Profit or Loss.

The Company recognizes all actuarial gains and losses arising from the defined benefit plan in other comprehensive income (OCI) and all other expenses related to defined benefit plans are recognize as personnel expenses in Statement of Profit or Loss. This retirement benefit obligation is not externally funded.

However, according to the Payment of Gratuity Act No.12 of 1983, the liability for the gratuity payment to an employee arises only on the completion of 5 years of continued service with the Company.

3.12.3 Short-term Employee BenefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus if the company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

3.13 Provisions, Contingent Assets and Contingent LiabilitiesProvisions are made for all obligations (legal or constructive) existing as at the reporting date when it is probable that such an obligation will result in an outflow of resources and a reliable estimate can be made of the quantum of the outflow. The amount recognized is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation at that date.

All contingent liabilities are disclosed as a note to the Financial Statements unless the outflow of resources is remote. Contingent assets are disclosed, where inflow of economic benefit is probable.

Statement of Profit or Loss and Other Comprehensive Income

3.14 Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Company, and the revenue and associated costs incurred or to be incurred can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment.

3.14.1 Interest Income on Leases, Hire Purchases, Loans and AdvancesInterest income and expense are recognized in Profit or Loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Company estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all transaction costs and fees paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Interest income and expense presented in the Statement of Profit or Loss includes,

• interest on financial assets and financial liabilities measured at amortized cost calculated on an effective interest basis

• interest on investments measured at FVOCI securities calculated on an effective interest basis

Interest income and expense on all trading assets and liabilities are considered to be incidental to the Company's trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income.

Fair value changes on other derivatives held for risk management purposes, and other financial assets and liabilities carried at fair value through Profit or Loss, are presented in net income from other financial instruments at fair value through Profit or Loss in the Statement of Profit or Loss.

The excess of aggregated contract receivable over the cost of the assets constitutes the total unearned income at the commencement of a contract. The unearned income is recognized as income over the term of the facility commencing with the month that the facility is executed in proportion to the declining receivable balance, so as to produce a constant periodic rate of return on the net investment.

3.14.2 Service charge and facility fee from micro finance facilitiesCollection on service charge and facility fee from micro finance facilities are accounted on cash basis.

3.14.3 Fees and Other IncomeFees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees are recognized as the related services are performed.

Profit or loss on contracts terminated, collections on contracts written off, interest on overdue rentals, interest earned on property sale and buy back agreements are accounted for on cash basis.

3.14.4 Net income from other financial instruments at fair value through Profit or LossNet income from other financial instruments at fair value through Profit or Loss relates to non-trading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities designated at fair value through Profit or Loss, and include all realized and unrealized fair value changes, interest, dividends and foreign exchange differences.


3.14.5 Factoring IncomeRevenue is derived from two sources, Funding and providing Sales Ledger Related Services.

Funding - Discount income relating to factoring transactions is recognized at the end of a given accounting month. In computing this discount, a fixed rate agreed upon at the commencement of the factoring agreement is applied on the daily balance in the client’s current account.

Sales Ledger Related Services - A service charge is levied as stipulated in the factoring agreement.

Income is accounted for on an accrual basis and deemed earned on disbursement of advances for invoices factored.

The above revenue components are accounted on an accrual basis and deemed earned on disbursement of advances for invoices factored.

3.14.6 Other IncomeRent income and non-operational interest income are accounted for on accrual basis.

Dividend income is recognized when the right to receive payment is established.

Gain on disposal of property, plant and equipment and other non-current assets, including investments held by the Company have been accounted for in the Statement of Profit or Loss Income, after deducting from the net sales proceeds on disposal of the carrying amount of such assets.

3.14.7 Rental IncomeRental income from investment property is recognized in Profit or Loss on a straight-line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income, over the term of the lease. Rental income from subleased property is recognized as other income.

3.15 Expenses RecognitionExpenses are recognized in the Statement of Profit or Loss on the basis of a direct

association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant & equipment in a state of efficiency has been charged to income in arriving at the profit for the year.

For the presentation of the Statement of Profit or Loss the Directors are of the opinion that the nature of the expenses method present fairly the element of the Company’s performance, and hence such presentation method is adopted.

3.16 Earnings per ShareThe Company presents basic earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the Profit or Loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.

3.17 Statement of Cash FlowsThe Cash Flow Statement has been prepared using the 'Indirect Method' of preparing Cash Flows in accordance with the Sri Lanka Accounting Standard 7 'Cash Flow Statements.' Cash and cash equivalents comprise short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Cash and cash equivalents comprise of cash in hand and cash at banks and other highly liquid financial assets which are held for the purpose of meeting short-term cash commitments with original maturities of less than three months which are subject to insignificant risk of changes in their fair value.

3.18 Movement of Reserves Movement of Reserves is disclosed in the Statement of Changes in Equity.

3.19 Related Party TransactionsTransactions with related parties are conducted on normal business terms. The relevant disclosures are given in Note 42 to the Financial Statements.

3.20 Transactions with Related PartiesThe Company carries out transactions in the ordinary course of its business with parties who are defined as related parties in Sri Lanka Accounting Standard 24.

3.20.1 Transactions with Key Management PersonnelAccording to Sri Lanka Accounting Standard 24 “Related Party Disclosures”, Key management personnel, are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the company has pre-defined approved list of key management personal.

3.22 Operating SegmentsAn operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. All operating segments operating results are reviewed regularly by Board of Directors of the Company to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.

Accordingly, the segment comprises of financial services are described in Note 47.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

Expenses that cannot be directly identified to a particular segment are allocated on bases decided by the management and applied consistently throughout the year.

3.23 Events after reporting date All material subsequent events have been considered and where appropriate adjustments or disclosures have been made in the respective Notes to the Financial Statements.



3.24 Commitments and ContingenciesAll discernible risks are accounted for in determining the amount of all known liabilities. Contingent Liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent Liabilities are not recognized in the statement of financial position but are disclosed unless they are remote.

3.25 Capital Management The Board of Directors monitor the return on capital investment on a month basis. This review is mainly carried out through return on investment analysis prepared on a quarterly basis. The plan forecasts are also reviewed on a monthly basis to ensure that targets are met in order to manage the capital invested on the Company.

The Board of Directors also decides and monitors the level of dividends to ordinary shareholders. The Company does not subject to any externally impose capital requirements. However, companies within the company have such requirement based on the industry in which such company established. The Company which require externally imposed capital will monitor such requirement on a regular basis and report to respective legal authority in order to ensure compliance with such regulatory requirement.

4. NEW ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE AS AT REPORTING DATEThe Institute of Chartered Accountants of Sri Lanka has issued the following amendments to the new Sri Lanka Accounting Standards (SLFRSs/ LKASs) which will become applicable for financial periods beginning after 1st January 2020. Accordingly, the Company has not applied the following new standards in preparing these Company’s Financial Statements.

The following amendments to the standards are not expected to have a significant impact on the Company’s Financial Statements.

• Amendments to references to conceptual framework in Sri Lanka Financial Reporting Standards

• Definition of a business (Amendments to SLFRS 3) SLFRS 17 Insurance Contracts

• Interest rate benchmark reforms. (Amendments to SLFRS 9, LKAS 39, and SLFRS 7)

“Interest rate benchmark reform is a global initiative to replace or reform interbank offered rates (IBORs) that are used to determine interest cash flows on financial instruments such as loans to customers, debt securities and derivatives. Historically IBORs such as USD LIBOR have been determined by panels of banks with a heavy reliance on expert judgement. The objective of the reforms is to replace IBORs with alternative nearly risk-free rates (RFRs) that are based on actual market transactions. The Financial Conduct Authority has stated that it will no longer compel panel banks to submit values for LIBORs after 31 December 2021 and it is expected that these benchmarks will cease to exist thereafter. Consequently, financial contracts referencing these benchmarks with a maturity beyond 2021 may need to be amended to reference the alternative RFR in the applicable currency.

There remain many uncertainties associated with the IBOR transition, including the prospective assessment of hedge accounting effectiveness because it is not known when hedged items and hedging instruments will be amended to reference alternative RFRs, or how this will change the cash flows on these instruments.”


FOR THE YEAR ENDED 31ST MARCH 2020 2019 Rs. Rs.

5 INTEREST INCOMEInterest income on;Finance lease 2,945,104,135 3,266,004,759 Loans and advances 8,218,184,204 8,914,683,340 Hire purchases 2,741,336 4,770,935 Factoring 475,954,486 701,127,703 Overdue rental 910,867,599 990,674,940 Rentals and sales proceeds - contracts written off 238,917,979 249,229,762

12,791,769,739 14,126,491,439

6 INTEREST EXPENSEInterest on other financial liabilities due to customers 3,102,343,727 3,072,086,811 Interest on bank overdrafts and other short-term borrowings 40,833,200 137,726,950 Interest on long term borrowings 1,737,220,036 1,738,711,815 Debenture interests 490,758,505 490,891,919 Charges on forward rate contracts 723,830,830 1,257,420,714 Interest on lease liability 64,573,910 -

6,159,560,208 6,696,838,209

7 NET INCOME FROM OTHER FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS Decrease in market value of quoted investments - shares (10,123,547) (25,693,391)Appreciation in market value of quoted investments - unit trust 433,209,762 25,710,782 Fair value gain/(loss) on investment in LOLC Myanmar Micro-Finance Company Limited 319,771,025 (3,477,348)

742,857,240 (3,459,957)

8 OTHER INCOMEDividend Income 240,800 7,733,981 Interest received from government securities 457,714,493 513,388,427 Interest income on fixed deposits and debentures 87,136,620 25,700,826 Profit on disposal of property, plant and equipment 191,248 2,650,000 Documentation fees 174,457,998 189,041,058 Commission Income 57,290,000 55,767,500 Sundry income 64,011,321 142,399,189 Foreign exchange gain 71,170,950 83,006,746 Change in fair value of investment properties (Note 25) 35,186,676 114,657,720 Transfer fees and profit on termination 611,948,011 619,512,558

1,559,348,117 1,753,858,005

9 ALLOWANCE FOR IMPAIRMENT AND WRITE OFFSLease receivables (Note 18.1.4) 575,712,309 217,869,047 Hire purchases (Note 18.2.3) - 233,905 Advances and loans (Note 19.1.2) 1,563,837,790 996,721,509 Factoring (Note 19.2.2) 266,191,229 670,522,548 Impairment on Debenture (Note 17.2.2.1) - 203,689

2,405,741,328 1,885,550,698



FOR THE YEAR ENDED 31ST MARCH 2020 2019Stage 1 Stage 2 Stage 3 Total Total

Rs. Rs. Rs. Rs. Rs.9.1 Impairment charge/(reversal) to the Income

StatementInvestment securities - - - - 203,689

Financial assets measured at amortised cost/ Finance lease receivables and hire purchasesFinance lease receivables Individual impairment (Note 18.1.3.1) - - 287,895,247 287,895,247 148,670,402 Collective impairment (Note 18.1.3.2) 33,363,812 90,550,080 163,903,170 287,817,062 69,198,645

Hire purchase receivables Individual impairment (Note 18.2.2.1) - - - - 240,308 Collective impairment (Note 18.2.2.2) - - - - (6,403)

Financial assets measured at amortised cost/ Advances and other loansAdvances and loans Individual impairment (Note 19.1.1.1) - - 668,784,327 668,784,327 421,337,605 Collective impairment (Note 19.1.1.2) (50,687,533) 128,143,286 817,597,710 895,053,463 575,383,904

Factoring receivables Individual impairment (Note 19.2.1.1) - - 138,530,410 138,530,410 530,295,456 Collective impairment (Note 19.2.1.2) 11,107,326 (9,583,810) 126,137,303 127,660,819 140,227,092

(6,216,395) 209,109,556 2,202,848,166 2,405,741,328 1,885,550,698

9.2 Comparison between provision for impairment as per SLFRS 09 and Central Bank (CBSL) requirement

AS per SLFRS 09 AS per CBSLImpairment ChargetoProfitorLoss

for 2019/20

Writtenoffduring

the year

Charge to profitorloss

netofwriteoff

ProvisionImpact

Rs. Rs. Rs. Rs.Lease receivables 575,712,309 427,144,462 148,567,847 126,917,860 Advances and loans 1,563,837,790 975,745,902 588,091,888 646,024,029 Factoring 266,191,229 409,882,295 (143,691,066) (189,077,058)

2,405,741,328 1,812,772,659 592,968,669 583,864,830

FOR THE YEAR ENDED 31ST MARCH 2020 2019Rs. Rs.

10 DEPRECIATION AND AMORTIZATIONDepreciation of property, plant and equipment (Note 27) 155,827,252 128,370,878 Amortization off of intangible assets (Note 26) 1,659,671 2,036,281 Amortization off of right-of-use asset (Note 28) 134,472,796 -

291,959,719 130,407,159



11 RESULTS FROM OPERATING ACTIVITIES Results from operating activities before value added tax on financial services (VAT on FS), nations building tax (NBT) on financial services and

debt recovery levy is stated after all the expenses including the followings;

FOR THE YEAR ENDED 31 ST MARCH 2020 2019Rs. Rs.

Directors' fees and other Emoluments 24,929,000 28,962,853 Auditors' remuneration - statutory audit 1,700,000 1,650,000 - audit related services 1,280,000 2,213,600 Depreciation and amortization 157,486,923 130,407,159 Amortization of right-of-use asset 134,472,796 - Legal and professional expenses 48,004,147 40,141,056 Personnel expenses (Note 11.1) 1,456,287,197 1,515,141,655

11.1 Personnel expensesSalaries and other benefits 1,316,782,956 1,394,828,528 Defined contribution plan cost - EPF 83,188,264 79,333,638 - ETF 20,797,062 19,833,410 Defined benefit plan costs - Employee benefits 35,518,915 21,146,079

1,456,287,197 1,515,141,655

12 VAT AND NBT ON FINANCIAL SERVICES AND DEBT RECOVERY LEVYValue added tax on financial services 478,720,917 496,452,427 Nation building tax on financial services 41,615,483 66,193,657 Debt recovery levy 227,155,409 130,771,330

747,491,809 693,417,414

13 INCOME TAX EXPENSECurrent tax expense (Note 13.1) 619,564,658 656,101,900 Deferred tax charge (Note 36.2.1) (169,748,825) 187,216,219 Income tax expense 449,815,833 843,318,119

The Company is liable to pay income tax at the rate of 28% for the period of nine months from 1st April 2019 to 31st December 2019 as per the Inland Revenue Act No 24 of 2007 and at the rate of 24% for the period from 1st January 2020 to 31st March 2020 as per the IRD notice no PN/IT/2020-03 dated 12th Feb 2020 on its taxable income for the year 2019/20 (2018/19 : 28%).


13.1 Current tax expenseCurrent year income tax expense on ordinary activities (Note 13.2) 619,564,658 649,582,449 Under provision of taxes in respect of previous years - 6,519,451

619,564,658 656,101,900



13.2 Numericalreconciliationofaccountingprofitstoincometaxexpense,Accounting profit before income tax 1,996,662,218 2,041,414,660 Aggregate disallowable expenses 4,484,709,390 7,249,707,462 Aggregate tax deductible expenses (3,427,797,501) (4,218,982,097)Tax exempt income (758,890,188) (2,752,202,708)Taxable profit 2,294,683,919 2,319,937,317

Income tax at 28 % 481,883,623 649,582,449 Income tax at 24 % 137,681,035 - Current income tax expense 619,564,658 649,582,449

Though the legislative process relating to the amendment to laws needs to be completed in order for the tax rate to be considered as substantively enacted as at the reporting date, the difference between computing the current tax liability using the proposed rate of 24% and the existing 28%, has an immaterial impact on the financial statements.

14 EARNINGS PER SHARE

FOR THE YEAR ENDED 31ST MARCH 2020 2019Net profit attributable to equity holders of the Company (Rs.) 1,546,846,385 1,198,096,541 Weighted average number of ordinary shares in issue (shares) 6,377,711,170 6,377,711,170 Earnings per Share (Rs.) 0.24 0.19

Basic earnings per share is calculated by dividing the net profit for the year attributable to the ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

AS AT 31ST MARCH 2020 2019Rs. Rs.

