A VALUABLE PROPOSITION - Kanrich

8th Proof

of

KANRICH FINANCE LTD.Annual Report 2014/15

submitted

by

Smart Media (Pvt) Ltd.

on

16th July 2015

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Kanrich Finance Ltd.

No. 69, Ward Place, Colombo 7, Sri LankaHotline: +94 114 381 381 Tel: +94 112 685 656 E-mail: [email protected]

A VALUABLEPROPOSITION

kanrich.lk

Vision StatementWe move towards our goal of being a best corporate entity in the country, performing in steady practices and surpassing the desires of customers.

Mission StatementWe foresee of being a best corporate entity in the country, performing in steady practices, conducting business with responsibility, consistently outperforms our peers and surpassing the desires of customers through excellence in delivering innovative products. We continuously promote a learning culture and provide a dynamic and challenging environment for our employees whilst creating lasting value for our shareholders.

Kanrich Finance Ltd. Annual Report 2014/15A VALUABLE PROPOSITION

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a valuableproposition

Our strategic and sustainable growth over the years

is underpinned by the powerful and superior value

propositions we consistently offer to all our stakeholders

in all their interactions with us. This is because we

consider our offer to be a ‘gift’, carefully selected and

pleasantly wrapped in a way that brings the desired

outcomes to the recipients as well as the giver.

Be it our range of products and services, attractive

returns, conducive working environment, commitment

to governance, risk management and corporate

responsibility, ours is a valuable proposition indeed, as

borne out by our figures.

Kanrich Finance Ltd. Annual Report 2014/15 A VALUABLE PROPOSITION

About Us

02

The Company started its journey in 1971 with the incorporation of Mutual Investment and Finance Ltd., and was registered under the Companies Ordinance No. 51 of 1938.

The Company re-registered under the new Companies Act No. 07 of 2007. In 2010, it was rebranded as Kanrich Finance Ltd., revolutionary changing the path towards a brand new direction.

With a strong financial tradition of over 43 years, KFL offers a portfolio of financial solutions including deposits, savings, leasing, hire purchase, real estate and microfinance products. KFL started its operations with 60 employees and an asset base of Rs. 600 million. Today, the total workforce is over 1,200 employees

and the asset base is more than Rs. 11 billion. The Company has expanded its reach with its presence in 44 locations spread across the country except in the Northern Province.

KFL was completely transformed after taking over by Mutual Holdings Ltd. (MHL) to what it is today and presently it ranks among the top finance companies in Sri Lanka.

KFL is led by a highly experienced and professional Board of Directors and a young and dynamic management team.

The Company is guided by its core principles and values and is on a well-planned strategic path to achieve market leadership. The Company serves its clientele with an unmatched product spread, coupled with supreme service quality by customising the core products to attract the market. With a customer base exceeding 260,000, KFL has already established itself in the financial services industry and will continue to remain firm and focused with a strong brand of financial stewardship.


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129

71

31

66

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06

Chief Executive Officer’s Review

Sustainability Report

Risk Management

Management Discussion and Analysis

Highlights of the Year

Annexes

Chairman’s Message

Contents

Financial Reports

39Stewardship

46

Corporate Governance Report


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Highlights of the Year Highlights of the Year

Rs. 2,854

Rs. 6.59

1,208

11.49%

Gross Income

Earnings per Share

No. of Employees

Core Capital

million

Rs.11,557Asset Base

million


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Highlights of the Year Highlights of the Year

Actuals Growth Y on Y Forecasted

2015 Rs. '000

2014 Rs. '000 %

2016 Rs. '000

Results for the Year

Gross Income 2,854,120 1,441,163 98 5,798,893

Interest Income 2,514,992 1,296,154 94 5,156,339

Interest Expenses 828,728 687,025 21 1,162,922

Net Interest Income 1,686,263 609,129 177 3,993,417

Other Operating Income 339,128 145,009 134 642,554

Personal Cost 415,493 260,348 60 815,825

Other Operating Expenses 657,913 376,477 75 1,172,879

Profit before Taxation 691,676 40,859 1,593 2,647,266

Provision for Tax 204,516 26,288 678 1,346,754

Profit after Tax 487,159 14,571 3,243 1,200,513

Financial Position at the Year end

Stated Capital 672,993 472,993 42 672,993

Shareholders' Fund (Stated Capital and Reserves) 1,057,504 347,780 204 2,269,724

Deposits from Customers 1,596,676 1,010,353 58 2,800,000

Interest-Bearing Loans and Borrowings 7,161,753 3,400,093 111 13,905,859

Loans and Advances, Leases and Hire Purchases 9,557,747 3,882,804 146 15,612,181

Total Assets 11,557,073 5,050,254 129 20,954,521

Investors

Earning per Share (Rs.) 6.59 0.20 3,194 15.45

Net Asset per Share (Rs.) 14.30 4.78 199 29.21

Ratios

Return on Shareholders' Funds (%) 69.33 4.35 1,486 73

Return on Average Assets (%) 5.87 0.34 1,608 16

Equity : Assets (Times) 0.09 0.07 33 0.11

Debt : Equity (Times) 9.61 13.16 -27 7.84

Statutory Ratios

Liquid Assets (%) 16.00 10.00 60 20

Core Capital Ratio (%) Minimum Required (5%) 11.49 7.29 58 11.53

Total Risk-Weighted Capital Ratio (%) Minimum Required 10% 11.49 7.29 58 11.53

Employees

Number of Employees (Nos.) 1,208 885 36 1,980

Profit per Employee (Rs.) 404 16 2,351 606

Staff-Related Cost per Employee 344 294 17 412

Rs. 573Operating Profit per Employee

129%Increase in Total Assets

692(Rs. million)Profit before Taxation


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Chairman’s Message Chairman’s Message

Year 2014/15 was for Kanrich Finance Ltd., an important juncture in its 43-year history; a prudent and necessary transformation of the size, structure and scope of our Company.

It was also a year of challenges and significant accomplishments; if we step back and view the year in context, we can see how far our Company has come in a short time – exemplifying the effectiveness of our value propositions.

Operating EnvironmentGlobal growth in 2014 was a modest 3.4%, reflecting an increased growth in advanced economies compared to the previous year and a slowdown in emerging market and developing economies. However, despite the slowdown, emerging market and developing economies still accounted for three-fourths of global growth. South Asia was the fastest-growing region in the world in the last quarter of 2014 on account of the strong expansion in India, coupled with favourable oil prices.

Amidst uneven developments in the global economy, Sri Lanka recorded an economic growth of 7.4%, compared to 7.2% in 2013. This was largely due to the favourable macroeconomic conditions supported by relaxed monetary policy stance on par with low and stable inflation during the year. The credit demand was low for most parts of the year, on account of decline in gold prices, the rapid growth of the corporate debt market and increased foreign borrowings by Sri Lankan corporates.

The banking sector remained robust, maintaining its lead role in the financial sector and continued to expand its asset base. The asset growth of the Licensed Finance Companies and the Specialised Leasing Company sector moderated during 2014 due to lower demand for credit, particularly during the early


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part of the year. However, the demand for credit picked up during the second half of 2014. The lower interest rate scenario facilitated the improvement of credit demand and maintenance of the rising non-performing loans at a manageable level.

Turning Challenge to an OpportunityOur overarching strategic objective for the year in review was to support the Consolidation Programme of the Central Bank of Sri Lanka (CBSL). Having been categorised as a Group ‘B’ company by the CBSL, we were required to either merge with a local bank or a category ‘A’ company or, upgrade ourselves to a Group ‘A’ company. Opting for the latter option, we set about to accomplish the ambitious target of raising our core capital to Rs.1 billion and our asset base to Rs. 7.5 billion by December 2014. The asset base of our Company at that time was Rs. 4 billion, whilst the core capital was Rs. 305 million.

What would seem as a challenge we successfully converted into an opportunity to grow and expand our Company. Our corporate plan was accelerated to create a reshaped Kanrich; one that is bigger, stronger and positioned to succeed over the long term and deliver increased value for shareholders. Our monthly profits were increased substantially to build capital. This was achieved by expanding our operations island wide, except in the North, increasing our staff strength to over 1,200 and increasing our lending targets significantly. I am extremely encouraged by the significant feat we have accomplished by attaining these ambitious targets before the time frame set by the CBSL.

Our corporate plan was accelerated to create a reshaped Kanrich; one that is bigger, stronger and positioned to succeed over the long term and deliver increased value for shareholders.



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When formulating our corporate plan in year 2010, we made a conscious decision to move away from the conventional products such as hire purchase, leasing and pawning and particularly focus on the microfinance and the SME sector. Operating in a market atmosphere in which conventional business approach would be difficult to sustain on account of declining gold prices and fluctuation of vehicle prices, our strategic focus brought in resounding results to the Company. Our lending was not affected due to our central focus on microlending during the year. Amid stagnant loan growth in the industry, the loan growth of our Company recorded an upward movement achieving an assets growth of over 129% year on year. Our capital adequacy which was less than the required minimum of 10% at the commencement of the financial year was increased to over 12% by year end. Despite the industry’s Non-Performing Loan (NPL) escalating to levels as high as 5%, I am happy to state that the NPL of our Company remained at a low level of 2%; below the industry average. Most importantly, we stepped up our compliance as well. Our compliance score awarded by the CBSL was increased to 94% by year end compared to the score of 62% three years ago. These results amply demonstrate that we have accomplished much during the year and our growth is unique in the industry.

Positioned for Long-Term SuccessDuring the year, we did not diversify due the adverse market conditions that prevailed for leasing, hire purchase and pawning products. However, we will move into the

conventional product segment to balance our asset base in the upcoming year. New products will be developed, especially information technology based products to expand our product offering. In addition, our support services will be enhanced to sustain the business growth. Accordingly, areas such as human resources, information technology, finance and administration will be upgraded in 2015/16. I am personally committed to ensuring that ethical standards continue to be embedded in our culture across our Company. Our processes and procedures will be developed to the standard of a banking institution. It is our ambition, to build up our Company to a bank in the future, which also complements the intention of the CBSL to strengthen the financial sector of Sri Lanka. Hence, the processes, procedures, policies and business ethics of our Company will be strengthened further.

AcknowledgementAs we journey on, we will continue to build on the solid foundations we have put in place to deliver on our commitments to customers, shareholders, business partners, regulators and the broader society. Every year a new chapter is written into the history of our Company and I am sure, 2014/15 will be considered in the future to have been an important, positively transformational, period in KFL’s history.

In closing I extend my deep appreciation to all the employees of Kanrich Finance Ltd. for contributing to the excellent results through their dedication and ingenuity. I commend Shiran Weerasinghe, our Chief Executive Officer/Director, and his entire management team, for their leadership and resourcefulness


during a year that will be remembered as the defining point of Kanrich Finance Ltd. I wish to thank my fellow Board members for their wisdom and insight in guiding the Company to yet another commendable performance. I especially thank the Governor and the officials of CBSL and in particular the Director of the Department of Supervision of Non-Bank Institutions for the guidance and support extended at all times. I am grateful to our customers and shareholders for their continued patronage and loyalty.

S.H. PiyasiriChairman

27th May 2015


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Chief Executive Officer’s Review Chief Executive Officer’s Review


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The strong operating results for 2014/15 reflect the collective actions of our employees to meet the high expectations of all our stakeholders.

2014 was a successful year for Kanrich Finance Ltd., in many respects. We have progressed considerably in terms of assets, profitability and corporate governance to reach the level of a leading financial company currently operating in Sri Lanka. Our collective efforts have enabled us to achieve these impressive results and at the same time positioned us well to produce overall stronger returns in the years to come.

Record Results Driven by Sound Strategy The strength of our business focused lending in microfinancing, as well as our client-driven strategy allowed us to outperform despite curtailed credit growth in the economy during the fiscal year. The strong operating

results for 2014/15 reflect the collective actions of our employees to meet the high expectations of all our stakeholders. In order to achieve these results, we accelerated our corporate plan to increase our monthly profits, strengthen the Balance Sheet and increase the efficiency of our operations. Within a short period of 9 months we successfully increased our core capital by Rs. 600 million and asset base by Rs. 4,038 million.

We achieved the highest level of lending targets in the history of our Company. Microfinance lending soared to Rs. 13.8 billion in the fiscal year 2015, compared to Rs. 5 billion the previous year. Accordingly, the monthly lending increased to Rs. 1 billion from under Rs. 0.4 billion a month. This escalated our interest income to Rs. 2,515 million, which was


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Rs. 1,296 million the previous year. As a result, total income increased from Rs. 1,441 million to Rs. 2,854 million in FY 2014/15 recording a growth of 98% year on year.

Our asset base swelled by 129% to Rs. 11.5 billion compared to Rs. 5.1 billion in 2013/14. Overall our net profit after tax increased by 3243 % to Rs. 487 million, compared to Rs. 14 million the previous year.

In addition, we are proud to be the first financial institute in Sri Lanka to securitise microfinance receivables. Accordingly, Rs. 1 billion was raised in debt through as issue of asset receivable backed trust certificates on our microfinance portfolio.

Our customer based crossed 250,000 whilst our staff strength increased to over 1,200 during the year. Our successful performance continued to gain recognition in various platforms in 2014. Kanrich Finance Ltd., was named the 'Best Microfinance Services Provider and the Fastest Growing and Emerging Finance Company in Sri Lanka - 2014' by the Global Banking and Finance Review - London.

Our Operations Our plan was to diversify our product offering by moving into conventional products such as hire purchase, leasing and pawning during the financial year in review. However, we continued to focus on our specialised area of microfinance lending as the economic milieu was not conducive for these products during the fiscal year.

Our asset base swelled by 129% to Rs. 11.5 billion compared to Rs. 5.1 billion in 2013/14. Overall our net profit after tax increased by 3,243% to Rs. 487 million, compared to Rs. 14 million the previous year.


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In addition, our priority remained on meeting the consolidation targets of increasing our core capital level and the asset base as stipulated by the Central Bank of Sri Lanka. I am happy to state that our Non-Performing Levels (NPLs) remained below industry average, whilst our lending base grew substantially during the year. Over the past 3 years we have focused on growing our business-lending portfolio in contrast to consumer lending which has a higher tendency to increase the NPL levels. Due to the high turnover in microfinance facilities, we did not have a maturity mismatch in our cash flows as well.

We joined the Sri Lanka Interbank Payment System (SLIPS), which is a fund transfer system for the handling of interbank payments in Sri Lanka. With the new arrangement, we are able to offer an efficient fund transfer facility to a large number of our microfinance customers island-wide to obtain their loan disbursements in a timely manner.

In addition, we introduced a branchless banking solution over GPRS networks powered by ATSL TeleSoft, an Access Group Company. This has equipped us with a robust software solution and the GPRS network-based Point of Sale (POS) equipment to launch branchless banking solutions to our customers. As the first stage, our micro loan recoveries will be automated, providing a more efficient, reliable and accurate service to our micro loan clients numbering over 250,000. Going forward, we will facilitate the collection of other loan recoveries, bill payments at customer’s door-steps and finally

introduce the payments using clients’ credit cards using the POS facility. The solution provides the much needed easy access to financial services to small scale rural entrepreneurs who do not get convenient access to finance from the conventional banking system.

Since our concentration was on microfinance lending, we opened microfinance centres, instead of branches during the year. However, in the upcoming year we will be upgrading these centres to fully-fledged branches to complement our diversification strategy. In addition, we will move into the North as well.