15 CASH AND CASH EQUIVALENTS 15.1 Favourable cash and cash equivalent balances

Cash in hand 197,398,775 127,136,035 Balances with banks 1,937,343,035 2,423,138,281

2,134,741,810 2,550,274,316

15.2 Unfavourable cash and cash equivalent balancesBank overdraft (384,978,149) (390,069,910)Total cash and cash equivalents in the cash flow statement 1,749,763,661 2,160,204,406




16 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL)Equity shares (Note 16.1) 1,025,209,302 350,783,353 Unit trust (Note 16.2) 2,069,883,577 2,475,710,778

3,095,092,879 2,826,494,131

2020 2019AS AT 31ST MARCH No. of % Cost Fair Value No. of % Cost Fair Value

Shares Rs. Rs. Shares Rs. Rs.16.1 Equity shares

Colombo Drydocks PLC 4,315 0.006% 85,997 217,476 4,315 0.006% 85,997 228,695

DFCC Bank PLC 38 0.000% 380 3,105 38 0.000% 380 2,660

Overseas Realty Ceylon PLC 113,680 0.009% 1,664,891 1,705,200 113,680 0.009% 1,664,891 1,864,352

Seylan Bank PLC 110,805 0.042% 1,104,210 3,213,345 79,978 0.042% 1,104,210 2,871,210

Hayleys PLC 734,144 0.979% 216,803,911 113,718,906 734,144 0.979% 216,803,911 123,336,192

LOLC Myanmar Micro-Finance Company Limited (Note 16.1.1)

3,168,920 13.83% 430,900,000 906,351,270 519,520 4.04% 66,800,000 222,480,244

650,559,389 1,025,209,302 286,459,389 350,783,353

16.1.1 LOLC Myanmar Micro-Finance Company Limited The Company has recognized investment in LOLC Myanmar Micro-Finance Company Limited as financial asset measured at fair value through

profit or loss in the year ended 31st March 2020. During the year, the Company has acquired 2,649,400 shares at a par value of Rs.137.43 (MMK 1000) amounting to Rs.364,100,000 (MMK 2,649,400,000).

Fair value of unquoted shares valued based on Residual Income approach and is classified as Level 3 valuation based on SLFRS 13 - “Fair value measurement”. Equity Risk Premium used for the fair valuation is 17.91% (2018/19 : 18.83%) and Terminal Growth rate is 3% (2018/19 : 3%).

2020 2019AS AT 31ST MARCH No. of Cost Fair Value No. of Cost Fair Value

Units Rs. Rs. Units Rs. Rs.16.2 Unit trust

NDB Wealth Money Plus Fund 51,309,943 1,000,000,000 1,130,476,054 51,309,943 1,000,000,000 1,012,535,019

JB Vantage Money market Fund 36,963,447 819,727,274 939,407,523 45,092,372 1,000,000,000 1,011,259,565

First Capital Money market fund - - - 294,800 449,999,996 451,916,194 1,819,727,274 2,069,883,577 2,449,999,996 2,475,710,778


17 INVESTMENT SECURITIES / OTHER INVESTMENTSFinancial assets measured at fair value through other comprehensive income (Note 17.1) 3,245,145,959 3,755,998,435 Financial assets measured at amortised cost (Note 17.2) 806,105,416 2,930,284,134

4,051,251,375 6,686,282,569



17.1 Financial assets measured at fair value through other comprehensive incomeTreasury bills (17.1.1) 3,244,967,209 3,755,819,685 Unquoted shares (Note 17.1.2) 178,750 178,750

3,245,145,959 3,755,998,435

AS AT 31ST MARCH 2020 2019Cost Fair Value Cost Fair Value

Rs. Rs. Rs. Rs.17.1.1 Treasury bills

First Capital Treasuries Limited 3,114,603,820 3,244,967,209 3,545,633,300 3,755,819,685 3,114,603,820 3,244,967,209 3,545,633,300 3,755,819,685

AS AT 31ST MARCH 2020 2019No. of Cost Fair Value No. of Cost Fair Value

Shares Rs. Rs. Shares Rs. Rs. 17.1.2 Unquoted shares

Equity Investments Lanka Limited 16,875 168,750 168,750 16,875 168,750 168,750 Credit Information Bureau 100 10,000 10,000 100 10,000 10,000

178,750 178,750 178,750 178,750

17.1.2.1 The Management has determined the fair value of investments in unquoted shares as at 31st March 2020. However, fair value change has not been recoded since is not material to the financial statements.


17.2 Financial assets at amortized costGovernment securities (Note 17.2.1) 806,105,416 2,409,024,492 Debentures (Note 17.2.2) - 521,259,642

806,105,416 2,930,284,134

AS AT 31ST MARCH 2020 2019Year of Cost Fair Value Year of Cost Fair Value

Maturity Rs. Rs. Maturity Rs. Rs.17.2.1 Government securities

Reverse repurchase agreements 2020 806,105,416 806,105,416 2019 2,409,024,492 2,409,024,492 806,105,416 806,105,416 2,409,024,492 2,409,024,492


AS AT 31ST MARCH 2020 2019Year of Cost Fair Value Year of Cost Fair Value

Maturity Rs. Rs. Maturity Rs. Rs. 17.2.2 Debentures

Dunamis Capital PLC - - - 2019 / 2020 251,008,185 259,310,598 Citizens Development Business Finance PLC

- - - 2021 251,054,500 262,152,733

- - 502,062,685 521,463,331 Provision for impairment (Note 17.2.2.1)

- - - (203,689)

- - 502,062,685 521,259,642

AS AT 31ST MARCH 2020 2019 Rs. Rs.

17.2.2.1 Movement in provision for impairment during the year Balance as at 1st April (203,689) - Reversal/ (Charge) for the year 203,689 (203,689)Balance as at 31st March - (203,689)


18 FINANCIAL ASSETS MEASURED AT AMORTISED COST - FINANCE LEASE RECEIVABLES AND HIRE PURCHASESGross PortfolioStage 1 10,983,617,107 12,724,803,743 Stage 2 1,279,628,489 1,082,774,566 Stage 3 506,765,681 400,984,928

12,770,011,277 14,208,563,237 Less: Expected credit lossStage 1 (113,542,092) (80,178,280)Stage 2 (174,581,550) (84,031,470)Stage 3 (151,126,445) (126,472,490)

(439,250,087) (290,682,240)Net Portfolio 12,330,761,190 13,917,880,997

Analysis of Net PortfolioBy ProductFinance lease receivables (Note 18.1) 12,330,761,190 13,917,880,997 Hire purchase receivables (Note 18.2) - -

12,330,761,190 13,917,880,997




18.1 Finance lease receivablesGross rentals receivable 17,067,851,575 19,268,884,285 Unearned income (4,297,840,298) (5,060,321,048)Total rentals receivable (Note 18.4) 12,770,011,277 14,208,563,237 Allowance for impairment (Note 18.1.3) (439,250,087) (290,682,240)

12,330,761,190 13,917,880,997 Finance lease receivablesReceivables within one year (Note 18.1.1) 3,164,991,132 5,337,808,164 Receivable from one to five years (Note 18.1.2) 8,642,692,653 8,279,875,019 Overdue rental receivable 962,327,492 590,880,054

12,770,011,277 14,208,563,237 (-) Allowance for impairment (Note 18.1.3) (439,250,087) (290,682,240)

12,330,761,190 13,917,880,997 18.1.1 Receivables within one year

Gross rentals receivable 5,426,612,227 8,076,390,354 Unearned income (2,261,621,095) (2,738,582,190)

3,164,991,132 5,337,808,164 18.1.2 Receivable from one to five years

Gross rentals receivable 10,678,911,856 10,601,613,877 Unearned income (2,036,219,203) (2,321,738,858)

8,642,692,653 8,279,875,019

18.1.3 Expected credit loss18.1.3.1 Allowance for individually significant impairment

Balance as at 1st April 68,312,653 144,807,205 Impact on initial application of SLFRS 9 - (62,205,748)Adjusted balance as at 1st April 68,312,653 82,601,457 Charge for the year (Note 18.1.4) 287,895,247 148,670,402 Write offs (288,006,758) (162,959,206)Balance as at 31st March 68,201,142 68,312,653

18.1.3.2 Allowance for individually non-significant impairmentBalance as at 1st April 222,369,587 39,987,569 Impact on initial appreciation of SLFRS 9 - 165,927,113 Adjusted balance as at 1st April 222,369,587 205,914,682 Charge for the year (Note 18.1.4) 287,817,062 69,198,645 Write offs (139,137,704) (52,743,740)Balance as at 31st March 371,048,945 222,369,587 Total expected credit loss 439,250,087 290,682,240




18.1.4 Impairment provision for the yearAllowance for individually significant impairment 287,895,247 148,670,402Allowance for individually non-significant Impairment 287,817,062 69,198,645

575,712,309 217,869,047

Movements in expected credit loss during the yearStage 1Balance as at 1st April 80,178,280 15,314,588 Impact on initial application of SLFRS 9 - 69,236,700 Adjusted balance as at 1st April 80,178,280 84,551,288 Charge/(Reversal) for the year 33,363,812 (4,373,008)Balance as at 31st March 113,542,092 80,178,280

Stage 2Balance as at 1st April 84,031,470 10,667,122 Impact on initial application of SLFRS 9 - 83,686,088 Adjusted balance as at 1st April 84,031,470 94,353,210 Charge/(Reversal) for the year 90,550,080 (10,321,740)Balance as at 31st March 174,581,550 84,031,470

Stage 3Balance as at 1st April 126,472,490 158,813,063 Impact on initial application of SLFRS 9 - (49,201,423)Adjusted balance as at 1st April 126,472,490 109,611,640 Charge for the year 451,798,417 232,563,795 Written-off during the year (427,144,462) (215,702,945)Balance as at 31st March 151,126,445 126,472,490 Total expected credit loss 439,250,087 290,682,240

Stage 3 - Individually non-significant Balance as at 1st April 58,159,837 14,005,858 Impact on initial application of SLFRS 9 - 13,004,325 Adjusted balance as at 1st April 58,159,837 27,010,183 Charge for the year 163,903,170 83,893,393 Reversal for written-off during the year (139,137,704) (52,743,739)Balance as at 31st March 82,925,303 58,159,837

Stage 3 - Specific allowance for impairmentBalance as at 1st April 68,312,653 144,807,205 Impact on initial application of SLFRS 9 - (62,205,748)Adjusted balance as at 1st April 68,312,653 82,601,457 Charge for the year 287,895,247 148,670,402 Reversal for written-off during the year (288,006,758) (162,959,206)Balance as at 31st March 68,201,142 68,312,653



18.2 Hire purchases receivablesGross rentals receivable - - Allowance for impairment (Note 18.2.2) - -

- -

Hire purchase receivables - - Receivables within one year (Note 18.2.1) - - Receivables from one to five years - - Overdue rental receivable - - (-) Allowance for impairment (Note 18.2.2) - -

- -18.2.1 Receivables within one year

Gross rentals receivable - - Unearned income - - Collective allowance for impairment - -


Balance as at 1st April - 1,804,281 Charge for the year (Note 18.2.3) - 240,308 Write off during the year - (2,044,589)Balance as at 31st March - -

18.2.2.2 Allowance for individually non-significant impairmentBalance as at 1st April - 41,418 Impact on initial application of SLFRS 9 - (9,915)Adjusted balance as at 1st April - 31,503 Reversal for the year (Note 18.2.3) - (6,403)Write off during the year - (25,100)Balance as at 31st March - -

Total expected credit loss - -

18.2.3 Impairment charge for the yearAllowance for individually significant impairment - 240,308 Allowance for individually non-significant Impairment - (6,403)

- 233,905



Movements in expected credit loss during the yearStage 3Balance as at 1st April - 1,845,701 Impact on initial application of SLFRS 9 - (9,916)Adjusted balance as at 1st April - 1,835,785 Charge for the year - 233,906 Write off during the year - (2,069,690)Balance as at 31st March - -

Stage 3 - Individually non-significant Balance as at 1st April - 41,419 Impact on initial application of SLFRS 9 - (9,916)Adjusted balance as at 1st April - 31,503 Charge for the year - (6,403)Write off during the year - (25,100)Balance as at 31st March - -

Stage 3 - Specific allowance for impairmentBalance as at 1st April - 1,804,282 Impact on initial application of SLFRS 9 - - Adjusted balance as at 1st April - 1,804,282 Charge for the year - 240,308 Write off during the year - (2,044,589)Balance as at 31st March - -

18.3 Allowance for impairment for leases and hire purchases receivablesBalance as at 1st April 290,682,240 186,640,472 Impact on initial application of SLFRS 9 - 103,711,450 Adjusted balance as at 1st April 290,682,240 290,351,922 Charge for the year 575,712,309 218,102,952 Write off during the year (427,144,462) (217,772,634)Balance as at 31st March 439,250,087 290,682,240



AS AT 31ST MARCH % Gross amount 2020 % Gross amount 2019Rs. Rs.

18.4 Concentration by sectorManufacturing 10% 1,295,989,268 11% 1,553,765,555 Agriculture 9% 1,126,880,868 8% 1,198,506,033 Trade 12% 1,588,329,357 14% 1,954,776,818 Transport 15% 1,853,203,867 14% 2,012,002,692 Construction 22% 2,790,754,877 20% 2,860,252,635 Services 26% 3,258,920,782 27% 3,879,251,757 Micro and others 7% 855,932,258 5% 750,007,747

12,770,011,277 14,208,563,237

Assets pledged as securitiesLease & hire purchase receivables amounting to Rs.7,176,035,349 /- assigned under funding arrangement (2019- Rs. 7,556,156,769/-) also included under lease and hire purchase receivables.


19 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS, ADVANCES AND FACTORING RECEIVABLESGross PortfolioStage 1 37,100,004,941 35,534,683,298 Stage 2 3,027,423,766 2,433,849,197 Stage 3 4,037,010,526 3,518,763,537

44,164,439,233 41,487,296,032 Expected credit loss/impairment allowance Stage 1 (284,913,182) (324,493,389)Stage 2 (317,884,147) (199,324,671)Stage 3 (1,753,831,850) (1,388,410,298)

(2,356,629,179) (1,912,228,358)Net Portfolio 41,807,810,054 39,575,067,674

Analysis of gross portfolio - By productAdvances and loans (Note 19.1) 40,447,903,380 37,738,243,987 Factoring receivables (Note 19.2) 1,359,906,674 1,836,823,687

41,807,810,054 39,575,067,674

19.1 Rentals receivable on loans to customersRentals receivable on loans to customers 39,446,113,965 37,172,189,713 Overdue loan instalments 2,716,838,928 1,693,011,899 Total rentals receivable 42,162,952,893 38,865,201,612 Allowance for impairment (Note 19.1.1) (1,715,049,513) (1,126,957,625)

40,447,903,380 37,738,243,987




Balance as at 1st April 324,577,813 287,390,480 Impact on initial application of SLFRS 9 - (101,953,556)Adjusted balance as at 1st April 324,577,813 185,436,924 Charge for the year (Note 19.1.2) 668,784,327 421,337,605 Reversal for written-off during the year (378,356,027) (282,196,716)Balance as at 31st March 615,006,113 324,577,813

19.1.1.2 Allowance for individually non-significant ImpairmentBalance as at 1st April 802,379,812 127,684,563 Adjustment on initial application of SLFRS 9 - 413,135,821 Adjusted balance as at 1st April 802,379,812 540,820,384 Charge for the year (Note 19.1.2) 895,053,463 575,383,904 Reversal for written-off during the year (597,389,875) (313,824,476)Balance as at 31st March 1,100,043,400 802,379,812

Total expected credit loss 1,715,049,513 1,126,957,625

19.1.2 Allowance for impairment during the yearAllowance for individually significant impairment 668,784,327 421,337,605 Allowance for individually non-significant Impairment 895,053,463 575,383,904

1,563,837,790 996,721,509

Movements in expected credit loss during the yearStage 1Balance as at 1st April 313,388,645 24,042,788 Impact on initial application of SLFRS 9 - 219,928,625 Adjusted balance as at 1st April 313,388,645 243,971,413 Charge/(Reversal) for the year (50,687,533) 69,417,232 Balance as at 31st March 262,701,112 313,388,645

Stage 2Balance as at 1st April 179,444,356 22,268,120 Impact on initial application of SLFRS 9 - 102,462,595 Adjusted balance as at 1st April 179,444,356 124,730,715 Charge for the year 128,143,286 54,713,641 Balance as at 31st March 307,587,642 179,444,356




Stage 3Balance as at 1st April 634,124,624 368,764,134 Impact on initial application of SLFRS 9 - (11,208,953)Adjusted balance as at 1st April 634,124,624 357,555,181 Charge for the year 1,486,382,037 872,590,635 Reversal for written-off during the year (975,745,902) (596,021,192)Balance as at 31st March 1,144,760,759 634,124,624

Total expected credit loss 1,715,049,513 1,126,957,625

Stage 3 - Individually non-significant Balance as at 1st April 309,546,811 81,373,655 Impact on initial application of SLFRS 9 - 90,744,602 Adjusted balance as at 1st April 309,546,811 172,118,257 Charge for the year 817,597,710 451,253,030 Reversal for written-off during the year (597,389,875) (313,824,476)Balance as at 31st March 529,754,646 309,546,811

Stage 3 - Specific allowance for impairmentBalance as at 1st April 324,577,813 287,390,480 Impact on initial application of SLFRS 9 - (101,953,556)Adjusted balance as at 1st April 324,577,813 185,436,924 Charge for the year 668,784,327 421,337,605 Reversal for written-off during the year (378,356,027) (282,196,716)Balance as at 31st March 615,006,113 324,577,813