We also strengthened our efforts to help the communities we serve. For instance, we deployed specialised resource personnel and conducted workshops for our customers in various industry segments to impart industry-related knowledge.

Strengthening Risk Management One of our primary responsibilities as a financial institution is to guarantee the safety and security of customers’ deposits and make payments with absolute confidence. Therefore, it is imperative to conduct our operations with integrity and respect at all times, and balance our risks to produce sustainable profitability. Whilst we have taken stringent measures to strengthen our risk management processes, we have been graded very high by the Central Bank of Sri Lanka on governance as well.

An Exemplary Team Only a strong team can drive excellent performance, especially in a challenging economic milieu. We remained deeply committed to the ongoing development of our team. They have energy and optimism and their passion and ingenuity are contagious. In fiscal 2014, we invested significantly in training and professional development to help ensure that our employees have the skills they need to serve our clients at the highest level. We also foster a culture that is open and transparent whilst the decision-making process is delegated down the hierarchy within the set framework.

Future Outlook Everyone at Kanrich Finance Ltd., is fully-committed to our strategy and targets. We are well on track and will continue relentlessly to implement our strategy and to deliver excellent performance in the years ahead. As we journey on, whilst diversifying our product offering through conventional products, we will continue to expand our microfinance and SME lending portfolio. Our focus would be on expanding the business-lending portfolio of our Company. We will also expand ‘Welanda Warama’ the new product launched for the SME sector. Business loans will be extended to the higher level customers in the SME segment as well. In addition, more funds will be allocated for employee training on leadership and risk management.


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Chief Executive Officer’s Review ManagementDiscussion

and AnalysisAppreciations My appreciation is extended to the Chairman and the Board of Directors for their valuable insight and direction. I thank each and every one of our employees for their dedication and passion to the Company and for the support they have shown me through my career. I extend my appreciation to the Governor of the Central Bank of Sri Lanka and the Director and the officials of the Non-Banking Financial Institution Supervision Unit for their extremely valuable advice and guidance. I especially thank you, our shareholders, for your trust and support and appreciate the confidence and trust extended by our customers in our Company.

Shiran Weerasinghe Chief Executive Officer/Director

27th May 2015

We are well on track and will continue relentlessly to implement our strategy and to deliver excellent performance in the years ahead.

Kanrich Finance Ltd. Annual Report 2014/15

Chief Executive Officer’s Review ManagementDiscussion

and Analysis

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OperationsReview

FinancialReview

Operating Environment

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Operating Environment

Global Economy in Perspective

The global economy continued to struggle due to the disappointing out-turns, with developed countries still failing and trying to gain momentum and free themselves from the legacies left behind from the global financial crisis. In 2014, global growth was lower than initially expected, closing at 2.6% from last year's 2.5%, dubbing 2014 as a year of secular stagnation that continues to be convoluted due to numerous global problems that keep persevering. Russia's economic collapse, threat of deflation and another year of record low interest rates are primary reasons.

The low inflationary stance seen throughout the world is primarily due to the collapse in oil prices, which had much to do with the Russian economy

Management Discussion and Analysis Management Discussion and Analysis

Life’s Key Moments

Supporting...

contracting by 4% in 2015. It is this combination of low oil prices, the conflict in Ukraine and sanctions on the Russian Government prompting a dive in markets that figure prominently in Russia’s somewhat lacklustre performance.

Having performed very impressively, albeit somewhat artificially in the last few years to prop the global economy into a sense of slight stability, China is now undergoing a carefully managed slowdown. Other developing countries too showcased disappointing growth due to weak external demand, domestic policy tightening, political uncertainties and supply-side constraints.

Soft commodity prices, persistently low interest rates and increasingly divergent monetary policies across major economies, weak world trade and the sharp decline in oil prices are the factors that are currently driving

global outlook. It is these that will support global activity which is hoped to be seen in oil-importing developing economies, billed to take advantage of this milieu. However, on the converse, oil-exporting countries will undoubtedly be impacted negatively, while the oil-importing countries gain an advantage, which in the short to medium-term see regional repercussions emerging.

With the World Bank titling South Asia as the fastest growing region in the world, it is interesting that by end 2014, South Asia inclined 5.5% from a ten year low of 4.9% in 2013. It is India that became the champion for the region emerging with impressive growth post-two years of modest growth. Regional growth is expected to incline therefore 6.8% by 2017 due to a number of positives that are currently being instituted.


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It is estimated by the World Bank that global growth will observe a moderate rise to 3% in 2015 and 3.3% by 2017. High-income countries will average 2.2% growth in the next three years, a marginal increase from 1.8% which will be the outlook for 2015, attributed primarily to gradually recovering labour markets, ebbing fiscal consolidation and continuing low financing costs. The features that stifled 2014 growth will ease with recovering strengthening in high-income countries and developing countries echoing the advantages with accelerated growth. Growth outlook therefore will see positive increases from the 4.4% posted in 2014 to 4.8% in 2015 and 5.4% by 2017.

The Sri Lankan Economy

Seen as one of the fastest growth economies among Asia's developing economies in recent years by the International Monetary Fund (IMF), Sri Lanka’s GDP grew by 7.4% during 2014, up slightly from 7.2% a year earlier. The country's economic performance was certainly better than expected despite currents


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Sri Lanka's unemployment remains well below regional and global average speaking well for the progressive policies implemented to spur entrepreneurship, especially in the micro and SME sectors. Unemployment rate declined marginally due to increased employment opportunities, to 4.3% from 4.4%, due to labour productivity levels continuing to increase across all sectors of the economy. Core inflation remained at low levels throughout moving to 3.2% YoY, having taken advantage of the combination of prudent monetary management, moderation in international commodity prices, stable exchange rate and fiscal policy measures taken to address supply side volatilities.


experienced from chronic market turbulence and climatic shocks. Sri Lanka’s short-term outlook appears broadly positive, as the country is well-positioned to benefit from the global economic recovery, and particularly, stronger growth in advanced economies.

It is to be noted however that Sri Lanka did not achieve the growth forecast of 7.8% for 2014, although compared to the region, the country did perform quite robustly. According to the Asian Development Bank, inflation fell markedly and the current account deficit narrowed. The election in January 2015 heralded a mandate for political and economic change, auguring well for investor confidence and growth prospects.

GDP expanded to Rs. 9,740,853 million compared to last year's Rs. 8,674,230 million with the continued high growth being driven by faster expansion in industry,

which offset substantially weaker growth in agriculture. This sector remains one of the three main pillars of the economy but performed disappointingly, slowing down to 0.3% from 4.7% last year. However, the industry sector inclined an impressive 11.4% compared to 9.9% last year, primarily attributed to fast expansion in construction and the apparel sector's impressive performance. The services sector moved upwards by 6.5%.


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Sri Lanka's impressive performance in global indices has added credence to its consistent growth pattern, billed to continue for the next few years at least and its ambition of achieving a GDP per capita income of US $ 4,000 by 2016. The country is the highest ranked in South Asia in the Global Prosperity Index, Ease of Doing Business Index and Economic Freedom Index, which positions it well on a stable path to progress, despite external macro challenges that could plague other economies.

Challenges will continue to emerge however, especially on the political front which thus far remains stable and augurs well for the political transition that will invariably happen in the coming year. The revised priorities of the new Government must be envisaged and trends focused on, as there is concern that political uncertainty could retard private

investment. Construction, which was led primarily by large Government led infrastructure projects is expected to slow after leading growth in recent years. Government consumption in the meanwhile is expected to increase with the shift seen in the budget towards recurrent expenditure and private consumption too will pick up with reductions in food and fuel.

The faster growth experienced in advanced economies will benefit export industries, including Sri Lanka's vibrant apparel and tourism sector. However, according to the Asian Development Bank, agriculture remains uncertain due to climatic changes impacting this sector quite negatively. Increases in Government-guaranteed prices for several agricultural products will boost production however. With the assumption of stability in the political arena and a rebound in investment, Sri Lanka's growth prospects are billed

at 7% for 2015 and 7.3% for 2016, well aligned with regional growth and certainly well above, global growth.

Overall Performance of the Non-Banking Financial Institution (NBFI) Sector

In the financial sector, the strengthened regulatory and supervisory framework, improved risk management capabilities and adequate buffers to mitigate risks, enabled financial institutions to remain resilient during the year. Momentum was moderately higher in the performance of the finance companies and specialised leasing companies which comprise the NBFI sector, posting improved performance. Continuous and consistent business strategies and a prudent financial recovery process begun in preceding years are now cascading positive tenets. As detailed in the Central Bank

Empowering...the Entrepreneurial Spirit


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of Sri Lanka's Annual Report 2014, the performance of the financial sector was primarily led by the continuation of relaxed monetary policy and improved macroeconomic performance.

The financial sector consolidation programme continued throughout most of the year, envisaged to contribute positively in building a more resilient Licensed Finance Company (LFC) and Specialised Leasing Company (SLC) sector. The process has now been realigned with the current Government's economic policy, aimed at strengthening and sustaining the country's financial stability. The new direction will be conducted primarily in consultation with shareholders and stakeholders. It is expected that the capital and asset base will increase as a result of this process, enabling LFCs and SLCs to mobilise low cost, long-term funds. Accordingly, the plan envisaged is to reduce the number of non-banking financial institutions to around 20 from 58 with regulatory support and tax incentives. By end 2014, 10 mergers were completed and 22 were still on a states of work-in-progress. However, given the several concerns that have arisen, the programme has been temporarily halted pending the findings of the Consolidation Review Committee appointed by the new Government.

The LFC and SLC sector encompasses 7% of Sri Lanka’s financial system, comprising 48 LFCs and 8 SLCs. The sector expanded its branch network by 72 to now collate a total of 1,132. In the drive that began a few years ago to permeate the concept of financial inclusivity across the country, the concerted effort to reach the geographical locations beyond the Western Province therefore, saw a total of 44 accessible points opened inside and outside the Western Province.


Asset growth moderated due to lower demand for credit, particularly during the early part of the year, but saw upward inclines thereafter. The lower interest rate scenario helped improve credit demand and maintain inclining non-performing loans at prudent levels. Mergers and acquisitions did assist in building resilience and improving the soundness of the sector. Strengthening risk management and building capacity of the sector to facilitate better absorption of risks was also focused upon, aligned with macroeconomic plans. Despite the dips and turns, the entire sector saw growth of 18.9% in its total asset base, growing to Rs. 853 billion compared to the growth of 20.3% experienced last year.

With interest rates in most segments declining to historically low levels in 2014, due to the relaxed monetary stance of the CBSL and high excess liquidity in the domestic money market, credit granted to the private sector contracted in the first eight months of 2014. This was due to the decline in pawning advances and increased access to alternative financing sources. But private sector credit did rebound during the latter part of 2014, finally taking advantage of the low interest rates, CBSL’s policy measures and contraction in pawning advances.

The 2013 impact of the high lending interest rates prevailing over most of that year and the fluctuations in gold prices permeated the pawning business considerably, permeating to increased Non-Performing Assets (NPA), which this year increased by 19.9% in 2014. NPAs now stand at Rs. 44.3 billion, higher than last year's Rs. 36.9 billion, symptomatic of the pervasive impacts of both these factors combined. However, it is to be noted that NPAs relative to the total outstanding loans increased only marginally to 6.9% from 6.7% last year. Taking into consideration the loan

provision, the net NPA ratio decreased marginally from 2.5% in 2013 to 2.3% this year, with total provision coverage increasing to 58.9% in 2014, compared to 56.1% in 2013.

Net interest income increased by 40.9% to Rs. 62.2 billion from Rs. 44.1 billion posted the previous year. The interest margin which is net interest income as a percentage of total assets of the sector also showcased an incline of 8%, compared to 6.6% last year. Overall statutory liquid assets available within the sector showed a surplus of Rs. 29.5 billion from the stipulated minimum requirement of Rs. 52.8 billion. The liquid assets to total assets ratio increased to 9.6% from 8% in 2013, directly attributed to the steady growth in deposits in relation to the moderate credit growth of the sector. Hence, liquid assets rose to Rs. 25 billion, similar to the increase of last year.

Profitability was sound as evidenced with the sector recording a profit after tax of Rs. 13.9 billion, compared to Rs. 7.7 billion in 2013, contributed mainly through increased net interest income. This is despite increased operational costs and provisioning requirements. Loan loss provision increased by Rs. 3.7 billion in 2014, when compared with the upward movement of Rs. 6.6 billion in 2013. ROA and ROE increased to 3% and 13.1% respectively, from 2.1% and 8.2% last year.

Internally generated funds contributed significantly to the increase seen in capital funds, which rose by 20.9% to Rs. 114 billion at the end of this year, compared to the 9.6% increase in 2013. Another significant positive for the sector was that it maintained its capital adequacy ratios well above the minimum requirements,


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although a decrease due to growth in risk-weighted assets was experienced. The total capital adequacy ratio (as a percentage of risk-weighted assets) decreased to 13.5% as at end of 2014 from 14.8% as at end of 2013. Core capital ratio (as a percentage of risk-weighted assets) also experienced declined by a marginal 13% compared to 13.5% last year. The ratio of capital funds to total deposits of LFCs also decreased marginally from 23.3% in 2013 to 22.9% this year.

National Development Gains Momentum

The country is on a concerted effort to imbibe entrepreneurship spirit into the national development agenda. Thus far, access to funding has been challenging for the micro and SME sectors, with funding entities positing a risk averse attitude and hence, growth in these sectors not achieving their full potential. Promoting market-based alternative financing rather than conventional bank-based financing to ensure adequate long-term financing is being promoted. While the banking sector has been the major source of financing for the SME and corporate sectors, raising funds for expansion in economic activity through capital markets has been limited to only large corporates. There is a need to have and support inclusive growth which can only be achieved if the potential of the SME sector is optimised.

The lack of access to financing, human resource and technological capabilities have been inherent constraints holding back the SME sector and remedial measures must be introduced to ensure availability of funds to this sector. Available credit guarantee schemes, credit advisory and counselling services as well as Business Development

Services, can play an imperative role in enhancing scope and facilitating the technical capabilities of SMEs. In addition, industrial clusters that will pool experiences, expertise and improve efficiencies will also be established. Upgrading the SME sector is vital to push the overall development strategy of the country, where a viable dynamic SME sector encompassing agriculture, industry and services can play a pivotal role in generating employment and income and alleviating poverty.

Operations Review

KFL Adds Prowess to Macro Picture

The year has certainly been a significant one for Kanrich Finance Ltd. This is a definite laurel for us given the intensely competitive environment we operate in and adds credence to the face that we achieved our financial targets. This is due to astute imperatives instituted through the years within our unique operational dynamic of relationships without borders. We are strong, stable and ready for a future that is undoubtedly driven by sound strategy and an extraordinary team that has taken ownership of our goals and vision.

In a nutshell, our financial performance has been commendable, primarily due to our pragmatic outlook in accelerating our corporate plan, which was designed to increase monthly profits, strengthen the balance sheet and increase efficiency and productivity. This resulted in achieving lending targets at the highest level in our entire history, increasing our core capital by Rs. 710 million and asset base of by Rs. 6,507 million. NPAT spiralled upwards to Rs. 487 million from

Rs. 14 million last year, which is a noteworthy growth of 3,243%. The emphasis we employed in developing our microfinance business saw extraordinary results with lending to this sector posted at an impressive 11.5 billion, impressive primarily due to this figure being just Rs. 5 billion last year. This also pushed monthly lending in excess of Rs. 1 billion.