19.2 Factoring receivablesFactoring receivables 2,001,486,341 2,622,094,420Allowance for impairment (Note 19.2.1) (641,579,667) (785,270,733)Balance as at 31st March 1,359,906,674 1,836,823,687

19.2.1 Allowance for impairment19.2.1.1 Allowance for individually significant impairment

Balance as at 1st April 565,875,106 399,176,014 Adjustment on initial application of SLFRS 9 - - Adjusted balance as at 1st April 565,875,106 399,176,014 Charge for the year (Note 19.2.2) 138,530,410 530,295,456 Write off during the year (327,156,029) (363,596,364)Balance as at 31st March 377,249,487 565,875,106



19.2.1.2 Allowance for individually non-significant impairmentBalance as at 1st April 219,395,627 32,586,361 Impact on initial application of SLFRS 9 - 46,582,174 Adjusted balance as at 1st April 219,395,627 79,168,535 Charge for the year (Note 19.2.2) 127,660,819 140,227,092 Write off during the year (82,726,266) - Balance as at 31st March 264,330,180 219,395,627

Total expected credit loss 641,579,667 785,270,733

19.2.2 Impairment charge for the yearAllowance for individually significant impairment 138,530,410 530,295,456 Allowance for individually non-significant Impairment 127,660,819 140,227,092

266,191,229 670,522,548

Movements in expected credit loss during the yearStage 1Balance as at 1st April 11,104,744 1,055,907 Impact on initial application of SLFRS 9 - 9,868,724 Adjusted balance as at 1st April 11,104,744 10,924,631 Charge for the year 11,107,326 180,113 Balance as at 31st March 22,212,070 11,104,744

Stage 2Balance as at 1st April 19,880,315 620,857 Impact on initial application of SLFRS 9 - 5,818,721 Adjusted balance as at 1st April 19,880,315 6,439,578 Charge for the year (9,583,810) 13,440,737 Balance as at 31st March 10,296,505 19,880,315

Stage 3Balance as at 1st April 754,285,674 430,086,611 Impact on initial application of SLFRS 9 - 30,893,728 Adjusted balance as at 1st April 754,285,674 460,980,339 Charge for the year 264,667,713 656,901,699 Net write off/ (Recoveries) during the year (409,882,295) (363,596,364)Balance as at 31st March 609,071,092 754,285,674

Total expected credit loss 641,579,667 785,270,733




Stage 3 - Individually non-significant Balance as at 1st April 188,410,568 30,910,597 Impact on initial application of SLFRS 9 - 30,893,728 Adjusted balance as at 1st April 188,410,568 61,804,325 Charge for the year 126,137,303 126,606,243 Reversal for write-offs (82,726,266) - Balance as at 31st March 231,821,605 188,410,568

Stage 3 - Specific allowance for impairmentBalance as at 1st April 565,875,106 399,176,014 Impact on initial application of SLFRS 9 - - Adjusted balance as at 1st April 565,875,106 399,176,014 Charge for the year 138,530,410 530,295,456 Reversal for write-offs (327,156,029) (363,596,364)Balance as at 31st March 377,249,487 565,875,106

AS AT 31ST MARCH % Gross amount 2020 % Gross amount 2019Rs. Rs.

19.2.3 Concentration by sectorAgriculture 8% 3,594,680,035 11% 4,438,250,298 Manufacturing 11% 4,863,270,147 6% 2,553,147,113 Services 28% 12,214,489,005 22% 9,076,416,101 Trading 24% 10,554,941,951 10% 4,078,611,255 Transport 9% 3,786,662,344 7% 3,056,303,379 Construction 11% 5,020,600,478 36% 14,790,042,321 Micro and Others 9% 4,129,795,273 8% 3,494,525,565

44,164,439,233 41,487,296,032

Assets pledged as securitiesLoan receivables amounting Rs. 6,411,266,173/- assigned under funding arrangement (2019-Rs. 5,693,646,676/-) are also included under loan receivables.


20 DERIVATIVE ASSETS HELD FOR RISK MANAGEMENTForward rate contracts (Note.20.1) 107,133,356 311,352,151


20.1 FORWARD RATE CONTRACTS The company entered into forward exchange contracts in order to hedge the risk of variability in functional currency equivalent cash flows

associated with the foreign currency - denominated loan. The forward contract is designed as a hedge of the changes in the cash flows relating to the changes in foreign currency rates relating to the loans.

Classificationofderivatives Derivatives are only used for economic hedging purposes and not as speculative investments. However, where derivatives do not meet the

hedge accounting criteria, they are classified as ‘held for trading’ for accounting purposes and are accounted for at fair value through profit or loss. They are presented as current assets or liabilities to the extent they are expected to be settled within 12 months after the end of the reporting period.

Fair value measurement For information about the methods used in determining the fair value of derivatives refer to note 49 to the financial statements.

Hedgeineffectiveness Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to

ensure that an economic relationship exists between the hedged item and hedging instrument.

For hedges of foreign currency purchases, the company enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item through revolving arrangements. The company therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the company uses the hypothetical derivative method to assess effectiveness.

Details Description of the hedge

Hedge instruments Forward foreign exchange contracts

Hedge items Foreign currency denominated borrowings

The company uses a mixture of forward foreign exchange contracts to hedge the foreign currency translation risk on its foreign borrowings.

The fair value of the derivatives designated as cash flow hedges are as follows;

2020 2019 Assets Liabilities Assets Liabilities

Rs. Rs. Rs. Rs.

The fair value of the derivatives designated as cash flow hedges 107,133,356 - 311,352,151 179,560,616

The time periods in which the hedged cash flows are expected to occur and affect the statement of comprehensive income are as follows;

2020 2019Within 1 year 1-5 Years Over 5 Years Within 1 Year 1-5 Years Over 5 Years

Rs. Rs. Rs. Rs. Rs. Rs.

Maturity of Cash Flow Hedges

9,616,550,540 - - 16,154,006,722 - -

For the year ended 31st March 2020, net loss of Rs.54 Mn (2019 : Net gain of Rs. 7.5 Mn) relating to the effective portion of cash flow hedges was recognised in other comprehensive income.




21 DUE FROM RELATED COMPANIESDikwella Resort (Private) Limited 27,432 - Browns Hotels and Resorts PLC 5,486 - Eden Hotel Lanka PLC 32,918 - Green Paradise (Private) Limited 1,905 - Browns Engineering & Construction (Private) Limited 5,486 -

73,227 -

22 CURRENT TAX ASSETSWithholding tax recoverable 7,658,883 17,945,394

7,658,883 17,945,394

23 OTHER CURRENT ASSETSFinancial assetsAdvances to employees (Note 23.1) 1,293,256 1,293,567

1,293,256 1,293,567 Non-financialAssetsPrepayments and advances 92,240,882 125,400,927 Debt relief fund (Note 23.2) 17,506,970 21,883,712 Other non-financial receivables 14,252,916 17,417,124 Inventories 5,782,928 4,599,450

129,783,696 169,301,213 Total other current assets 131,076,952 170,594,780

23.1 Advances to employeesBalance at 1st April 1,293,567 1,196,787 Advances granted during the year 8,138,439 6,436,900 Advances recovered during the year (8,138,750) (6,340,120)Balance at 31st March 1,293,256 1,293,567

23.2 As per the memorandum of understanding entered into by the Company with the Government of Sri Lanka on the Debt Relief Scheme on 8th January 2019, Rs. 17,506,970/- is to be received from Ministry of Finance as at 31st March 2020 (2019: Rs. 21,883,712).



AS AT 31ST MARCH 2020 2019Holding No. of

SharesBalance Holding No. of

SharesBalance

% Rs. % Rs.24 EQUITY ACCOUNTED INVESTEES

Commercial Insurance Brokers Limited 40% 240,000 800,000 40% 240,000 800,000 Add : share of profits applicable to the companyBalance at 1st April 97,850,635 90,010,410 Current year's share of profits before taxation 25,156,450 22,785,881 Taxation (6,839,883) (9,654,712)Current year's share of profits after taxation 18,316,567 13,131,169 Actuarial loss 38,726 (181,867)Income tax on other comprehensive income (10,843) 50,923 Dividends received during the year (8,400,000) (5,160,000)Sub total 107,795,085 97,850,635 Balance at 31st March 108,595,085 98,650,635

LOLC Development Finance PLC (formerly known as BRAC Lanka Finance PLC)

44.33% 105,499,048 1,265,987,676 44.33% 105,499,048 1,265,987,676

Add : share of profits applicable to the CompanyBalance at 1st April 2018 76,227,045 150,051,536 Current year's share of profits before taxation 78,228,495 (61,881,995)Taxation (29,743,647) (6,217,434)Current year's share of profits after taxation 48,484,848 (68,099,429)Actuarial loss (2,351,652) 6,631,139 Fair value losses that arose during the year (514,371) (10,499,481)Income tax on other comprehensive income - (1,856,720)Sub total 121,845,870 76,227,045 Balance at 31st March 1,387,833,546 1,342,214,721

Total 1,496,428,631 1,440,865,356

The principal activities of the equity accounted investees are as follows,Commercial Insurance Brokers Limited - Insurance BrokeringLOLC Development Finance PLC - Leasing/ Loans/ Deposit mobilisation


24.1 Currentyear’sshareofprofitThe Share of equity accounted investee profit is based on the audited financial statements of respective companies.Summarized financial data as at financial year end of Commercial Insurance Brokers Private Limited is stated below.

FOR THE YEAR ENDED 31ST DECEMBER 2019 2018Rs. Rs.

Revenue 255,178,492 268,138,948 Profit before tax 6,289,126 56,964,702 Profit after tax 45,791,419 32,827,923

Non Current Assets 167,658,610 144,361,263 Current Assets 211,533,834 199,647,666 Total assets 379,192,444 344,008,929

Current Liabilities 60,035,828 61,266,505 Non Current Liabilities 32,788,428 27,235,365 Total liabilities 92,824,256 88,501,870

Summarized financial data as at financial year end of LOLC Development Finance PLC is stated below.

For the year ended 31st March 2020 2019Rs. Rs.

Revenue 4,354,253,887 3,994,642,027 Profit before tax 176,468,520 (139,593,944)Profit/(Loss) after tax 109,372,541 (153,619,286)Total assets 18,418,730,739 13,839,228,112 Total liabilities 15,756,790,076 11,280,194,793

AS AT 31ST MARCH 2020 2019No. of Shares Fair Value No. of Shares Fair Value

Rs. Rs. LOLC Development Finance PLC 105,499,048 3,586,967,632 105,499,048 4,114,462,872


25 INVESTMENT PROPERTIESBalance as at 1st April 2,100,080,280 1,632,000,000 Additions during the year 637,902,044 353,422,560 Disposal during the year (4,939,000) - Change in fair value during the year 35,186,676 114,657,720 Balance as at 31st March 2,768,230,000 2,100,080,280

25.1 Valuation of investment properties The fair values of the investment properties were determined as at 31st March 2020, by Mr.W.M Chandrasena ,R.I.C.S an external,

independent valuers who hold recognized and relevant professional qualification and has recent experience in the location and category of the investments properties. The Company’s external valuer is not a Related Party to the Company.


NOTES TO THE FINANCIAL STATEMENTS25

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ar P

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per

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ft fo

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ildin

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00 7

30

Price

per

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ft fo

r Ser

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per

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50 1

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prec

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ain S

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for S

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ldin

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75

Price

per

sq.

ft fo

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ores

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for c

ool r

oom

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uild

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rate

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se60

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n ra

te S

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ldin

g 1

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eciat

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rate

Sto

re B

uild

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220

%De

prec

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n ra

te c

ool r

oom

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25.1

Va

luat

ion

of in

vest

men

t pro

perti

es (C

ontin

ued)

Pro

perty

& lo

catio

n M

arke

t Com

para

ble

Met

hod

Met

hod

of

valu

atio

n L

and

exte

nt

No

of

Build

ings

Bui

ldin

g ex

tent

His

toric

al

cost

Fair

valu

e20

2020

19Rs

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.Rs

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ya,D

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er p

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for l

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oach

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000,

000

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per

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ft fo

r bui

ldin

gRs

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0De

prec

iatio

n ra

te20

%No

, 14/

5 &

14/5

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aya

Road

, Hen

dala,

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tala.

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ice p

er p

erch

for l

and

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t ap

proa

ch 0

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0 -

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per

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ft fo

r bu

ildin

g 1

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per

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ft fo

r bui

ldin

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eciat

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rate

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awila

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ara.

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ch fo

r lan

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ket

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ch fo

r lan

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atio

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f Bu

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ct O

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o.15

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28A

, Bad

ulla

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ount

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ad b

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00



ComputerSoftware

License and fees

Total2020

Total2019

Rs. Rs. Rs. Rs.26 INTANGIBLE ASSETS

CostBalance as at 1st April 3,842,500 6,341,400 10,183,900 10,166,400 Additions - - - 17,500 Balance as at 31st March 3,842,500 6,341,400 10,183,900 10,183,900

Accumulated amortizationBalance as at 1st April 2,852,672 5,439,901 8,292,573 6,256,292 Amortization charged 768,500 891,171 1,659,671 2,036,281 Balance as at 31st March 3,621,172 6,331,072 9,952,244 8,292,573

Carrying amountAs at 31st March 2020 221,328 10,328 231,656

As at 31st March 2019 989,828 901,499 1,891,327


Lan

ds B

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ts fo

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pera

ting

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es

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l20

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tal

2019

Rs.

Rs.

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Rs.

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Rs.

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27PR

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PLA

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AND

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s at

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il 6

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27.1

Pr

oper

ty, p

lant a

nd e

quip

men

t inc

lude

d fu

lly d

epre

ciate

d as

sets

that

are

still

in u

se h

avin

g a

gros

s am

ount

of R

s.33

9,34

3,02

7/- a

s at

31s

t Mar

ch 2

020

(201

8/19

- Rs.

38

4,03

1,35

7/-).

27.2

La

nd a

nd b

uild

ings

of t

he c

ompa

ny a

re s

tate

d ba

sed

on a

valu

atio

n pe

rform

ed b

y M

r.W.M

Cha

ndra

sena

, R I

C S

( Sri

Lank

a) a

n ex

tern

al, in

depe

nden

t Cha

rtere

d Va

luer

, as

at 3

1st M

arch

201

8. C

ompa

ny’s

exte

rnal

valu

er is

not

a R

elate

d Pa

rty to

the

Com

pany

. The

det

ails

of w

hich

are

as

follo

ws,

Info

rmat

ion

on fr

eeho

ld la

nd a

nd b

uild

ing

of th

e co

mpa

ny

Valu

atio

n of

Net B

ook

Valu

e of

Reva

luat

ion

Surp

lus

Exte

nt

Land

Exte

nt

Build

ing

Mar

ket

Com

para

ble

Met

hod

Acco

mm

odat

ionLo

catio

nLa

ndBu

ildin

gTo

tal

Land

Build

ing

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

(Sq.

Ft)

No.6

8, B

audd

halo

ka

Maw

atha

, Col

ombo

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13,5

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97,6

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96

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04 0

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0 Pr

ice p

er p

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r lan

dRs

. 16,

500,

000

Head

Offic

e

Price

per

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are

foot

for b

uildi

ngRs

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00

Depr

eciat

ion ra

te15

%No

.04,

UC

Hous

es,N

ew T

own

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adha

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280,

000

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e La

nd

75,

280,

000

-

- -

0A- 0

R- 1

4.03

P -

Price

per

per

ch

for l

and

Rs. 4

,200

,000

Anur

adha

pura

No 2

4,Ab

haya

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ace,

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adha

pura

. 4

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0,00

0 B

are

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4

4,90

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0 -

-

- 0A

-3R-

19.1

4P -

Price

per

per

ch

for l

and

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Anur

adha

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No 7

4,Co

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bo

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189

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7

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197

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151

,000

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7

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,205

38

,195

,795

0A-

1R-

33.

65P

3,7

40 P

rice

per p

erch

fo

r lan

dRs

. 2,0

00,0

00Ne

gom

bo

Price

per

squ

are

foot

for b

uildi

ngRs

.3,5

00

Depr

eciat

ion ra

te40

% 6

51,3

05,0

00 2

15,8

75,0

00 8

67,1

80,0

00 4

64,5

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01

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27.3

If

land

and

bui

ldin

gs w

ere

mea

sure

d us

ing

the

cost

mod

el, t

he c

arry

ing

amou

nts

wou

ld b

e as

follo

ws:

2020

2019

Cos

t Ac

cum

ulat

ed

Dep

reci

atio

n N

et B

ook

Valu

eC

ost

Accu

mul

ated

D

epre

ciat

ion

Net

Boo

kVa

lue

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Free

hold

land

s 3

32,9

46,0

00

-

332

,946

,000

3

32,9

46,0

00

-

332

,946

,000

Fr

eeho

ld b

uild

ings

20,

432,

000

(13,

791,

600)

6,6

40,4

00

20,

432,

000

(13,

280,

800)

7,1

51,2

00

353

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(1

3,79

1,60

0) 3

39,5

86,4

00

353

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0) 3

40,0

97,2

00



27.4 There were no restrictions on the title of the property plant and equipment as at the reporting date. Further there were no items pledged as securities for liabilities.