The fact that we are the first financial institution in Sri Lanka to securitise microfinance receivables and to be named Best Micro Finance Services Provider and the Fastest Growing and Emerging Finance Company in Sri Lanka 2014 by Global Banking and Finance Review London are all crowns we don proudly. These remain evidence of our progressive stance in the NBFI sector in Sri Lanka.


22

With microfinance being a strategic element in our business plan, Kanrich Finance Ltd., began infusing the dynamics within that plan to build our microfinance business. We began the initial step of launching microfinance centres, which in the next year will see these centres upgraded to fully-fledged branches, covering the North of the country as well, where we see immense potential for this segment of business.

Technology was also optimised within our operations as an imperative tool to aid small scale entrepreneurs gain added convenience for access to finance. We have now introduced branchless banking using GPRS networks, based POS equipment via a robust software solution. Micro loan recovery will be automated with collection of loans, bill payments at a location of a customer's choice and credit cards using POS as well as adding the payment of utility bills in the field via POS machines, will be added into the solution very soon.

Given our emphasis on relationships without borders, we strengthened our relationships with our stakeholders. One of these initiatives was in deploying team members and resource persons to conduct workshops for customers who operate in diverse industries, imparting specialist and expert knowledge and tools in these varied industries. This is an initiative that adds immense value to our efforts of encompassing an expansive customer portfolio, from high-end corporates to SMEs and micro enterprises, as well as customers permeating the entire income spectrum, high to low-end. By astutely adding to our product portfolio, we will have a diversified portfolio of products

that will be able to compete more competitively with a better product mix. Customer service excellence remains vital to the growth of our business and we will be embarking on the pragmatic feature of restructuring the customer care unit to better reflect customer expectations and aspiration. To gain better analysis of these expectations, periodic customer satisfaction surveys will be conducted and the feedback acted upon accordingly.

In our bid to achieve the status of being among the first five finance companies in the NBFI sector in Sri Lanka within the next financial year, we have been extremely cognisant on building a solid financial base for us to grow sustainably. By February 2015, we posted an impressive asset base of Rs. 10 billion, an increase of over 236% compared three years ago, which unequivocally showcases outstanding performance and the fastest growth in the history of Kanrich Finance Ltd. The short-term will prompt us to increase our Tier II capital with a debenture issue to maintain our capital adequacy.

Our initiatives of launching branchless banking and mobile banking will gain further momentum with the agreement signed with ATSL TeleSoft for the branchless banking solution. This GPRS network based Point of Sales system will be the tool in automating our microfinance operations and augmenting our future pathway in this area of business. In adding further value added services to our customers, the launch of our SME loan product, Welanda Warama has been extremely successful. We also launched business loans, gold loans and have begun aggressively expanding leasing operations and

purview have added to maximising the accessibility of our portfolio of products and services to our customers. This accessibility will also include the launch of more fully-fledged branches in strategic locations in order to ensure our presence will have the maximum impact to our stakeholders.

We are constantly improving the bar of convenience, flexibility and innovation, which we believe we will add the newer dimension of being a preferred employer within this industry. The ambitious expansion strategy we have planned in the immediate, will also mean that our team must reflect these futuristic goals and be equipped with knowledge, skill and tools to achieve these goals. Our team will also be presented with rewards, benefits and remuneration that are well above industry norms, including housing, vehicle and educational loans at low interest rates, medical insurance including accident cover, while training and development will continue being a priority. We will be adding professionals and experts into our team, while also bringing in a young group of trainees who will be trained and developed to take ownership for our vision and etch the Company into the annals of the NBFI sector indelibly. Employee Satisfaction Surveys will form an integral foundation to the plans we have for our team.

There is also a dire need for the Company to look inwards, infuse effective cost management strategies and work on strategic initiatives that would create a lean organisation that is well aligned to evolutionary paradigms emerging within the industry locally and globally.



23

This therefore would encourage the decrease of unnecessary costs and increase low interest funds including securitised loans, which we believe will be a prudent stance. We will be pursuing foreign funding opportunities and new credit lines to expand our funding potential.

Customer Service

Customer service excellence remains vital to the growth of our business and we will be embarking on the pragmatic feature of restructuring the customer care unit to better reflect customer expectations and aspiration. To gain better analysis of these expectations, periodic customer satisfaction surveys were conducted and the feedback acted upon accordingly.

As customers have grown accustomed to personalised solutions in other industries, the demand has begun to receive the same attention from their financial services providers. With all the innovation that is ongoing in other sectors, KFL too, always tries to implement new strategies that offer more convenience to customers. Products such as our GPRS network based Point of Sales (POS) system will be the tool in automating our microfinance operations and augmenting our future pathway in this area of business.

This accessibility will also include the launch of more fully-fledged branches in strategic locations in order to ensure our presence will have the maximum impact with our stakeholders.

Branding

To remain as a trusted partner in the hearts and minds of all our stakeholders, it is necessary that we sponsor useful events whilst also engaging in community development projects with a broader scope.

And we strongly believe in Below The Line (BTL) communication methods in order to sustain in widespread customer base which is more than 5% of Sri Lankan population. Positive word of mouth endorsements also make our KANRICH brand across Sri Lanka in a very affirmative influence to be a finance brand in Sri Lankan finance context. Apart from that, we also do media conferences and press releases about KFL’s achievements and CSR events in order to remain in the minds of our stakeholders.

Technology

KFL is very proud to say that we have strong IT literate human resources as we have implemented our very own IT system which is handling all KFL integrated transactions.

Micro loan recovery will be automated with collection of loans, bill payments at a location of a customer's choice and credit cards using POS as well as adding the payment of utility bills in the field via POS machines, will be added into the solution very soon. We also joined SLIPS, the Sri Lanka Interbank Payment System, which enables an efficient fund transfer

facility and is certainly a boon to our microfinance customers, as they can now facilitate loan disbursements much faster. Given the crucial role played by IT in the future of finance the world over, we intend improving our IT system aggressively to support the expansion of our product portfolio for increased efficiency, productivity and better information management encompassing an expansive customer portfolio, from high-end corporate to SMEs and micro enterprises, as well as customers permeating the entire income spectrum, high to low-end. By astute, we are planning on developing mobile banking system and more door step solutions with the help of IT developments in KFL's near future.

Corporate Social Responsibility (CSR)

Giving Total Financial solutions for our customers is our business. Beyond financial responsibilities, KFL has chartered new territories by identifying needs and providing just the right kind of service when required. The KFL Social Responsibility Trust, founded for this purpose, has reached out to the core to uplift creatively, socially, culturally and ethically in an outstanding manner.

Our diversified approaches to social responsibility positions our interventions at many levels with microfinance, as mentioned above, being the driving sustainability platform in our social responsibility dynamic.



Combining...Value Addition with Familial Aspirations

KFL CSR philosophy is linked with our Microfinance Strategy and through our Microfinance services, we provide many CSR strategies. We provide financial services, training and leadership programs focusing on empowering women. After three decades of war now over, Sri Lanka is moving forward with an emerging economy in every sector. This has given KFL great opportunities in the Microfinance industry. KFL expanded Microfinance projects with a scientific approach where Loans are granted only to women borrowers. Now the programme maintains a 99% recovery rate with every loan covered by loan protection insurance.

The new approach focuses on women where they undergo three weeks of training regarding the development of a new business and then loans are granted to fund the new venture. This creates an opportunity to empower women to earn an income. This unique approach makes a huge impact on our society where more women participate to contribute to the GDP. Highly experienced and trained KFL staff are working on developing their business with them with weekly visits educating customers with various issues like marketing their product and the economics changes.

We also develop rural leadership programs as a CSR initiative. In the micro model, we create groups in the villages with a group leader. We carry out train the trainer, programme with the leaders being trained first who in turn will train their own members in the village. The Company provides this as a charity service, with technical support from the Central Bank.

The importance of a healthy nation to drive national development, remains at the forefront of our sustainability focus, into which the annual blood donation is a firm contributor. Two highly successful campaigns were organised this year in Anuradhapura and Ratnapura.


24


As discussed above, given our emphasis on relationships without borders, we strengthened our relationships with our stakeholders. One of these initiatives was in deploying team members and resource persons to conduct workshops for customers who operate in diverse industries, imparting specialist and expert knowledge and tools in these varied industries. This was an initiative that added immense value to our efforts of encompassing an expansive customer portfolio,


25

from high end corporates to SMEs and microenterprises, as well as customers permeating the entire income spectrum, high to low end. By astutely adding to our product portfolio, we will have a diversified portfolio of products that will be able to compete more competitively with a better product mix.


26


Future Outlook

We will be adding professionals and experts into our team, while also bringing in a young group of trainees who will be trained and developed to take ownership for our vision and etch the Company into the annals of the NBFI sector indelibly. Employee Satisfaction is also a dire need for the Company to look inwards, infuse effective cost management strategies and work on strategic initiatives that would create a lean organisation that is well aligned to evolutionary paradigms emerging within the industry locally and globally.


This therefore would encourage the decrease of unnecessary costs and increase low interest funds including securitised loans, which we believe will be a prudent stance. We will be pursuing foreign funding opportunities and new credit lines to expand our funding potential. Surveys will form an integral foundation to the plans we have for our team.

We are also planning to launch business loans, gold loans and have begun aggressively expanding leasing operations. Expanding our savings account purview and maximising the accessibility of our


27

Welcoming...Young Stakeholder


enter a new era. Each of our team remains fully committed to achieving our vision, delivering performance excellence well beyond expected boundaries. The diversification of our products and services are well aligned to the evolutionary milieu expected in the next few years, where we believe that microfinance will drive economic development and the SME sector will be the standard bearer in pushing growth into higher realms. To achieve

all this however, we know that the secret to our formula of success is, 'Relationships without borders', and this is the tenet we will continue to maintain as the overarching principle in building a sustainable business.

portfolio of products and services to our customers are also in-line for one future. This accessibility will also include the launch of more fully-fledged branches in strategic locations in order to ensure our presence will have the maximum impact with our stakeholders.

As we have been crowned with some very impressive laurels this year, we are now paving the way for us to


28


Financial Review

Overall Performance

During the year 2014/15, Kanrich Finance Ltd. has recorded its best ever performance in its 43 year history. Total assets have grown more than double and reached Rs. 11.5 billion while the profit after taxes for the year soared to Rs. 487 million, an unparalleled and unprecedented growth of 3,243%. Factors underlying this stellar performance are analysed below.

Results of Operations

Despite operating in a low interest rate regime, total income almost doubled to Rs. 2,854 million for the year from Rs. 1,441 million in 2013/14. The main contributory factor for this growth was the substantial increase in interest income which accounted for 88% of the total income. Corresponding to an increase of 129% in total assets and the improvement in the net interest margin from 46% to 67%, interest income grew from Rs. 1,296 million in 2013/14 to Rs. 2,515 million during the year. Other operating income, mainly comprising fee and commission income amounted to Rs. 339 million, which is again an increase of 134%.

Total Income, Interest Income

and Net Interest IncomeRs. million

11/12 14/1513/1412/1310/11

3,000

2,000

1,500

2,500

500

1,000

0

Net Interest Income

2,8

54

1,6

86

2,5

15

Total Income Interest Income

2013/142012/132011/122010/11 2014/15

Operating ProfitRs. million

(17

)

13 17 4

1

69

2

We managed to contain the interest expenses to Rs. 828 million, a 21% growth from Rs. 687 million in 2013/14. This was possible due to prudent and timely management of the funding portfolio.

The total operating income for the year grew by 168% to Rs. 2,025 million compared to Rs. 754 million during the previous financial year. We have also

made an impairment charge of Rs. 235 million during the year compared to Rs. 62 million in the previous financial year.

Keeping pace with the increase in business volumes, operating expenses for the year have grown by 67% to Rs. 1,098 million from Rs. 657 million in 2013/14. As a result of the substantial increase in income, the cost : income ratio nevertheless recorded a significant improvement which decreased from 61% in 2013/14 to 47% during the year under review. All in all, the profit before income tax and VAT on Financial Services has increased from Rs. 41 million in 2013/14 to Rs. 692 million in 2014/15. Profit for the year also has reached Rs. 487 million compared to the mere Rs. 14.5 million recorded in 2013/14.

2013/142012/132011/12 2014/15

Cost to Income Ratio%

76

81

61

47

Profitability

Reflecting the improved results of operations, earnings per share too have improved from Rs. 0.20 to Rs. 6.59 for the year under review. Return on assets and return on equity too showed similar improvements when they reached 6% and 69% for the year compared to 0.34% and 4% respectively for the previous year.


29


2013/142012/132011/12 2014/15

Return on Equity%

06

05

04

69

5.8

7

2013/142012/132011/12 2014/15

Return on Assets%

0.9

4

0.6

4

0.3

4

Financial Position

Total assets of the Company as at 31st March 2015 reached Rs. 11,557 million compared to Rs. 5,050 million as at 31st March 2014, an unprecedented 129% growth. The net loans and advances portfolio has grown from Rs. 3,882 million to

Rs. 9,557 million during the year which constituted 82% of the total assets and it has been the single biggest contributor for this overwhelming asset growth. Within the gross loans and advances portfolio, Rs. 9,789 million and Rs. 3,924 million recorded significant growth of 149% compared to the previous year. Reflecting the overall market trend, the non-performing loans and advances portfolio increased from Rs. 112 million as at 31st March 2014 to Rs. 338 million as at the current year end, causing asset quality to somewhat deteriorate. This of course led to the gross NPL ratio to rise to 3.45% from 2.86% as of previous year end. With the enhanced impairment provisioning, net NPL ratio however remained, when compared to as at 31st March 2014. Other assets that recorded significant growth included placement with bank and financial institution, cash and bank balances from Rs. 127 million to Rs. 941 million and financial investments – held-to-maturity from Rs. 168 million to Rs. 489 million.

09/10 11/1210/11 12/13 13/14 14/15

89

0

1,0

72

1,7

42

5,0

50

3,4

34

11

,55

7

Rs. million

Asset Base

Lending Portfolio

2010/11 2011/12 2012/13 2013/14 2014/15

21

5 69

1

2,2

53

3,8

83

9,5

58

Rs. million

The growth in asset base was primarily funded through debt instruments issued/other borrowed funds and due to banks and financial institutions which recorded increases from Rs. 3,400 million and Rs. 165 million to Rs. 7,161 million and Rs. 1,405 million respectively as at 31st March 2015. Deposits from customers too have increased from Rs. 1,010 million to Rs. 1,597 million. Reflecting the improved profitability and new funds infused through the issue of shares, total equity has increased from Rs. 347 million to Rs. 1,057 million as at 31st March 2015.


30



74%

22%

Due to Banks Due to Customers

2013/14 2014/15

Borrowings

Debt Instruments Issued and

Other borrowed funds

4% 70%

16%

14%

2010/11 2011/12 2012/13 2013/14 2014/15

20

9 24

4 32

3

34

8

1,0

58

Rs. million

Shareholders’ Fund

It is noteworthy that our interest earning assets improved from 72% as at 31st March 2014 to 159% as at 31st March 2015, contributing to the overall profitability of the business.