27.5 The initial cost of fully depreciated property plant and equipment and intangible assets as at 31st March are still in use are as follows;


Motor Vehicles 80,719,922 76,789,493 Furniture and Fittings 73,715,754 68,668,812 Office Equipment 115,422,632 120,399,686 Computers 65,843,319 118,173,366 Total fully depreciated property plant and equipment 335,701,627 384,031,357 Total fully depreciated intangible assets 3,641,400 - Total fully depreciated assets 339,343,027 384,031,357

27.6 Temporarily idle property, plant and equipment There were no property, plant and equipment idle as at 31st March 2020 and 31st March 2019. 27.7 Unrestricted access to the title of property, plant and equipment There were no restrictions on the title of the Property and Equipment as at 31st March 2020 and as at 31st March 2019.


28 RIGHT-TO-USE ASSETCostBalance as at 1st January - - Adjustment on Initial Application of SLFRS 16 612,703,139 - Additions during the period 35,084,649 - Balance as at 31st March 647,787,788 -

Accumulated AmortisationCharge for the year 134,472,796 - Balance as at 31st March 134,472,796 -

Net Carrying Value 513,314,992 -

SLFRS 16 – “Leases”, requires lessee to recognise all leases to on their Statement of Financial Position as lease liabilities with the corresponding right-of-use assets w.e.f. 1 April 2019.


29 DERIVATIVE LIABILITIES HELD FOR RISK MANAGEMENTDerivative liabilities held for risk management (Note 20.1) - 179,560,616

- 179,560,616



30 FINANCIAL LIABILITIES MEASURED AT AMORTISED COST - DEPOSITS FROM CUSTOMERSFixed and savings deposits measured at amortised costFixed deposits 22,851,736,846 22,688,654,963 Saving deposits 1,175,077,424 956,692,017 Interest payable on customer deposits 918,854,684 670,759,124

24,945,668,954 24,316,106,104

31 INTEREST BEARING BORROWINGSShort-term loans and others 300,426,164 - Debentures (Note 31.3) 5,119,635,553 5,116,377,048 Long-term borrowings (Note 31.1) 16,750,463,878 20,843,730,927

22,170,525,595 25,960,107,975

31.1 Long-term borrowingsBalance as at 1st April 21,032,597,553 22,053,375,750 Loans obtained during the year 4,530,990,982 4,954,708,039 Repayments during the year (9,026,301,150) (6,208,633,881)Amortized interest 392,279,069 233,147,645 Balance at the end of the year - Gross 16,929,566,454 21,032,597,553 Unamortised finance cost (179,102,576) (188,866,626)Balance as at 31st March 16,750,463,878 20,843,730,927

31.2 Loans and borrowingsLoans and borrowings- Current 15,158,598,196 9,520,443,043 Loans and borrowings- Non current 7,011,927,399 16,439,664,932 Total loans and borrowings 22,170,525,595 25,960,107,975

AS AT 31ST MARCH 2020 2019Face Value Amortized Cost Face Value Amortized Cost

Rs. Rs. Rs. Rs. 31.3 Debentures

Rated,Senior,Unsecured,Redeemable debenture 5,000,000,000 5,119,635,553 5,000,000,000 5,116,377,048

Year of Issue

Year of Redemption

Type of Issue

Fixed Rate Semi Annually

Rated, Senior, Unsecured, Redeemable debenture 2015 2020 Senior - Unsecured -Redeemable

9.75%

Highest Price Lowest Price Last Traded Price Last Traded DateMarket summary 97.93 97.73 97.93 24-Sep-19


31.3 Debentures (Continued)Interest rate of comparable government securityBuying and selling prices of treasury bond as at 31st March 2020.

5 Year Bond Price Rs.

Yield%

Buying 99.88 9.03 Selling 100.38 8.91

Market prices and yield during the year Price Rs.

Yield%

5 Year Bond 100.13 8.97

2020 2019 Debt to equity ratio 2.51 times 2.9 times Quick asset ratio 0.79 times 0.81 times Interest cover 1.33 times 1.3 times


32 LEASE LIABILITYBalance as at 1st April - - Adjustment on Initial Application of SLFRS 16 547,747,536 - Adjusted Balance as at 1st April 547,747,536 - Additions/renewal of operating lease agreements during the year 28,424,649 - Interest charge for the year 64,573,910 - Lease rental payments for the year (137,630,018) - As at 31st March 503,116,077 -

AS AT 31ST MARCH 2020Rs.

32.1 Maturityanalysis-ContractualundiscountedcashflowsLess than one year 159,682,501 Between one and five years 456,580,594 More than five years 37,848,439

654,111,534


33 CURRENT TAX LIABILITIESBalance as at 1st April 427,501,928 519,857,489 Current tax expense for the year (Note 13.2) 619,564,658 649,582,449 Under provision in respect of previous year - 6,519,451 Tax paid during the year (554,204,845) (748,457,461)Balance as at 31st March 492,861,741 427,501,928




34 AMOUNT DUE TO RELATED COMPANIESLOLC Holdings PLC 44,291,436 99,193,692 LOLC Motors Limited 1,246,100 1,942,471 LOLC Finance PLC 2,120,594 2,369,599 LOLC Technology Services Limited 10,119,291 9,980,975 LOLC Development Finance PLC 378 - LOLC Corporate Services (Private) Limited 595,000 564,228

58,372,799 114,050,965

35 TRADE AND OTHER PAYABLESFinancial liabilitiesAccrued Expenses 285,563,479 282,842,884Creditors for cost of equipment 686,925,150 322,515,560Other payable 292,000,761 362,678,104

1,264,489,390 968,036,548 Non-financialliabilitiesOther payable 314,023,884 277,257,185

314,023,884 277,257,185 Total trade and other payables 1,578,513,274 1,245,293,733

AS AT 31ST MARCH 2020 2019 Taxable/ (Deductible) TemporaryDifference

TaxEffect Taxable/ (Deductible) TemporaryDifference

TaxEffect

Rs. Rs. Rs. Rs.36 DEFERRED TAX (ASSETS)/LIABILITIES

Property, Plant and Equipment 156,107,490 43,710,097 353,347,920 98,937,418 Lease receivables 1,683,268,799 471,315,263 2,230,850,343 624,638,096 Retirement benefit obligation (168,440,266) (47,163,274) (114,984,766) (32,195,734)Revaluation of Property, plant and equipment 137,241,005 38,427,481 137,241,005 38,427,481 Derivative Asset / (Liability) (96,035,021) (26,889,806) (41,990,315) (11,757,288)Financial Assets - FVOCI 73,343 20,536 501,585 140,444 Gain on investment in LOMEL* - - 155,680,245 15,568,024 Investment Property 149,844,446 14,984,445 114,657,720 11,465,772 Provision for Impairment - Collective Impairment (74,971,548) (20,992,033) (65,867,710) (18,442,959)Provision for Impairment - SLFRS 9 (461,475,889) (129,213,249) (461,475,889) (129,213,249)Unrealized gain on revaluation of unit trusts 250,156,302 70,043,765 - - Net lease liability (34,312,753) (9,607,571) - -

1,541,455,908 404,635,654 2,307,960,138 597,568,005

*LOMEL - LOLC Myanmar Micro-Finance Limited

As the proposed income tax rate of 24% for companies is pending formal approval , it is not considered as substantially enacted as at the reporting date. Accordingly, the tax rate of 28% (2018/19 - 28%) has been used in the deferred tax computation as at 31st March 2020 except for investment properties which is taxed at the rate of 10% (2018/19 - 10%).



36.1 Movement in recognised deferred tax liabilitiesBalance as at 1st April 597,568,005 477,339,023 Originations / (Reversal) during the year (Note 36.2) (192,932,351) 120,228,982 Balance as at 31st March 404,635,654 597,568,005

2020 2019 Rs. Rs.

36.2 Amount charged/(reversed) during the yearRecognised in profit and loss (169,748,825) 187,216,219 Total Recognised in profit and loss (169,748,825) 187,216,219

Recognised in other comprehensive income (23,183,526) 46,310,253 Total Recognised in other comprehensive income (23,183,526) 46,310,253

Recognized directly in Equity - (113,297,490)Total Recognised directly in equity - (113,297,490)

(192,932,351) 120,228,982

2020 2019 Rs. Rs.

37 RETIREMENT BENEFIT OBLIGATIONBalance as at 1st April 114,984,766 89,326,490 Benefit paid during the year (10,388,774) (3,646,254)Expense recognised in the income statement (Note 37.1) 35,518,915 21,146,079 Expense recognised in the other comprehensive income (Note 37.2) 28,325,359 8,158,451

168,440,266 114,984,766

37.1 Expense recognised in the income statementCurrent service cost 19,466,015 11,320,166 Interest on obligation 16,052,900 9,825,913

35,518,915 21,146,079

37.2 Expenses recognized in other comprehensive incomeActuarial loss 28,325,359 8,158,451

28,325,359 8,158,451

The retirement benefit obligation was actuarially valued under the projected unit credit (PUC) method by professionally qualified actuary firm Messes Piyal S. Goonethilake and Associates.



The principle financial assumptions used in the valuation for the current and comparative years are as follows;

Actuarial assumptions 2020 2019Rate of discount 10.5% 11.0%Salary increment rates 8.5% 9.0%Retirement age 55 years 55 years

37.3 Sensitivity of the actuarial assumptionsSensitivity analysis on discounting rate and salary increment rate to statement of financial position and statement of profit and Loss.

Assumption 2020 2019Rate

changeFinancial

Position - Liability Rs.

Rate change

Financial Position Liability

Rs. Discount rate +1 158,350,144 +1 100,306,662

-1 (179,864,541) -1 (116,897,721)

Future salary increases +1 (179,714,966) +1 (118,390,639) -1 158,305,063 -1 98,906,511

There are no material issues pertaining to employees and industrial relations of the company.


38 STATED CAPITALIssued and fully paid (Note 38.1) 1,425,946,629 1,425,946,629 Number of shares (Note 38.2) 6,377,711,170 6,377,711,170

All shares rank equally with regard to the company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the company.


38.1 Movement in stated capitalBalance at 1st April 2019 1,425,946,629 1,425,946,629 Balance at 31st March 2020 1,425,946,629 1,425,946,629

38.2 Movement in number of ordinary sharesNo of shares at 1st April 2019 6,377,711,170 6,377,711,170 No of shares at 31st March 2020 6,377,711,170 6,377,711,170



39 RESERVESStatutory reserve (Note 39.1) 873,382,685 796,040,366 Revaluation reserve (Note 39.2) 944,501,828 944,501,828 General reserve (Note 39.3) 288,079,789 288,079,789 Fair value reserve on FVTOCI (Note 39.4) 52,808 18,725,493 Hedging reserve (Note 39.5) (69,145,212) (30,233,023)Total 2,036,871,898 2,017,114,453

39.1 Statutory reserveThe reserve is created according to Direction No.1 of 2003 issued under the Finance Business Act No.42 of 2011. The company transfers 5% of its annual net profit after tax to this reserve in compliance with this direction.

39.2 Revaluation reserveThe revaluation reserve relates to the revaluation surplus of Property, Plant and Equipments. Once the respective revalued items have been disposed, the relevant portion of revaluation surplus is transferred to retained earnings.

39.3 General reserveGeneral reserves are the retained earnings of a company which are kept aside out of company’s profits to meet future (known or unknown) obligations

39.4 Fair value reserve on Fair value through other comprehensive incomeThis reserve is maintained to recognize the fair value changes of financial assets measured at fair value through other comprehensive income

39.5 Hedging reserveThe hedging reserve comprises of the effective portion of the cumulative net change in fair value of cash flow hedging instruments related to hedge transactions that have not yet affected the profit or loss.


40 RETAINED EARNINGSBalance as at 1st April 14,015,471,935 13,084,306,136 Impact of adoption of SLFRS 9 - (189,020,807)Adjusted balance as at 1st April 14,015,471,935 12,895,285,329 Net profit for the year 1,546,846,385 1,198,096,541 Other comprehensive income (28,325,359) (8,158,451)Share of other comprehensive income from equity accounted investee (2,838,140) (5,856,005)Transferred from during the year (77,342,319) (59,904,777)Tax on other comprehensive income (excluding deferred tax on revaluation) 7,931,100 (3,990,702)Balance as at 31st March 15,461,743,602 14,015,471,935

The carrying amount of the retained earnings represents the undistributed earnings held by the company. This could be used to absorb future losses and dividend declaration.



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42 RELATED PARTY TRANSACTIONS The company carried out transactions in the ordinary course of it's business with parties who are defined as related parties in Sri Lanka

Accounting Standard 24 (LKAS 24) ' Related Party Disclosures', the details of which are reported below.

42.1 Identity of related parties The company has related party transactions with, its equity accounted investee LOLC Development Finance PLC and Commercial Insurance

Brokers Private Limited and LOLC Holdings PLC the main shareholder of the Company and with its Directors.

42.2 Transactions with key management personnel According to Sri Lanka Accounting Standard (LKAS) 24 'Related Party Disclosures', key management personnel are those having authority

and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Board of Directors (including Executive and Non-Executive) and the heads of its core functions have been identified as key management personnel of the company. Independent transaction with key management personnel, are disclosed as follows,

(i) Loans to directors No loans have been given to the directors of the company.

(ii) Compensation of key management personnel

2020 2019Rs. Rs.

Short-termemploymentbenefitsDirectors fees and other emoluments 24,929,000 28,962,853 Other KMP emoluments 33,607,354 34,480,446

58,536,354 63,443,299

Long-termemploymentbenefits There are no long term employment benefits to key management personnel during the year.

(iii) Related party transactions Accordingly, the value of all transactions carried out by the company with its related companies during the year ended 31st March 2020 are

summarized bellow.

Name of the company Relationship Nature of thetransaction

Transactionvalue

Amount due from/(to)


2020 Rs.

2020Rs.

2019Rs.

LOLC Holdings PLC Parent Interest expense (4,274,826)Net fund Transfers 600,000,000Guarantee fees (12,000,000)Asset hire expenses (21,821,997)Show back Charge (55,871,217)Settlement of expenses by LOLC (451,129,704) (44,291,436) (99,193,692)

LOLC Development Finance PLC Associate Expenses shared 378 (378) - Commercial Insurance Brokers (Private) Limited

Associate Insurance commission received 57,290,000 - -



Name of the company Relationship Nature of thetransaction

Transactionvalue



2020 Rs.

2020Rs.

2019Rs.

LOLC Motors Limited Fellow Subsidiary

Fund transfer settlement of valuation fee income 33,383,018 Valuation fee income (29,531,995)Rent income 3,040,816 Expenses shared (6,195,470)Finance lease interest income 97,258,190 Loan Capital Recovered (51,338,753) (1,246,100) (1,942,469)

LOLC Technology Services Limited

Fellow Subsidiary

Provision for information services (132,675,806)Payments 148,846,218 Expenses shared (16,308,727) (10,119,291) (9,980,977)

LOLC Finance PLC Fellow Subsidiary

Provision For Rent Fee (16,200,000)Provision For Yard Fee (7,800,000)Fund transfer settlement of Expenses 27,554,182 Nawala Yard income 200,000 Shared Expenses (3,505,182) (2,120,596) (2,369,599)

Browns & Company PLC Fellow Subsidiary

Loan interest income 199,853,790 Loans granted 1,000,000,000 Loan Recovered (998,972,940) - -

Ishara Traders Other Related Party

Loan interest income 251,496,913Loans granted 1,500,000,000Loans granted (Re-scheduled) 1,500,000,000Loan Recovered (Re-scheduled) (1,500,000,000) - -

LOLC Corporate Services (Private) Limited

Fellow Subsidiary

Provision for secretarial fees (7,007,778)Tax on shared service (1,005,536)Fund transfer (Settlement of expenses by CLC) 7,982,542 (595,000) (564,228)

Galoya Plantations (Private) Limited

Fellow Subsidiary

Loan interest income 48,960,398 Loan Recovered (44,401,490) - -

Browns Engineering & Construction (Private) Limited

Fellow Subsidiary

Expenses shared 5,486 5,486 -

Browns Hotels and Resorts Limited

Fellow Subsidiary


Dickwella Resorts Limited Fellow Subsidiary


Eden Hotels Lanka PLC Fellow Subsidiary


Green Paradise Resorts (Private) Limited

Fellow Subsidiary


Ajax Engineers (Private) Limited Fellow Subsidiary

Loans granted 110,500,000 Loan interest income 7,141,643 - -

LOLC Life Assurance Limited Fellow Subsidiary

Insurance Premium paid 174,336,891 - -

LOLC General Insurance Limited Fellow Subsidiary

Insurance Premium paid 105,502,560 - -



42.3 Non-recurrent related party transactionsThere were no any non-recurring related party transactions of which aggregate value exceeds 10% of the equity or 5% of the total assets whichever is lower as per 31st March 2020 audited financial statements of the Company, which requires additional disclosure in 2019/2020 Annual Report under Colombo Stock Exchange listing rule 9.3.2 (a).

42.4 Recurrent related party transactionsAll the transactions which are disclosed under note 42.2 (iii) with related parties are recurrent, of revenue or trading nature and which is necessary for day-to-day operations of the Company. In the opinion of Related Party Transactions Review Committee, terms for all these transactions are not favourable to the Related Party than those generally available to the public.

Name of the related party

Relationship Nature of the transaction Aggregate Value of the related party

transactions entered into during the

financialyear(Rs.)

Value of the related party transactions as a % of Net Revenue

Terms & conditions of the related party

transactions

Ishara Traders Other Related party Loan interest income 251,496,913 1.97% Transactions took place under

commercial terms in the ordinary course of

business

Loan granted 1,500,000,000 11.73%Loan granted (Re-scheduled) 1,500,000,000 11.73%

Loan Recovered (Re-scheduled) (1,500,000,000 ) (11.73%)

1,751,496,913 13.69%

Except the above, there were no any recurrent related party transactions of which aggregate value exceeds 10% of the revenue of the Company as per 31st March 2020 audited financial statements, which require additional disclosures in 2019/2020 Annual Report under Colombo Stock Exchange Listing rule 9.3.2 (b).

42.5 The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis.

2020 2019Rs. Rs.

43 CONTINGENT LIABILITIESGuarantees issued to banks and other institutions 200,471,046 191,288,445

44 CAPITAL COMMITMENTSThere were no significant capital commitments which have been approved or contracted for by the company as at the reporting date except for the following.

2020 2019Rs. Rs.

Forward exchange contracts 9,616,550,540 17,102,953,393 Facility limits not utilized 3,909,505,918 4,807,236,289

13,526,056,458 21,910,189,682


45 LITIGATION AND CLAIMSLitigation is a common occurrence in the finance industry due to the nature of the business undertaken. The Company has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Company makes adjustments to account for any adverse effects which the claims may have on its financial standing.

The Company confirms that there is no case filed against the Company which is not disclosed which would have a material impact on the Statement of Financial Position of the Company as at 31st March 2020

46 EVENTS AFTER THE REPORTING DATE No circumstances have arisen subsequent to the reporting date which would require adjustments to or disclosure in the financial statements.

47 COMPARATIVE FIGURESThe presentation and classification of the following items in these Financial Statements are amended to ensure the comparability with the current year.

AS AT 31ST MARCH 2020 Value added tax (VAT) recoverable

Trade and other payables

Rs. Rs.As previously reported in the published financial statements for the year ended 31st March 2019 52,571,883 1,297,865,616 Adjustment made on Value added tax (VAT) recoverable (52,571,883) (52,571,883)Adjusted balance in the published financial statements for the year ended 31st March 2020 - 1,245,293,733

The Value added tax recoverable amount of the Company was previously classified under "Value added tax (VAT) recoverable". This amount is reclassified to "Trade and other payables" to improve the presentation.

48 SEGMENT INFORMATION

Business Segment Conventional

Financial Services Islamic Financial

Services FactoringBusiness

Others/Adjustments

Total

Rs. Rs. Rs. Rs. Rs. For the year ended 31st March 2020Total revenue 13,531,623,960 907,936,654 654,414,482 - 15,093,975,096 Net interest cost (5,581,482,697) (285,499,068) (292,578,443) - (6,159,560,208)Profit before operating expenses 7,950,141,263 622,437,586 361,836,039 - 8,934,414,888

Operating expenses (5,492,349,056) (356,847,803) (407,865,417) - (6,257,062,276)Value added tax on financial services and NBT (699,180,733) (23,831,019) (24,480,057) - (747,491,809)Profit from operations 1,758,611,474 241,758,764 (70,509,435) - 1,929,860,803

For the year ended 31st March 2019Total revenue 14,026,767,924 958,277,454 891,844,109 - 15,876,889,487 Net interest cost (6,108,463,059) (200,368,846) (388,006,304) - (6,696,838,209)Profit before operating expenses 7,918,304,865 757,908,608 503,837,805 - 9,180,051,278

Operating expenses (5,250,936,516) (278,737,897) (860,576,529) - (6,390,250,942)Value added tax on financial services and NBT (621,817,049) (35,509,742) (36,090,623) - (693,417,414)Profit from operations 2,045,551,300 443,660,969 (392,829,347) - 2,096,382,922


48 SEGMENT INFORMATION (CONTINUED.)

Business Segment Conventional

Financial Services Islamic Financial

Services FactoringBusiness

Others/Adjustments

Total

Rs. Rs. Rs. Rs. Rs. For the year ended 31st March 2020Capital expenditure - - - 651,772,586 651,772,586 Depreciation of property plant and equipment - - - 141,921,579 141,921,579 Provision for doubtful debts and bad debts written off

1,926,385,489 226,081,068 253,274,771 - 2,405,741,328

For the year ended 31st March 2019Capital expenditure - - - 105,843,399 105,843,399 Depreciation of property plant and equipment - - - 130,407,159 130,407,159 Provision for debts and bad debts written off 1,089,078,443 131,594,806 664,877,449 - 1,885,550,698

As at 31st March 2020Total assets 48,655,413,321 4,123,251,244 1,359,906,673 15,650,546,602 69,789,117,840 Total liabilities 43,589,886,121 3,252,293,354 1,218,326,451 2,778,141,397 50,838,647,323

As at 31st March 2019Total assets 47,435,480,109 4,220,643,873 1,836,823,686 17,363,401,232 70,856,348,900 Total liabilities 44,823,073,274 3,339,232,677 1,735,664,580 3,499,845,354 53,397,815,885

49.1 Valuation Models ‘Fair Value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

at the measurement date in the principal or, in its absence, the most advantageous market to which the Company has access at that date. The fair value of a liability reflects its non-performance risk.

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy Note 3.3. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The fair value hierarchy of financial instruments is given below:

Level 1 : Fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 : Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3 : Fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

49.2 Assets and Liabilities Measured at Fair Value - Fair Value Hierarchy The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy in to which

the fair value measurement is categorized. The amounts are based on the values recognized in the statement of financial position. The fair values include any deferred differences between any transaction price and the fair value on initial recognition when the fair value is based on a valuation technique that uses unobservable input.



AS AT 31 MARCH 2020 Note Carrying amount Level 1 Level 2 Level 3 Total Rs. Rs. Rs. Rs. Rs.

Financial assetsCash and Cash Equivalents 15.1 2,134,741,810 2,134,741,810 - - 2,134,741,810

Financial Assets recognized through Profit or Loss (FVTPL)Equity securities 16.1 1,025,209,302 118,858,032 - 906,351,270 1,025,209,302 Unit trust 16.2 2,069,883,577 2,069,883,577 - - 2,069,883,577 Derivative assets held for risk management 20 107,133,356 - 107,133,356 - 107,133,356

3,202,226,235 2,188,741,609 107,133,356 906,351,270 3,202,226,235 Investment SecuritiesTreasury bills 17.1.1 3,244,967,209 3,244,967,209 - - 3,244,967,209 Unquoted equity securities 17.1.2 178,750 - - 178,750 178,750

3,245,145,959 3,244,967,209 - 178,750 3,245,145,959

Financial assets measured at amortised cost/ Finance lease receivables and hire purchases

12,330,761,190 - - 12,330,761,190 12,330,761,190

Financial assets measured at amortised cost/ loans, advances and factoring receivables

41,807,810,054 - - 41,807,810,054 41,807,810,054

Amounts due from related companies 73,227 - - 73,227 73,227 62,720,758,475 7,568,450,628 107,133,356 55,045,174,491 62,720,758,475

Financial LiabilitiesBank Overdraft 15.2 384,978,149 384,978,149 - - 384,978,149 Financial Liabilities at Amortised Cost 24,945,668,954 - - 24,945,668,954 24,945,668,954 Loans and borrowings 7,515,043,476 - - 7,515,043,476 7,515,043,476 Lease Liability 503,116,077 - - 503,116,077 503,116,077 Amount due to related companies 58,372,799 - - 58,372,799 58,372,799

33,407,179,455 384,978,149 - 33,022,201,306 33,407,179,455


49.2 Assets and Liabilities Measured at Fair Value - Fair Value Hierarchy (Continued)

As at 31 March 2019 Note Carrying amount Level 1 Level 2 Level 3 Total Rs. Rs. Rs. Rs. Rs.

Financial assetsCash and Cash Equivalent 15.1 2,550,274,316 2,550,274,316 - - 2,550,274,316

Financial Assets recognized through Profit or Loss (FVTPL)Equity securities 16.1 350,783,353 128,303,109 - 222,480,244 350,783,353 Unit trust 16.2 2,475,710,778 2,475,710,778 - - 2,475,710,778 Derivative assets held for risk management 20 311,352,151 - 311,352,151 - 311,352,151

3,137,846,282 2,604,013,887 311,352,151 222,480,244 3,137,846,281 Investment SecuritiesTreasury bills 17.1.1 3,755,819,685 3,755,819,685 - - 3,755,819,685 Unquoted equity securities 17.1.2 178,750 - - 178,750 178,750 Reverse repurchase agreements 17.2.1 2,409,024,492 - - 2,409,024,492 2,409,024,492 Debentures 17.2.2 521,259,642 521,259,642 - - 521,259,642

6,686,282,569 4,277,079,327 - 2,409,203,242 6,686,282,569


18 13,917,880,997 - - 13,917,880,997 13,917,880,997


19 39,575,067,674 - - 39,575,067,674 39,575,067,674

65,867,351,838 9,431,367,530 311,352,151 56,124,632,157 65,867,351,837 Financial LiabilitiesBank Overdraft 15.2 390,069,910 390,069,910 - - 390,069,910 Derivative liabilities held for risk management 29 179,560,616 - 179,560,616 - 179,560,616 Financial Liabilities at Amortised Cost 30 24,316,106,104 - - 24,316,106,104 24,316,106,104 Loans and borrowings 31 25,960,107,975 - - 25,960,107,975 25,960,107,975 Amount due to related companies 34 114,050,965 - - 114,050,965 114,050,965

50,959,895,570 390,069,910 179,560,616 50,390,265,044 50,959,895,570



49.3 Level 3 Fair Value Measurements Reconciliation The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in level 3 of the fair

value hierarchy.

Unquoted equitysecurities -

FVTPL

Unquoted equitysecurities -

FVTOCI

Investmentproperties

Land andBuildings

Rs. Rs. Rs. Rs. Balance as at 1st April 2019 222,480,244 178,750 2,100,080,280 867,180,000 Total gains or losses: in profit or loss 319,771,025 - 35,186,676 - Purchases 364,100,001 - 637,902,044 - Disposals (4,939,000) - Balance as at 31st March 2020 906,351,270 178,750 2,768,230,000 867,180,000

Balance as at 1st April 2018 225,957,592 178,750 1,632,000,000 867,180,000 Total gains or losses: in profit or loss (3,477,348) - 114,657,720 - Purchases - - 353,422,560 - Balance as at 31st March 2019 222,480,244 178,750 2,100,080,280 867,180,000

49.4 Unobservable Inputs used in measuring fair valueThe following table sets out information about significant unobservable inputs used at 31st March 2020 and 2019 in measuring financial instruments categorized as level 3 in the fair value hierarchy.

Typeoffinancialinstrument Fair value at 31st March 2020 Valuation technique Significantunobservableinput

Unquoted equity securities - FVTPL 906,351,270 Residual Income Equity Risk Premium - 17.91%Terminal Growth Rate - 3%”

Unquoted equity securities 178,750 Cost Approach Cost per share

Investment properties 2,768,230,000 Market approach Market comparable method

Property, plant and equipment 867,180,000 Market approach Market comparable method

Typeoffinancialinstrument Fair value at 31st March 2019 Valuation technique Significantunobservableinput

Unquoted equity securities - FVTPL 222,480,244 Residual Income Equity Risk Premium - 19.83%Terminal Growth Rate - 3%”

Unquoted equity securities 178,750 Cost Approach Cost per share

Investment properties 2,100,080,280 Market approach Market comparable method

Property, plant and equipment 867,180,000 Market approach Market comparable method


49.4 Fair Value Disclosures (Continued) Significant unobservable inputs developed are as follows

Category Unobservable Input Increase / Decrease ImpacttotheprofitorlossUnquoted equity securities Residual Income 1% increase in risk premium (191,789,707)

1% decrease in risk premium 225,992,784

Land and Buildings and Investment Properties Valuation MethodLand in Property, plant and Equipment and Investment Property are valued using market approach with direct comparison method, making adjustments for points of difference to derive the fair value.

Buildings in Land and Buildings and Investment Property are valued using contractors methods

Under the Market Approach, estimated fair value would get increased/(decreased) if; Price per perch would get higher/(lower) Price per square foot would get higher/(lower) Depreciation rate for building would get lower/(higher)

49.5 Financial Instruments not measured at fair value The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value

hierarchy into which fair value measurement is categorized.

AS AT 31ST MARCH 2020 Note Total Fair value Total CarryingAmount

Rs. Rs.AssetsInvestment securitiesReverse Repurchase Agreements 17.2.1 806,105,416 806,105,416

806,105,416 806,105,416 Finance lease receivables, hire purchases and operating leasesFinance lease receivables 18.1 12,026,492,084 12,330,761,190

12,026,492,084 12,330,761,190 Advances and other loansAdvances and loans 19.1 38,849,550,732 40,447,903,380 Factoring receivables 19.2 1,359,906,674 1,359,906,674

40,209,457,406 41,807,810,054 53,042,054,906 54,944,676,660

LiabilitiesDeposits liabilities 30 22,125,461,000 24,945,668,954

22,125,461,000 24,945,668,954 Interest bearing borrowingsShort-term loans and others 31 300,426,164 300,426,164 Debentures 31 4,951,438,641 5,119,635,553 Long-term borrowings 31 16,639,011,644 16,750,463,878

21,590,450,285 21,870,099,431 43,715,911,285 46,815,768,385



AS AT 31ST MARCH 2019 Note Total Fair value Total CarryingAmount

Rs. Rs.AssetsInvestment securitiesReverse Repurchase Agreements 17.2.1 2,409,024,492 2,409,024,492 Debentures 17.2.2 521,259,641 521,259,642

2,930,284,133 2,930,284,134 Finance lease receivables, hire purchases and operating leasesFinance lease receivables 18.1 13,538,462,789 13,917,880,997 Hire purchase receivables 19.2 - -

13,538,462,789 13,917,880,997 Advances and other loansAdvances and loans 20.1 35,479,191,470 37,738,243,987 Factoring receivables 20.2 2,622,094,420 1,836,823,687

38,101,285,890 39,575,067,674 54,570,032,811 56,423,232,805

LiabilitiesDeposits liabilities 30 18,498,534,190 24,316,106,104

18,498,534,190 24,316,106,104 Interest bearing borrowingsDebentures 31 4,774,236,266 5,116,377,048 Long-term borrowings 31.1 20,734,847,903 20,843,730,927

25,509,084,169 25,960,107,975 44,007,618,359 50,276,214,079


49.6 Analysisoffinancialinstrumentsbymeasurementbasis Classification of financial assets and liabilities as per SLFRS 9 - “Financial instruments”

AS AT 31ST MARCH 2020 Financial assets measured at fair

value through profitorloss

(FVTPL)

Rs.

Financial assets measured

at fair value through other

comprehensive income (FVOCI)

Rs.

Financial assets measured at

amortized cost

Rs.

Total

Rs.Financial Assets

Cash and cash equivalents - - 2,134,741,810 2,134,741,810

Financial assets measured at fair value through profit or loss Equity shares 1,025,209,302 - - 1,025,209,302 Unit trust 2,069,883,577 - - 2,069,883,577 Derivative assets held for risk management 107,133,356 - - 107,133,356

Investment securitiesTreasury bills - 3,244,967,209 - 3,244,967,209 Unquoted shares - 178,750 - 178,750 Reverse repurchase agreements - - 806,105,416 806,105,416


- - 12,330,761,190 12,330,761,190


- - 41,807,810,054 41,807,810,054

Amounts due from related companies - - 73,227 73,227 Total financial assets 3,202,226,235 3,245,145,959 57,079,491,697 63,526,863,891

Financial LiabilitiesBank overdraft - - 384,978,149 384,978,149 Financial Liabilities at Amortised Cost - - 24,945,668,954 24,945,668,954 Loans and borrowings - - 22,170,525,595 22,170,525,595 Lease Liability - - 503,116,077 503,116,077 Amount due to related companies - - 58,372,799 58,372,799 Total Financial liabilities - - 48,062,661,574 48,062,661,574



AS AT 31ST MARCH 2019 Financial assets measured at fair

value through profitorloss

(FVTPL)

Rs.