Compared to the statutory minimum requirements, our liquid assets ratio improved to 16% as at 31st March 2015 in comparison to 10% a year ago. Further, reflecting the improved profitability and the corresponding growth in equity, net

assets per share too improved to Rs. 14.30 as at 31st March 2015 from Rs. 4.78 a year ago. Reflecting stability of our operations, core capital ratio and total capital adequacy ratio has improved to 11.49% during the year under review in comparison to 7.29% during previous year.

Cash Flow

We have disbursed substantial amounts of new loans and advances during the year and as a result, net cash generated from operating activities recorded an outflow of Rs. 482 million with an inflow of Rs. 379 million in the previous year. Due to investments in Treasury Bills and repurchase agreements , net cash flow from investing activities too has turned out to be a negative of Rs. 171 million compared to a negative of Rs. 38 million for the last year. Due to increased borrowings and proceeds from the issue of shares, Rs. 863 million was generated from financing activities compared to an outflow of Rs. 16 million in 2013/14.

The above led to a net increase in cash and cash equivalents of Rs. 210 million during the year.

Fixed & Intangible

Cash & Bank, InvestmentsOther Assets

Financial Assets Position

11% 2%

2%1%

4%2%

6% 12%

77% 83%

Lending Portfolio Real Estate Stock

2013/14 2014/15



37

37

38

32

34

35

Suppliers

Government

Future Outlook

The Kanrich Sustainability

Philosophy

Employees

Community and Environment

3232

33

Stakeholder Engagement

Investors

Customers


32

Sustainability Report Sustainability Report

Reporting on sustainability initiatives is a practice that enables us to look inwards at ourselves, make the necessary changes, bridge the gaps that will enable us to propel our performance to the next realm and take advantage of the opportunities that emerge in a constantly evolving landscape. Sustainability to us is all about empowering our stakeholders, but it's an empowerment that is brought about by focusing on the decisions we make and the impacts that our decisions have on them. We strive to create a milieu where we forge and nurture long-term relationships with our stakeholders, which also spotlights our responsibility towards the environment.

This sustainability report highlights the work we do with our stakeholders, the issues we engage with and the results that have emerged from this engagement. We have striven to quantify and qualify our actions, highlighting areas that need improvements and strengthening the areas that have shown results and have potential. At KFL, sustainability is a way of life and as you read through this report, you will gain some insight into the way we do business, the rich relationships we have with our stakeholders and the responsible consciousness we espouse in everything we do.

The Kanrich Sustainability PhilosophyOur name is derived from our roots, encased in a language that has existed for over three millennia. And it is this name that remains the quintessence of our sustainability philosophy. The word Kanrich has its genesis in the Sinhala language and means mutual wish or the agreement of a group. This truly embodies our philosophy of collaborated decision-making for the mutual

benefit of each of our stakeholders. This is further augmented in our ethos of 'Relationships without borders', where we develop and innovate financial solutions constructed on a platform of responsibility, accountability and absolute sustainability.

Stakeholder EngagementStakeholder engagement is a crucial truss to sustainable development as it is this engagement process that prompts the two-way dialogue and communication process which eventually, aligns the strong relationships among our stakeholders and forms the foundation to our sustainability journey. We are extremely committed to be engaged in all of our stakeholders, both internally and externally, to become the most sustainable, responsible company we can possibly make. By listening to, partnering with and considering the perspectives of our associates, customers, shareholders, academic leaders, Government and valued business partners, we can truly ensure that quantifiable and qualitative returns are assured.

Having identified our stakeholder groups, as discussed further in this Report also, we engage with them at various forums related to their interests and expectations, in an effort to adapt to changing needs and issues, which continue to evolve. As we pursue our corporate sustainability goals, we intend to further strengthen these relationships. Together, we are establishing transparency and enhancing our relevancy with the customers and communities we serve.

We have created more formal channels for interacting with stakeholders both to learn from their expertise and to provide a forum for them to give us their feedback.

InvestorsAs a player in the financial landscape, one of our primary objectives is to create value for the investors and enhance wealth through superior earnings in terms of their investment. As business operations have been restructured for better productivity and our tireless efforts have already brought us consistent financial performance in the recent past.

Growth Summary%

2013/14 2014/152012/13

9.0

6.0

4.5

7.5

1.5

3.0

1,800

1,200

900

1,500

300

600

00

Rs.

Earnings per Share (Rs.)

Profit Growth (%)

Asset Base Growth (%)

Our business strategies are aligned to create shareholder wealth growth by embracing economic, social and environmental aspects. Accordingly, we build and maintain a close relationships with our stakeholders and also deliver a sound return through a well qualified Board. Our continuous innovation and product development enhance final value of our products and keep us ahead of competition, thus securing our stakeholders trust in the Board and the Company’s Management.


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KFL publishes and issues a comprehensive Annual Report and holds an Annual General Meeting (AGM), Extraordinary General Meetings (EGM) in-line with the Companies Act, annually and as and when necessary. These provide ample opportunities for stakeholders to interact with the Board and obtain their invaluable feedback. The Company is committed to conduct periodic, individualised mailings and conference calls between senior management and investors and/or analysts when necessary. Our corporate website is being updated continually in order to provide extensive information on Company and financial statistics. We publish Interim Financial Statements quarterly and conduct press conferences and media releases regarding new products, branch opening and achievements continuously, which are helpful to our investors.

CustomersThe customer base of KFL comprises both depositors as well as borrowers. Each deposit customer is treated as a premier customer and is assigned to a staff member in order to provide a better service. Further, special privileges are provided to the senior citizens by maintaining a strong relationship and providing door step service.

KFL serves more than 250,000 micro customers across the country. Most of them are in the segment that is not served by competitive banking and finance companies. The mission of KFL in providing micro loan facilities is to uplift the lives of the community and it was a success throughout the period by reaching the aforementioned number of households. The strong relationship has been built by meeting them on a weekly basis which make them comfortable and further strengthen the bond.

Book donation conducted by the Horana branch.

Mass Medical campaign arranged at Anuradhapura serving more than 7,500 people.

Kanrich Sasunata Diriyak


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Training programmes are organised by KFL to enhance knowledge and skills of customers with the proposition of development of their earning potentials. Further, KFL open up opportunities to the community by creating a new market to sell their products and services by participating in numerous events organised by the Company.

'Welanda Waramma', the product solution for the SME sector negates the hindrance of growth of the sector. The convenient and door step service enable the customer to focus more on the business thereby.

Use of state-of-the-art technology enables more efficient service to rural communities. KFL implemented POS system for field officers and new services to clientele are yet to be implemented.

EmployeesThe human resource base exceeding 1,200 is a key competitive asset for KFL. The Company is strongly built on relationship between its employees. Young and dynamic, our team is a professional one that understands the evolutionary concept of operating in challenging paradigms. Our approach to developing our team begins even before recruitment, where we headhunt or look for team members who will complement our forward journey and our commitment to the tenets of sustainable development. This focus on gaining commitment and ownership is a trait that lies inherent in our team. Given that, at recruitment, we focus on attracting the right talent and retaining it, honing personal aptitudes and providing guided career progression.


Dansala Organised by head office staff on Vesak Poya Day.

A valuable contribution given to Dalada Maligawa for the Esala Perahera from the Kandy Branch.

KFL Pirith ceremony.


35

Age Analysis of Employees

Below 20 20 - 30

31 - 40 41 - 50

51 - 71

21%1%

1% 2%

75%

KFL is an equal opportunity employer and we provide employment not only on the basis of qualifications but also based on experience. The Company culture promotes comprehensiveness and team spirit among all employees.

With reference to the above graph, since we have a young team with a good spirit, the Company continue to invest in strengthening its human capital base to face intensifying competition and to sustain future growth plans throughout the year. There are growth opportunities for employees in our Company since we have a flat structure consisting 7 Strategic Business Units which are operated as separate units. This gives very competitive opportunities for employees to groom within the Company. Also we practice an ‘open-door ‘policy so that any employee at KFL can easily reach the management.