Financial assets measured

at fair value through other

comprehensive income (FVOCI)

Rs.

Financial assets measured at

amortized cost

Rs.

Total

Rs.Financial Assets

Cash and cash equivalents - - 2,550,274,316 2,550,274,316

Financial assets measured at fair value through profit or loss Equity shares 350,783,353 - - 350,783,353 Unit trust 2,475,710,778 - - 2,475,710,778 Derivative assets held for risk management 311,352,151 - - 311,352,151

Investment securitiesTreasury bills - 3,755,819,685 - 3,755,819,685 Unquoted shares - 178,750 - 178,750 Reverse repurchase agreements - - 2,409,024,492 2,409,024,492 Debentures - - 521,259,642 521,259,642


- - 13,917,880,997 13,917,880,997


- - 39,575,067,674 39,575,067,674

3,137,846,282 3,755,998,435 58,973,507,121 65,867,351,838

Financial LiabilitiesBank overdraft - - 390,069,910 390,069,910 Derivative liabilities held for risk management 179,560,616 - - 179,560,616 Financial Liabilities at Amortised Cost - - 24,316,106,104 24,316,106,104 Loans and borrowings - - 25,960,107,975 25,960,107,975 Amount due to related companies - - 114,050,965 114,050,965

179,560,616 - 50,780,334,954 50,959,895,570



50 FINANCIAL RISK MANAGEMENT Overview The company has exposure to the following risks from financial instruments:

• Credit risk • Liquidity risk • Market risk • Operational risk

This note presents information about the company’s exposure to each of the above risks, the company’s objectives, policies and processes for measuring and managing risk, and the company’s management of capital. Additional information related to changes in risk management consideration due to the impact of COVID-19 is disclosed in the note 51 to the financial statements.

Risk management framework The board of directors has overall responsibility for the establishment and oversight of the company’s risk management framework. The board

has established the Integrated Risk Management Committee (IRMC), which are responsible for developing and monitoring company risk management policies in their specified areas. All board committees have both executive and non-executive members and report regularly to the board of directors on their 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 risks and adherence to 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, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The company audit committee and the IRMC are responsible for monitoring compliance with the company’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the company. The company audit committee is assisted in these functions by Enterprise Risk Management division (ERM). ERM undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the company audit committee.

50.1 Credit risk Credit risk is the risk of financial loss to the company if a customer or counterparty to a financial instrument fails to meet its contractual

obligations, and arises principally from the company’s loans and advances to customers and other company's, and investment debt securities. For risk management purposes, credit risk arising on trading assets is managed independently.

Management of credit risk Facilities granted to customers (Lease / Hire purchase / Loans/ Factoring) Credit department has a Credit committee formed internally, is responsible for management of the company’s credit risk, including:

Formulating credit policies in consultation with Branch and Regional Heads, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

Establishing the authorization structure for the approval and renewal of credit facilities. Authorization limits are allocated to Branch and Regional Heads, Senior Marketing Officers at Head Office. Larger facilities require approval by Company Credit, Head of Company Credit, company Credit Committee or the board of directors as appropriate.

Reviewing and assessing credit risk. company credit assesses all credit exposures in excess of designated limits, prior to facilities being committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.


Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band and market liquidity (for investment securities).

Developing and maintaining the company’s risk grading in order to categorize exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The current risk grading framework consists of eight grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. The responsibility for setting risk grades lies with the final approving executive/committee as appropriate. Risk grades are subject to regular reviews by company risk.

Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to company credit who may require appropriate corrective action to be taken.

Providing advice, guidance and specialist skills to business units to promote best practice throughout the company in the management of credit risk.

Each Branch and Regional Head is required to implement company credit policies and procedures, with credit approval authorities delegated from the company credit committee. Each Branch and Regional Head is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval.

Regular audits of business units and company credit processes are undertaken by Enterprise Risk management (ERM).

Allowances for impairment The company establishes an allowance for impairment losses on assets carried at amortized cost that represents its estimate of incurred

losses in its lease and loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and, for assets measured at amortised cost,individually non-significant impairment established for groups of homogeneous assets as well as for individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired.

Write-offpolicy The company writes off a loan or an investment debt security balance, and any related allowances for impairment losses, when board of

directors determines that the loan or security is uncollectible. This determination is made after considering information such as the occurrence of significant changes in the borrower’s/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardized loans, write-off decisions generally are based on a product-specific past due status.

ApplicationofpracticalexpedientsinthemeasurementofECLforfinancialassets Due to uncertainty and lack of sufficient information to make any adjustments to capture the potential impact of COVID 19, based on the

“COVID - 19 Pandemic: Guidance Notes on the Implications on Financial Reporting” issued by the institute of chartered accountants of Sri Lanka, the Company considered the Probability of Default (PD), Loss Given Default (LGD) computed as at 29th February 2020 and Economic Factor Adjustment (EFA) used in the computation of ECL as at 31st December 2019 in determining the provision for ECL as at 31st March 2020. Further, appropriate adjustments were made to the statistical models in estimating the probability weighted outcomes of the ECL.


50 FINANCIAL RISK MANAGEMENT (CONTINUED.) Exposure to credit risk

AS AT 31ST MARCH Stage 1 Stage 2 Stage 3 2020 2019 Rs. Rs. Rs. Rs. Rs.

Financial assets at amortised cost/ Finance lease receivables and hire purchases Performing 10,983,617,107 1,279,628,489 - 12,263,245,596 13,807,578,309 Non performing - Collectively Assessed - - 229,892,169 229,892,169 139,143,855 Non performing - Individually Assessed 276,873,512 276,873,512 261,841,073 Total gross loans and advances 10,983,617,107 1,279,628,489 506,765,681 12,770,011,277 14,208,563,237

Expected credit loss allowance/impairment (113,542,092) (174,581,550) (151,126,445) (439,250,087) (290,682,240)Net Finance Lease & hire purchase receivable 10,870,075,015 1,105,046,939 355,639,236 12,330,761,190 13,917,880,997

Financial assets at amortised cost/ Advances and other loansPerforming 37,100,004,941 3,027,423,766 - 40,127,428,707 37,968,532,495 Non performing - Collectively Assessed - - 1,610,332,996 1,610,332,996 1,377,671,231 Non performing - Individually Assessed - - 2,426,677,527 2,426,677,527 2,141,092,306 Total gross loans and advances 37,100,004,941 3,027,423,766 4,037,010,524 44,164,439,231 41,487,296,032 Expected credit loss allowance/impairment (284,913,182) (317,884,147) (1,753,831,850) (2,356,629,179) (1,912,228,358)Net advances & other loans 36,815,091,759 2,709,539,619 2,283,178,674 41,807,810,052 39,575,067,674

Measurement of Expected Credit Losses (ECL) Inputs, assumptions and techniques used for estimating impairment under SLFRS 9 is disclosed under Accounting Policies Note 3.3.7.1

Significantincreaseincreditrisk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Company

considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information.

The Company uses a backstop of 180 days past due for determining whether there is a significant increase in credit risk.

Incorporation of forward-looking information The Company incorporates forward-looking information into both the assessment of whether the credit risk of an instrument has increased

significantly since its initial recognition and the measurement of ECL.

The Company has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macroeconomic variables and credit risk and credit losses.

The key drivers for credit risk GDP growth, unemployment rates, inflation and interest rates. The Company formulates multiple economic scenarios to reflect base case, best case and worst case.

The key inputs into the measurement of ECL are the term structure of the following variables: - Probability of Default (PD) - Loss Given Default (LGD) ; and - Exposure At Default (EAD)



ECL for exposures in Stage 1 is calculated by multiplying the 12-month PD by LGD and EAD. Lifetime ECL is calculated by multiplying the lifetime PD by LGD and EAD.

LGD is the magnitude of the likely loss if there is a default. The Company estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties.

EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortisation. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. For financial guarantees, the EAD represents the amount of the guaranteed exposure when the financial guarantee becomes payable.

Where modelling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics.

The groupings are subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous.

Collateral held and other credit enhancement The Bank holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities

over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and are updated regularly. Collateral generally is not held over loans and advances to Company’s, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities.

An estimate made at the time of borrowing of the fair value of collateral and other security enhancements held against loans and advances to customers is given below and the value of collateral has been restricted to the value of the loans outstanding balances.

Collateral type 2020 2019Rs. Rs.

Immovable property, plant and machinery 2,231,331,152 2,636,303,808 Movable property-Motor Vehicle 47,724,727,355 47,278,005,223 Fixed, savings, other deposits 667,023,815 635,641,935 Gold 602,644,246 -

51,225,726,568 50,549,950,966 On clean basis 5,708,723,940 5,145,908,303 Total 56,934,450,508 55,695,859,269

Other Receivables The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Company’s customer base, including the default risk of the industry in which customers operate, as these factors may have an influence on credit risk. The Credit Committee has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, when available, and in some cases Company references. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the Credit Committee ; these limits are reviewed quarterly. Customers that fail to meet the Company’s benchmark creditworthiness may transact with the Company only on a prepayment basis.


50 FINANCIAL RISK MANAGEMENT (CONTINUED.)More than 59 percent of the Company’s customers have been transacting with the Company for over one year. In monitoring customer credit risk, customers are Companied according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. Cash and cash equivalents The Company held cash and cash equivalents of Rs. 2,134 million at 31 March 2020 (2019 : Rs2,550 million) which represents its maximum credit exposure on these assets. Excessive risk concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Company’s performance to developments affecting a particular industry. In order to avoid excessive concentrations of risk, the Company’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Company to manage risk concentrations at both the relationship and industry levels.

50.2 Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Management of liquidity risk The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. Company Central Treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Company Central Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to Company’s and other inter-Company facilities, to ensure that sufficient liquidity is maintained within the Company as a whole. The liquidity requirements of business units and subsidiaries are met through short-term loans from Company central Treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The Company relies on bank borrowings and deposits from customers and Company’s, as its primary sources of funding. While the Company’s bank borrowings have maturities of over one year, deposits from customers and Company’s generally have shorter maturities and a large proportion of them are repayable on demand. The short-term nature of these deposits increases the Company’s liquidity risk and the Company actively manages this risk through maintaining competitive pricing and constant monitoring of market trends.

Exposure to liquidity risk The key measure used by the Company for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and Treasury bills and Repos maturing with in next financial year. A similar, but not identical, calculation is used to measure the Company’s compliance with the liquidity limit established by the Company’s lead regulator, [Central Bank of Sri Lanka - CBSL]. Details of the reported Company ratio of net liquid assets to deposits from customers at the reporting date and during the year were as follows:



AT 31 MARCH Company2020 2019

Rs. Rs. 24.80 35.84

Maturityanalysisforfinancialassetsandliabilities Note 41 to the financials statements summarises the maturity profile of the Company’s financial asset and liabilities excluding future interest as at 31st March 2020.

50.3 Market Risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Management of market risks

50.3.1 Foreign Currency Risk Foreign exchange rate risk arises from the movement of the rate of exchange of one currency against another, leading to an adverse impact

on the Company’s earnings or equity. The Company is exposed to foreign exchange rate risk due to variability of the cash flows of foreign currency borrowing repayments and the value of a financial instrument or the investment in its foreign assets, may fluctuate due to changes in foreign exchange rates.

The total interest-bearing liabilities of the Company denominated in US dollar amounted to Rs. 43.8 million and has been fully hedged by entering forward rate agreements with CITI Bank and Peoples Bank. The Objective of the hedge is to reduce the variability of the cash flows of foreign currency borrowings.

The Company has employed hedge accounting to mitigate the exposure to currency risk by designating an effective relationship between foreign currency denominated transaction with assets or liabilities. Hedge accounting enables to minimize the timing differences in recognizing foreign currency translation impact to the income statement or other comprehensive income statement and to effectively capture the economic substance of the transaction. The Group treasury monitors foreign exchange markets on a continuous basis and advises on appropriate risk mitigating strategies.

The Company ensures all market risk measures are adhered as laid down in the latest directions published by the Central Bank as well as according to best market practices followed locally and globally.

Significant movement in exchange rates during the year ended 31st March 2020

Lowest Level Highest Level Spread Year-end rate

Rate Date Rate Date

USD/LKR 174.35 22.04.2019 189.96 30.03.2020 15.61 189.25

EUR/LKR 194.71 01.08.2019 210.73 30.03.2020 16.02 207.74

EUR/USD 1.0891 20.03.2020 1.1027 25.06.2019 0.0136 1.0977

Given below are the foreign currency exposure and the rupee equivalent of currency, in which the Company trades in.

Net foreign Currency Exposure In foreign currency In functional currency

2019/20 2018/19 2019/20 2018/19

United States Dollar 44,629,722 90,957,581 8,446,174,895 15,941,680,518

Euro 897 891 186,421 175,299



50 FINANCIAL RISK MANAGEMENT (CONTINUED) An impact analysis of the foreign currency Net Open Position (NOP) was carried out applying shock levels of 5%, 10% and 15%, for depreciation on the current exchange rate and the impact on the overall foreign currency NOP (in USD) and the impact on Income Statement is shown in the table below:

NOP as on 31 March 2020 NOP as on 31 March 2019

USD ‘000 LKR ‘000 USD ‘000 LKR ‘000

NOP 44,631 8,446,361 NOP 90,959 15,941,856

At shock level of % Revised rupee position

EffectonIncomeStatement

At shock level of %

Revised rupee position

EffectonIncomeStatement

LKR ‘000 LKR ‘000 LKR ‘000 LKR ‘000

5 8,868,679 422,318 5 16,738,949 797,093

10 9,290,997 844,636 10 17,536,041 1,594,186

15 9,713,316 1,266,954 15 18,333,134 2,391,278

50.3.2 Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The company’s policy is to continuously monitor positions on a daily basis and hedging strategies are used to ensure positions are maintained within prudential levels. The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the company’s income statement.

AT 31 MARCH CompanyIf Market rates up by 1%

theeffectofthesameto the Interest Income/

(Expense)

If Market rates drop by 1%theeffectofthesame

to the Interest Income/(Expense)

Rs. Rs.Effect on Rate sensitive Assets 277,818,684 (277,818,684)Effect on Rate sensitive Liabilities (104,815,500) 104,815,500 Sensitivity of profit or loss 173,003,184 (173,003,184)

50.4 Operational RiskOperational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour.

The Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk in the following areas:

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk in the following areas:


● Requirements for appropriate segregation of duties, including the independent authorisation of transactions; ● Requirements for the reconciliation and monitoring of transactions;

● compliance with regulatory and other legal requirements;

● documentation of controls and procedures;

● requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

● requirements for the reporting of operational losses and proposed remedial action;

● development of contingency plans;

● training and professional development;

● ethical and business standards; and

● risk mitigation, including insurance where this is effective.

● Compliance with Company standards is supported by a programme of periodic reviews undertaken by ERM. The results of ERM reviews are discussed with the department heads to which they relate, with summaries submitted to the Audit Committee and senior management of the Company.

50.5 Capital Management The Company’s capital management is performed primarily considering regulatory capital.

The Company’s lead regulator, the Central Bank of Sri Lanka (CBSL) sets and monitors capital requirements for the Company.

The Company is required to comply with the provisions of the Finance Companies (Capital Funds) Direction No.01 of 2003, Finance Companies (Risk Weighted Capital Adequacy Ratio) Direction No.02 of 2006 and Finance Companies (Minimum Core Capital) Direction No.01 of 2011 in respect of regulatory capital.

The Company’s regulatory capital consists primarily of tier 1 capital, which includes ordinary share capital, retained earnings and statutory reserves.

The Company’s policy is to maintain a strong capital base so as to ensure investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Company recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Company’s regulatory capital under the CBSL guidelines is as follows;

As at As at31.03.2020 31.03.2019

Capital Element Ordinary share capital 1,425,946,629 1,425,946,629 Statutory reserve 873,382,685 796,040,366 General reserve 288,079,789 288,079,789 Retained earnings (Excluding share of profits of equity accounted investee) 15,232,102,468 13,841,394,254 Less - Revaluation gains/surplus of investment property (213,726,396) (178,539,720)Tier I capital 17,605,785,175 16,172,921,318

Less - Other intangible assets (net) (231,657) (1,891,327)50% of investment in other banking and financial institutions (635,086,438) (745,670,895)Tier I Capital (after adjustments) 16,970,467,080 15,425,359,096

Less - 50% of investment in other banking and financial institutions (635,086,438) (745,670,895)Total Capital 16,335,380,642 14,679,688,201



51 IMPACT OF COVID-19 PANDEMIC 51.1 Use of Going Concern assumption The sudden shock arisen from the outbreak of the COVID - 19 globally since January 2020 caused massive economic disruption leading to

uncertainty across the world. Sri Lanka as a country became exposed to this risk from late March 2020 and as an immediate precautionary measure the Government imposed island wide curfew. Since access to office was not feasible, the Company activated a to “work from home” plan by which, all key management personnel and all required staff to work from home. To ensure the timely servicing of clients’ needs and especially, payment of Fixed Deposit Interest, the management sought assistance from it’s banks of the Company and provided an uninterrupted service to its customers during the curfew period. With the gradual opening of the branches, serving the clients returned to near normalcy.

As the banking and NBFI sectors are the backbone of any economy, any significant economic downturn will directly affect banks and NBFIs.

Due to difficult operating conditions, the performance of the banking sector and the NBFIs in particular will be more challenging, with rising NPLs affecting the quality of the asset and the recovery of profitability. Relief measures for affected businesses and individuals in line with the directions issued by the CBSL (six-month moratorium) are expected to mitigate the impact on individuals and businesses but will increase non-performing loan since 2020. Further as per the Fitch Ratings, the outlook for the country, banking and NBFI sector in Sri Lanka is negative for 2020. The liquidity position of the financial sector will be affected by the debt moratorium, although this is balanced to some extent by the lowering of liquidity requirements for financial institutions. The need to strengthen the capital of NBFIs will be felt even more, as the company needs the financial capacity to tide over this crisis. Regular stress testing will be critical due to the evolving state of uncertainty.

The Company has assessed the probable impact stemming from Covid – 19 outbreak and determined that based on the available information

and management’s best judgement, the use of Going concern assumption is appropriate in preparing Financial Statements for the year ended 31st March 2020.

Some of the key actions that influenced the above determination are as follows,

● Despite the challenging environment of having difficulties in collecting the dues of the Company the Company was able to maintain a stable liquidity position and safeguard the interest of the stakeholders.

● A more prudent cost control mechanism was in place which ensured an effective cost structure in the Company.

● The unutilised Overdraft facilities, already negotiated and available unutilised funding lines provides as a cushion to absorb any sudden liquidity shocks if any.

In the assessment of the appropriateness of the going concern assumption disclosed above, the Company has used forecasts of future cash in / out flow estimates considering probability weighted economic scenarios applicable to the Company’s operations. The Company evaluated the key assumptions used in the above cash flow estimates and judgements under probable stress scenarios such as, retention ratio of Fixed Deposits, Deposit renewal ratio, Ratio of Rental Collection and Re-imposing of CBSL liquid asset requirement.

51.2 The estimation of Expected Credit Losses The significant accounting estimate impacted by the associated uncertainties is predominantly related to the estimation of expected credit

losses of the financial assets. Measurement of ECL needs to incorporate forward-looking reasonable and supportable information available without undue cost or effort at the reporting date (SLFRS 9.5.5.17). Accordingly, SLFRS 9 requires the application of judgement and both requires and allows entities to adjust their approach to determining ECL in different circumstances. Several assumptions used in the estimation of ECL to date may no longer be valid in the current environment due to the COVID-19.

The Company is required to develop estimates based on the best available information about past events, current conditions and forecasts of

economic conditions. In assessing forecast conditions, consideration need to be given both to the effects of the COVID-19 and the significant government support measures being undertaken. Additionally, consideration also need to be given on whether the concessions under moratoriums could enable certain borrowers to resume regular payments in the foreseeable future (whom otherwise would have fallen into financial difficulty), such that significant increase in credit risk would not occur over expected remaining lives of the receivables.


As such there is a considerable degree of judgement involved in the estimation of ECL. Such judgements include the extent and duration of the pandemic, the impacts of actions of governments and other authorities, and the responses of businesses and consumers in different industries, along with the associated impact on the economy. Mostly, these are out of the control of the Company. Hence the actual economic conditions are likely to be different from the anticipated events.

Collectively assessed provision for ECL In estimating collectively assessed ECL, the Company makes judgements and assumptions in relation to the selection of an estimation

technique or statistical models. Statistical models applied as such in estimating the collectively assessed ECL reported in these Financial Statements is consistent with that of

applied in Financial Statements for the year ended 31st March 2019. Key assumptions and judgements used in these statistical models are as follows ;

Assumption Key judgement

Economic factor adjustments The Company used the economic factor adjustments used in as at 31st December 2019 in line with the Guidance Notes on Accounting Considerations of the COVID 19 Outbreak issued by CA Sri Lanka.

Assignment of weight-age to worst case scenario

Weight-age assigned to worst case scenario has been increased by transferring the weight-age from best case scenario to worst case scenario.

Probability of Default (PDs) and Loss Given Default (LGDs)

The Company considered the Probability of Default (PD), Loss Given Default (LGD) computed as at 29th February 2020.

51.3 Liquidity Risk Management With the onset of COVID 19 pandemic in late March 2020 of this year, the Company introduced more rigour to the processes already in place

to manage its liquid assets. While closely monitoring any developments related to the pandemic, it has continued to keep its risk management measures under review to readily respond to changing circumstances. The Company is comfortable with its existing buffer of liquid assets. The actions taken will help to maintain existing liquidity position while mitigating any disruptive effect on liquidity that may arise due to the continuously evolving nature of the pandemic.

51.4 Financial impact on the application of the concessions given by the CBSL through the debt moratorium Based on the Circular Nos 4 and 5 of 2020 issued by the Central Bank of Sri Lanka (CBSL) NBFIs are required to provide extension of

payment holidays granted to borrowers in stressed/ specific industries. This may require the Company to modify certain contracts.

Gains / losses arising from the modification of such contracts are required to be charged to profit / loss immediately if such modifications are not considered as substantial. However, if there is a substantial modification, that would result in derecognition of the financial asset. Consequently, a new financial asset would be recognised and the EIR used would be restated.

Currently, the Company is in the process of finalising the customer debt relief applications in order to identify whether such modification of terms are to be considered as substantial or not.


SHAREHOLDER INFORMATION

ANALYSIS OF ORDINARY SHARES AS AT 31ST MARCH

2020 2019

Range No. of Shareholders

No. of Shares

% of Shares

No. of Shareholders

No. of Shares

% of Shares

1 - 1,000 664 146,886 0.00 662 148,598 0.00

1,001 - 10,000 224 968,669 0.01 194 841,786 0.02

10,001 - 100,000 150 5,316,482 0.08 124 4,751,309 0.07

100,001 - 1,000,000 32 10,975,818 0.18 27 9,808,376 0.15

Over 1,000,000 Shares 6 6,360,303,315 99.73 7 6,362,161,101 99.76

Total 1,076 6,377,711,170 100.00 1,014 6,377,711,170 100.00

SHAREHOLDERS AS AT 31ST MARCH

2020 2019

No. ofShares

% of IssuedCapital

No. ofShares

% of IssuedCapital

1. Hatton National Bank PLC/ LOLC Holdings PLC 3,833,000,000 60.10 2,250,000,000 35.28

2. LOLC Holdings PLC 2,475,876,426 38.82 4,058,876,426 63.64

3. Browns Investments PLC 40,000,000 0.63 40,000,000 0.63

4. Sinharaja Hills Plantation (Pvt) Ltd 5,445,851 0.09 5,445,851 0.09

5. CIC Holdings PLC/CIC Charitable & Educational Trust Fund Chemical Industries (Colombo) Ltd/CIC Charitable & Educational Trust Fund

4,000,000

NIL

0.06

NIL

NIL

4,000,000

NIL

0.06

6. Seylan Developments PLC 1,981,038 0.03 1,981,038 0.03

7. Mrs. N R Mather 1,000,000 0.02 1,000,000 0.02

8. Mrs. R L Mather 1,000,000 0.02 1,000,000 0.02

9. Mr. S R Mather 1,000,000 0.02 1,000,000 0.02

10. Mr. D N N Lokuge 890,660 0.01 890,660 0.01

11. Saakya Capital (Pvt) Ltd 800,050 0.01 800,050 0.01

12. Ceylon Biscuits Limited 787,053 0.01 1,857,786 0.03

13. Mr. A N William 650,000 0.01 650,000 0.01

14. Mr. W V A N Fernando & Mrs. K M M V R Jayasuriya

500,000 0.01 500,000 0.01

15. Dr. H S D Soysa 400,100 0.01 400,100 0.01

16. Mr. P B Jayasundara 260,000 0 260,000 0

17. Mr. R E Rambukwella 247,000 0 98,250 0

18. Miss. S Durga 230,000 0 NIL NIL

19. Mrs. A S Weerasuriya & Mr. G S Padumadasa 226,623 0 225,870 0

20. Mr. S M M A Ghaffoor 200,000 0 200,000 0

6,368,494,801 99.85 6,369,186,031 99.87


PUBLIC SHAREHOLDINGInformation pertaining to public shareholding is as follows:

31-Mar-2020 31-Mar-2019

Public Holding Percentage 0.452% 0.452%

Number of Public Shareholders 1,073 1,011

Float Adjusted Market Capitalization 51,889,058 74,970,334

The Company is not compliant with the Minimum Public Holding requirement stipulated in the Listing Rule 17.13.1 (b) of the Colombo Stock Exchange. While reviewing options available to comply, the Board of Directors is also pursuing requisite regulatory approvals, to list debt securities and remove all equity securities, to ensure compliance with both the Listing Rules of the Colombo Stock Exchange and the directions of the Central Bank of Sri Lanka.

HIGHEST, LOWEST AND LAST TRADED SHARE PRICES AS AT 31ST MARCH

2020Rs.

2019Rs.

Highest 4.00 3.00

Lowest 1.70 1.90

Last Traded 1.80 2.60

SHAREHOLDING AS AT 31ST MARCH

2020 2019

No. of Shares % of Shares No. of Shares % of Shares

Residents 6,377,657,516 100.00 6,377,678,540 100.00

Non Residents 53,654 0 32,630 0

Total 6,377,711,170 100.00 6,377,711,170 100.00


SUMMARISED QUARTERLY STATISTICS

RestatedFOR THE 3 MONTHS ENDED 2019/20 2018/19

30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-MarIncome Statement (Rs.‘000)Gross income 3,133,514 3,225,467 3,193,130 3,239,658 3,466,318 3,570,524 3,699,245 3,390,404 Other Income/(Expenses) 459,686 566,621 561,610 781,090 483,001 436,986 212,939 562,504 Interest Costs (1,675,272) (1,549,293) (1,485,028) (1,449,967) (1,630,405) (1,706,988) (1,731,897) (1,627,548)Profit before operating expenses 1,917,928 2,242,795 2,269,712 2,570,781 2,318,914 2,300,522 2,180,287 2,325,360 Other operating expenses (1,573,751) (1,598,695) (1,637,355) (2,194,753) (1,633,632) (1,726,159) (1,855,823) (1,868,054)Results from operating activities 344,177 644,100 632,357 376,028 685,282 574,363 324,464 457,306 Income tax expense (95,044) (171,364) (165,768) (17,639) (181,511) (169,336) (122,330) (370,140)Net profit after tax 249,133 472,736 466,589 358,389 503,771 405,027 202,134 87,166

RestatedAs at 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 30-Jun-18 30-Sep-18 31-Dec-18 31-Mar-19Financial Position (Rs.’000)Assets 68,223,418 71,344,731 68,746,084 69,631,675 72,408,300 74,664,052 70,299,680 70,856,349 Liabilities 50,562,411 53,207,196 50,131,290 50,707,113 55,381,344 57,161,736 52,592,710 53,397,816 Net Assets 17,661,007 18,137,535 18,614,794 18,924,562 17,026,956 17,502,316 17,706,970 17,458,533

Share capital & reserves 17,661,007 18,137,535 18,614,794 18,924,562 17,026,956 17,502,316 17,706,970 17,458,533 Share capital 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 Reserves 16,235,060 16,711,588 17,188,847 17,498,614 15,601,009 16,076,369 16,281,023 16,032,586


TEN YEAR SUMMARY

For the year ended 31st March(Rs. 'Mn) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Operating ResultsProfit before interest 2,047 5,405 4,110 4,321 4,132 5,373 8,320 9,747 8,793 8,089 Profit before tax 741 3,245 1,603 1,289 1,728 2,008 2,205 2,905 2,041 1,997 Profit after tax 664 2,964 1,168 936 1,426 1,574 1,686 2,144 1,198 1,547

AssetsTotal assets 21,351 26,398 27,229 32,934 42,385 84,359 77,761 73,508 70,856 69,632 LiabilitiesTotal Liabilities 17,656 19,635 19,392 24,078 32,270 72,561 63,586 57,002 53,398 50,707

Shareholders' FundsStated capital 1,426 1,426 1,426 1,426 1,426 1,426 1,426 1,426 1,426 1,426 Reserves 2,269 5,337 6,411 7,430 8,689 10,371 12,750 15,080 16,033 17,499 Shareholders' funds 3,695 6,763 7,837 8,856 10,115 11,797 14,176 16,506 17,459 18,925

Investor RatiosLong term borrowings to shareholders funds

1.85:1 1.43:1 0.58:1 0.83:1 0.66:1 2.32:1 1.83:1 1.32:1 1.19:1 0.89:1

Total borrowings to shareholders funds

4.19:1 2.73:1 1.87:1 1.62:1 2.91:1 5.97:1 4.35:1 3.27:1 2.91:1 2.51:1

Book value per share (Rs.) 0.58 1.06 1.23 1.39 1.59 1.85 2.22 2.59 2.74 2.97 Earnings per share(Rs.) 0.10 0.46 0.18 0.15 0.22 0.25 0.26 0.34 0.19 0.24 Return on capital employed(%) 23 57 16 11 15.03 14.37 12.99 13.98 7.05 8.50 Return on assets(%) 4 12 4 3 4.59 3.17 2.72 3.84 2.83 2.84

Non Financial InformationNumber of branches (Including Service Centres)

40 50 53 53 58 60 61 63 65 65

Number of employees 413 511 539 610 670 801 1,099 1,327 1,348 1,407


TEN YEAR SUMMARY

EQUITY COMPOSITION(Rs. Mn)

0

5,000

10,000

15,000

20,000

Stated capitalStatutory reservesRevaluation reserves

2016 2017 2018 2019 2020

Other reserves Retained earnings

0

10

20

30

40

50

60

70

80

NUMBER OF BRANCHES(No.)

2016 2017 2018 2019 20200

300

600

900

1,200

1,500

NUMBER OF EMPLOYEES(No.)

2016 2017 2018 2019 2020

PROFIT BEFORE TAX & PROFIT AFTER TAX

2016

Profit before taxProfit after tax

2017 2018 2019 2020

(Rs. Mn)

0

500

1,000

1,500

2,000

2,500

3,000

TOTAL ASSETS TO TOTAL LIABILITIES

2016

Total AssetsTotal Liabilities

2017 2018 2019 2020

(Rs. Mn)

0

20,000

40,000

60,000

80,000

100,000

0

50,000

100,000

150,000

200,000

250,000

NUMBER OF ACTIVE CONTRACTS (Rs. Mn)

2016 2017 2018 2019 2020


SOURCES AND DISTRIBUTION OF INCOME

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000 Rs.'000

Sources of incomeLease income 854,536 1,837,041 2,591,200 3,162,957 2,820,335 2,730,576 2,752,713 2,855,539 3,266,005 2,945,104 Hire purchase income 1,633,327 1,708,993 1,055,987 495,423 122,104 6,575 809 - - - Loan income 292,738 732,975 1,330,038 2,645,630 3,450,943 3,924,042 5,830,662 8,222,257 8,914,683 8,218,184 Vehicle hire income 34,133 16,583 13,189 14,046 17,511 15,944 16,518 17,967 4,771 2,741 Factoring income 460,887 830,050 723,414 694,703 521,284 702,716 1,303,971 1,295,538 701,128 475,954 Interest on overdue rentals 126,866 191,754 281,793 445,595 536,034 516,335 763,980 791,411 990,675 910,868 Collection from contracts written off

- - - 55,843 121,480 213,900 229,550 165,067 249,230 238,918

Other income 177,757 2,205,055 217,184 259,867 581,506 1,288,654 2,341,618 2,630,339 1,695,430 2,369,007 3,580,244 7,522,451 6,212,805 7,774,064 8,171,197 9,398,742 13,239,821 15,978,118 15,821,922 15,160,776

Distribution of incomeTo banks and other lenders 1,309,331 2,167,290 2,514,873 3,039,090 2,406,103 3,372,544 6,125,876 6,994,795 6,696,838 6,159,560 To government as taxation 224,778 366,115 550,047 471,911 471,378 704,540 976,382 1,371,667 1,536,736 1,197,308 To employees as emoluments 381,732 411,034 464,518 571,070 723,426 870,769 1,103,658 1,387,268 1,515,142 1,456,287 To providers of services 847,652 1,299,046 1,185,150 1,570,038 1,731,158 2,217,817 2,525,919 2,910,412 2,859,151 2,103,074 To shareholders as dividends - - - - - - - - - - Depreciation 44,047 47,360 57,178 54,546 95,380 87,034 109,606 113,661 130,407 291,960 Provision for doubtful debts 115,414 267,322 272,586 1,131,450 1,317,731 571,655 712,077 1,055,992 1,885,551 2,405,741 Reserves(including provision for deferred taxation)

657,290 2,964,284 1,168,453 935,959 1,426,021 1,574,383 1,686,303 2,144,323 1,198,097 1,546,846

3,580,244 7,522,451 6,212,805 7,774,064 8,171,197 9,398,742 13,239,821 15,978,118 15,821,922 15,160,776


STATEMENT OF VALUE ADDED

Company2019/20 2018/19(Rs.'000) (%) (Rs.'000) (%)

Value addedIncome 12,791,769 14,126,492 Other income 2,369,007 1,695,430

15,160,776 15,821,922 Cost of services (2,103,074) (2,859,151)Provision for losses (2,405,742) (1,885,551)

10,651,960 11,077,220

Distribution of value addedTo employees 14% 14%Remuneration and other benefits 1,456,287 1,515,142

To government 11% 14%Income tax,value added tax and VAT on financial services 1,197,308 1,536,736

To banks and other lenders 58% 60%Interest and bank charges on borrowings 6,159,560 6,696,838

To providers of capital - - Dividends to shareholders - -

To expansion and growth 17% 12%Depreciation 291,960 130,407 Retained profits 1,546,845 1,198,097

10,651,960 11,077,220


AAccounting PoliciesThe specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

Accrual BasisRecognizing the effects of transactions and events when they occur, without waiting for receipt or payment of cash or cash equivalents.

AmortisationThe systematic allocation of the depreciable amount of an intangible asset over it’s useful life.

Assets and Liability committee (ALCO)The committee that is responsible for managing assets and liabilities of the company.

Associate Company-Equity accounted investeeAn associate is an entity in which the investor has significant influence and which is neither a subsidiary nor an interest in a joint venture

Available- For-Sale Financial AssetsNon derivate financial assets that are designated as available for sale or are not classified as

(a) Loans and receivables,

(b) Held to maturity investments or

(c) Financial assets at fair value through profit or loss.

CCash BasisRecognising the effects of transactions and events when receipts or payments of cash or cash equivalent occur.

Cash EquivalentsShort term highly liquid investment that are readily convertible to known amount of cash and which are subject to an insignificant risk in change in value.

Cash FlowsCash equivalents are short term, highly liquid investment that are readily convertible to know amount of cash and which are subject to insignificant risk of changes in value.

Collective ImpairmentImpairment assessment on a collective basis for homogeneous groups of loans and receivables that are not considered individually significant and to cover losses which have been incurred but have not yet been identified at the reporting date.

Consolidated Financial StatementsFinancial Statements of a Group presented as those of a single company.

ContingenciesA condition or situation existing on the statement of financial position where the outcome will be confirmed only by occurrence or non occurrence of one or more future event.

Core CapitalCore capital is the minimum amount of capital that finance company should have on hand to comply with the regulatory requirement. Core capital consists of equity capital and declared reserves.

Corporate GovernanceThe process by which corporate entities are governed. It covers 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.

Credit RatingAn evaluation of a corporate’s ability to repay its obligations or the likelihood of not defaulting ,carried out by an independent rating agency.

Credit RiskCredit Risk is the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms & conditions.

Currency SwapsThe simultaneous purchase of an amount of a currency for spot settlement and the sale of the same amount of the same currency for forward settlement.

Customer DepositsMoney deposited by account holders. Such funds are recorded as liabilities.

DDifferedTaxationSum set aside for tax in the financial statements that may become payable/receivable in a financial year other than the current financial year.

DepreciationDepreciation is the allocation of the depreciable amount of an asset over it’s estimated useful life.

DerecognitionThe removal of a previously recognised financial asset or financial liability from an entity’s Statement of Financial Position.

Derivatives A derivative is a financial instrument or other contract, the value of which changes in response to some underlying variable (e.g. an interest rate), that has an initial net investment smaller than would be required for other instruments that have a similar response to the variable, and that will be settled at a future date.

EExecutionsAdvances granted to customers under leasing, hire purchase and loan facilities.

Equity Method The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition changes in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.

ExposureA claim, contingent claim or position which carries a risk of financial loss.

GLOSSARY TERMS


FFair ValueFair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Financial AssetsAny asset that is cash, an equity instrument of another entity or contractual right to receive cash or another financial asset from another entity.

Finance LeaseA contract where by a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortize the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risk and rewards incidental to ownership of the asset to the lessee.

Financial LiabilityIs a contractual obligation to deliver cash or another financial asset to another entity.

Foreign Exchange ContractsAgreement between two parties to exchange one currency for another at a future date at a rate agreed upon today.

GGearingLong-term borrowings divided by the total funds available for shareholders.

GoodwillAny excess of the cost of the acquisition over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction and is recognized as an asset.

Going ConcernThe Financial Statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future . Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of it’s operation.

Gross PortfolioTotal rental receivable of the advances granted to customers under leasing, hire purchase and loan facilities.

GroupA group is a parent and all it’s subsidiaries.

GuaranteesThree party agreement involving a promise by one party (the guarantor) to fulfil the obligations of a person owing a debt if that person fails to perform.

HHedgingA strategy under which transactions are effected with the aim of providing cover against the risk of unfavourable price movements. (Interest rates, prices and commodities etc).

Held to MaturityNon-derivative financial assets with fixed or determinable payments and a fixed maturity that an entity has the positive intention and ability to hold to maturity.

Hire PurchaseA hire purchase is a 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.

IImpairmentAmount by which the carrying amount of an asset or cash generating unit exceeds its recoverable amount.

Impairment Provisions/AllowancesProvision held as a result of the raising of a charge against profit for the incurred loss. An impairment provision may either be identified or unidentified and individual (specific) or collective (portfolio).

Individual ImpairmentExposure to loss is assessed on all individually significant accounts that do not qualify for collective assessment.

Intangible AssetAn identifiable non-monetary asset without physical substance.

Interest CostThe sum of money accrued and payable to the sources of borrowed working capital.

Interest Rate Risk The risk that the fair value or future cash flows of a financial instruments will fluctuate because of changes in the market interest rates.

Investment PropertyInvestment Property is a property (land or a building or part of a building or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business.

Investment Securities Securities acquired and held for yield or capital growth purposes and are usually held to maturity.

KKey Management PersonnelKey Management Personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly.

LLeaseA lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Liquid Assets Assets held in cash or in a form that can be converted to cash readily, such as deposits with other banks, Bills of Exchange and Treasury Bills and Bonds.

Liquidity RiskThe risk that an entity will encounter difficulty in meeting short-term obligations associated with financial liabilities.

GLOSSARY TERMS


MMarket CapitalisationTotal market value of a company’s outstanding shares.

NNegative GoodwillAny excess, as at the date of the exchange transaction, of the acquirer’s interest in the fair values of the identifiable assets and liabilities acquired over the cost of the acquisition and is treated as income in the period it arises.

Net PortfolioTotal rental instalment receivable excluding interest of the advances granted to customers under leasing, hire purchase and loan facilities.

Non-Controlling InterestPart of the net results of operations and of net assets of a subsidiary attributable to interests who are not owned, directly or indirectly through subsidiaries, by the Parent.

Non Performing PortfolioFacilities granted to customers who are in default for more than six months.

OOperating LeaseAn operating lease is a lease other than a finance lease.

PParentA parent is an entity which has one or more subsidiaries.

ProvisionAmount set aside against possible losses or net receivable of facilities granted to customers, as a result of them becoming partly or wholly uncollectable.

RRelated PartiesParties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions.

Related Party TransactionsA transfer of resources or obligations between related parties, regardless of whether a price is charged.

Residual ValueThe estimated amount that is currently realisable from disposal of asset, after deducting estimated cost of disposal, if the asset was already of the age and in the condition expected at the end of it’s useful life.

SSegmental AnalysisAnalysis of financial information by segments of an enterprise specifically, the different industries and the different geographical areas in which it operates.

Shareholder's Funds(equity)Total of issued and fully paid ordinary share capital and reserves.

Stated CapitalAll amount received by the Company or due and payable to the Company-(a) In respect of the issue of shares, (b) In respect of calls on shares.

Subsidiary CompanySubsidiary is a company that is controlled (power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities) by another company known as the Parent.

Substance over FormThe consideration that the accounting treatment and the presentation in Financial Statements of transactions and the events should be governed by their substance and financial reality and not merely by legal form.

SubsidiaryAn entity that is controlled by another entity which is known as the parent.

TTier 1 CapitalCore capital representing permanent shareholders’ equity and reserves created or increased by appropriations of retained earnings or other surpluses.

Tier 11 CapitalSupplementary capital representing general provisions and other capital instruments which combine certain characteristics of equity and debt, such as hybrid capital instruments and unsecured subordinated term debt.

UUnearned IncomeUnearned interest is an accounting method used by lending institutions to deal with long-term, fixed-income securities. Initially recorded as a liability, the unearned interest will eventually be recorded as income in the lending institution's books over the period of the loan as time passes and the interest is earned.

VValue AdditionValue of wealth created by providing leasing and other related services considering the cost of providing such services.


GLOSSARY TERMS

RATIOSMethod of computation and indicates

CCapital Adequacy RatioThis is ratio between core capital and risk weighted assets.

Cost to Income RatioTotal operating expenses as a percentage of total operating income.

DDebt to Equity(Gearing)RatioTotal debts divided by equity. The extent to which debt contributes to fund the total assets, compared to the contribution from equity.

EEarnings Per Share (EPS)Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the year. Share of current year’s earnings attributable to an ordinary shares in use.

IInterest CoverEarnings before interest and tax, divided by interest expense. Ability to cover or service interest charges of the debt holders.

MMarket CapitalizationNumber of ordinary shares in issue multiplied by market value of a share. Total market value of all ordinary shares in issue.

NNet Assets Value per Ordinary ShareOrdinary shareholders’ funds divided by the number of ordinary shares issued. (Book value of an ordinary share).

Non Performing RatioTotal gross non-performing portfolio divided by total gross portfolio. Percentage of total gross non-performing portfolio against the total gross portfolio.

PPrice Earnings Ratio (P/E Ratio)Market price of a share divided by earnings per share (EPS). Number of years that would be taken to recoup shareholders' capital outlay in the form of earnings.

RReturn On Assets(ROA)Net profit expressed as a percentage of average total assets. Overall effectiveness in generating profit with available assets, earning power of invested total capital.

Return on Equity (ROE)Net profit, less preference share dividends if any, expressed as a percentage of average ordinary share holders' funds. Earning power on shareholders’ book value of investment (equity).


NOTES


NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT THE 28TH ANNUAL GENERAL MEETING of the Company will be held on Monday, 30th November 2020 at 10.00 a.m. as an on-line audio-visual meeting with arrangements for the on-line meeting platform made at the L O L C Holdings PLC, No.100/1, Sri Jayawardenapura Mawatha, Rajagiriya, for the following purposes:

1. To receive and consider the Report of the Directors and Statement of Accounts for the year ended 31st March 2020 with the Report of the Auditors thereon.

2. To re-elect as Director Mr. L Jayaratne, who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

3. To re-elect as Director Mr T Sanakan, who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

4. To re-appoint M/s KPMG Chartered Accountants as auditors for the ensuing financial year at a remuneration to be fixed by the Directors.

5. To approve in terms of Companies (Donations) Act No. 26 of 1951 the making of donations by the Directors as determined by them for the current Financial Year and until the next Annual General Meeting of the Company.

By order of the BoardCOMMERCIAL LEASING & FINANCE PLC

LOLC Corporate Services (Pvt) LtdSecretaries

4th November 2020 Rajagiriya (in the greater Colombo)


FORM OF PROXY

I/We………………………………………………………………………………………………………………………………......…………………holder of NIC/

Reg. No.………………………………………of………………………………………………………………………………………………… being a member/

members of Commercial Leasing & Finance PLC hereby appoint ….………………………………………………………………….........................………

of………………………………………………………………………………………………………………………….…whom failing

Mr. Priyantha Damian Joseph Fernando of Colombo or failing himMr. Luxhman Jayaratne of Colombo or failing himMr. Ulluvis Hewage Ebert Silva of Colombo or failing himMr. Thamotharampillai Sanakan of Colombo or failing himMr. Don Manuwelge Don Krishan Thilakaratne of Colombo

as my/our proxy to represent me/us and vote on my/our behalf at the Annual General Meeting of the Company to be held as an on-line meeting on Monday, 30th November 2020 at 10.00 a.m. and at any adjournment thereof and at every poll which may be taken in consequence of the aforesaid Meeting.

For Against

1) To re-elect as Director Mr. L Jayaratne, who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

2) To re-elect as Director Mr T Sanakan, who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

3) To re-appoint M/s KPMG Chartered Accountants as auditors for the ensuing financial year at a remuneration to be fixed by the Directors.

4) To approve in terms of Companies (Donations) Act No. 26 of 1951 the making of donations by the Directors as determined by them for the current Financial Year and until the next Annual General Meeting of the Company.

dated this ……….…………………. day of ……………., Two Thousand Twenty.

……………..………………… Signature of Shareholder

(Please delete inappropriate words and refer overleaf for instructions


INSTRUCTIONS AS TO COMPLETION1 Please return the completed Form of Proxy after filling in legibly your full name and address,

signing on the space provided and filling in the date of signature.

2 The Proxy shall

a) in the case of an individual, be under the hand of the shareholder or his or her attorney, and if signed by an attorney, a notarially certified copy of the Power of Attorney should be attached to the completed Proxy if it has not already been registered with the Company.

b) if the shareholder is a company or a corporation, be either under its common seal or under the hand of an officer or attorney authorized by such organization in that behalf in accordance with its Articles of Association or Constitution.

3 Please indicate with an ‘X’ how the proxy should vote on each Resolution. If no indication is given, the proxy shall exercise his/her discretion and vote as he/she thinks fit.

4 The completed Form of Proxy should be deposited at No. 100/1, Sri Jayawardenapura Mawatha, Rajagiriya or scanned and emailed to [email protected] with the email subject titled “CLC AGM PROXY” not less than 48 hours before the time appointed for the holding of the Meeting.

Designed & produced by

Printed by Printage (Pvt) Ltd

NAME OF THE COMPANYCommercial Leasing & Finance PLC

COUNTRY OF INCORPORATIONSri Lanka

LEGAL FORMA quoted public company with limited liability

DATE OF INCORPORATION22nd April 1988

COMPANY REGISTRATION NO.PQ 131/PB/PQ

STOCK EXCHANGE LISTINGThe ordinary shares of the Company were listed on the Diri Savi Board of the Colombo Stock Exchange on 05th June2012.

CREDIT RATINGICRA Lanka assigned the company an issuer rating of (SL) A (Stable).

REGISTERED OFFICE AND HEAD OFFICENo. 68, Bauddhaloka Mawatha, Colombo 04.Tel: 0114 526526Fax: 0114 526559Email: [email protected]: https://www.clc.lk

DIRECTORSP D J Fernando – Chairman/ Independent Non-Executive DirectorL Jayaratne – Independent Non- Executive DirectorU H E Silva - Independent Non- Executive DirectorT Sanakan - Independent Non- Executive DirectorD M D K Thilakaratne - ExecutiveDirector/ CEO

SECRETARIESLOLC Corporate Services (Pvt) Ltd.No. 100/1, Sri Jayawardenapura Mawatha, Rajagiriya.Tel: 0115 880354/6, 0115 880880 (General)

AUDITORSKPMG, Chartered Accountants

LAWYERSJulius & Creasy, Attorneys-at-LawNithya Partners

REGISTRARSPW Corporate Secretarial (Pvt) LtdNo. 3/17, Kynsey Road, Colombo 08. Tel: 0114 640360 - 3 PRINCIPAL ACTIVITIESDuring the year the principal activities of the Company comprised provision of leasing, loans, factoring, mobilising of fixed and savings deposits, Islamic financing, micro financing and gold loans.

CORPORATE INFORMATION

BANKERSBank of CeylonCiti Bank N AHatton National Bank PLC Hongkong and Shanghai Banking Corporation LtdNations Trust Bank PLC Commercial Bank of Ceylon PLC NDB BankSeylan Bank PLC MCB BankSampath Bank PLC Standard Chartered BankDFCC Vardhana BankUnion Bank of Colombo PLC People’s BankHabib Bank

COMMERCIAL LEASING & FINANCE PLC I ANNUAL REPORT 2019/20

annual report 2019/20 - clc · 2020. 12. 1. · clc would continue to invest further in human...

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