The Company policies and procedures are very well-communicated from top to bottom. There is transparency and all employees at KFL are very much

secured with their jobs. In addition, KFL believes strongly that rewards and remuneration remains an intrinsic feature in nurturing a contented team. Therefore, wage ranges are also very attractive when compared to competitors. The staff are benefited by incentives, performance-based bonuses, annual increments, festival advances and allowances.

Most of the employees of the Company are from rural areas and majority of them are attached to the microfinance sector of the Company. As a company with the ambition of upgrading rural life, it is a privilege for us to develop their carrier. Low employee turnover has proved that KFL is a great place to work at.

Training and Development

Our team gains extensive training from recruitment, ensuring their transition seamlessly into our collaborative yet competitive work environment. Training is provided in key areas of technical knowledge, practical experience, personal development and career development, enabling our team to excel in mindset and action, while ensuring that a positive work/life balance is maintained throughout their working careers.

Some of the trainings we provided during the year are, Modern Office Management for Work Life Productivity, Customer Service, Laws, Regulating Mergers and Acquisitions of Finance Companies, Employee Misconduct and Preliminary Investigation, Managing Time or Planning Work, Employee Motivation, Social Media and Marketing and Franklin Covey's Leadership; Great Leaders, Great Teams, Great Results, etc.

Welfare

KFL believes its key success factor is its employees. Hence the Company ensures that its people develop to their utmost and invests in continuous enhancement of skills, knowledge and expertise to drive the Company towards excellence. Therefore we always look forward to retain them by enhancing staff welfare by providing a good medical scheme, accident cover for field staff, subscriptions for professional associations and staff loans.

The Company helps employees by giving cash payment in an event of child birth, wedding or funeral, offered by welfare. We have given gym facilities to staff in order to keep them physically fit. Our team is constantly engaged in initiatives that would harness their team spirit and instil camaraderie.

From celebrating religious festivals akin to Christmas carols and Pirith ceremonies, to KFL Night, which is the annual get-together for teams and their families, where one thousand KFL families unite to enjoy music, fun and games and the Sports Day, showcasing the sporting prowess of our team.

Community and EnvironmentOur multifold approach to social responsibility positions our interventions at many levels with microfinance, as mentioned above, being the driving sustainability platform in our social responsibility dynamic. Reaching more than 250,000 families through our microfinancing and development programmes, the accessibility to funding has been a keen feature in empowering communities, who now have thriving livelihoods and are maximising their potential. KFL caters to more than 5% of the Sri Lanka population through microfinance.



36


Microfinance is promoted as an entry point in the context of a wider strategy for women’s economic and sociopolitical empowerment. women’s access to savings and credit gives them a greater economic role in decision-making. When women control decisions regarding credit and savings, they optimise their own and the household’s welfare. Investments in women’s economic activities will improve employment opportunities for women and KFL has identified the value of women empowerment through microfinance engagements in most of the rural communities in Sri Lanka.

KFL has implemented continuous development plans to enhance the combination of women’s increased economic activity and control over income, by providing access to microfinance which would improve their skills, mobility, access to knowledge and support networks by conducting weekly meetings.

Believing strongly in gender equality and women’s empowerment, the entrepreneurial spirit of women was promoted through a series of highly successful workshops for women in Ratnapura, Thambuththegama and Anuradhapura areas.

Through “Micro-Finance” and “Welanda Warama” products we are catering to small and medium enterprises as well as entrepreneurs which is the backbone of the Sri Lankan economy to climb up with success stories in a competitive business world. This will be a great impact to creation of indirect and direct employment in the Sri Lankan communities. The value created will directly impact the GDP growth in Sri Lanka.

Road signboards are given to a Number of Police Stations as a part of the Corporate Social Responsibility initiative.

KFL Night 2014.



37

KFL has conducted drought relief campaigns in the North-Central Province to help affected residents in the area by conducting medical campaigns and distributing dry rations.

Also, in a bid to create an enabling environment through education, we implemented a book donation campaign and built libraries for the communities in Thambuththegama, Ratnapura, Horana and identified rural communities within the country.

The importance of a healthy nation to drive national development remains at the forefront of our sustainability focus into which the annual blood donation is a firm contributor towards this imperative. Two highly successful campaigns were organised this year in Anuradhapura and Ratnapura, while a Health Camp was also held in Anuradhapura and Ratnapura areas to create awareness on critical health issues that impact communities. We have shared very valuable knowledge to these rural communities by conducting seminars relating to child and women healthcare and we have also donated free medicines among the participants. Over 10,000 participants were gathered to health campaigns and it was a successful event organised by KFL during the year.

Various cultural and religious activities too were partnered in our bid to ensure religious harmony being used as a tool for nation rebuilding. These included being a partner in organising the Kandy Sri Dalada Perahera and the Pothgul Maha Viharaya in Heenatiyana, as well as the construction of Sabaragamuwa Maha Saman Dewalaya.

KFL has implemented the “Kanrich Sasunata Diriyak” (Helping Budhha Sasana), a project implemented with the primary aim of supporting

and developing the under privileged Buddhist temples. This programme was conducted in Kemhatha and Sooriyawewa temples and KFL is planning to continue to have this programme on every Poya Day during this year.

Further, KFL constructed a building called 'Sannipatha Malaya' at Sunethra Devi Piriwena in Pepiliyana for the use of Buddhist monks studying there and also on a quarterly basis an almsgiving was organised for all poor people around Kochchikade Church in Colombo.

In collaboration with Police and local authorities in various areas, we distributed 400 'No Parking' signs in Gampaha and Nugegoda and renewed street signage in Gampaha, Nugegoda and Kandy; honing our civic consciousness as a corporate steward.

From a macro perspective, we partnered the Sri Lanka Federation of Wildlife and the Ministry of Environment in running a series of initiatives creating awareness on Sri Lanka's wildlife and natural resources. This was well supported with the sponsorship of awareness billboard on environmental conservation and preservation in 44 locations around Sri Lanka.

Recycling used paper, toners and cartridges and only sourcing IT equipment that are energy star certified and air conditioners that are CFC free are the initial practices we have already implemented. KFL has joint hands with Sri Lanka Inter Bank Payment System (SLIPS) in order to give better customer service as well as to reduce paper use within KFL. However, we intend to build on these and include better energy management and conservation practices in the future.

While we do acknowledge that our environmental initiatives are not exceptionally large or permeating, we do believe that every initiative however small, does help in reducing our carbon footprint and prompting a greener planet.

SuppliersThe Company is maintaining Sustainable Procurement Policies in order to execute its social responsibility to carry out fair and equitable opportunities throughout the supply chain by strengthening partnership with suppliers.Most of time, the Company's approach is to encourage micro and SME suppliers there by reinforcing them, and regularly grant precedence to microfinance facilitating customers. The Company has always focused on mutually beneficial and trustworthy relationships and long-lasting association with stakeholders which substantiates the Company's promise, 'Relationship without Boarders'.

GovernmentThe Company contributes to local economic development through the organisation of financial operations. Our Microfinancing and SME financial services provide best solutions for working capital and capital requirements for SME and Retail sector in order to boost Micro, SME and Retail sectors in Sri Lankan business contexts.

SME and Retail sectors indicate great potential for economic growth and facilitates in solving macro economical problems such as GDP rate, unemployment, stagnant growth etc.



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Stewardship

Moreover, as a responsible financial institution, the Company has recognised its duty to increase Government wealth by paying relevant Government taxes.

Future OutlookAs a company, we always believe that good customer service is the most vital factor in order to sustain in the industry. We have planned Point of Sale (POS) utility bill paying system through which, we can offer a door step service to our customer base, through our well-committed employees. Further, KFL plans to network with ATMs in the coming financial year.

360 degree customer surveys are planned and awaited to be implemented in order to have a clear idea about customer concerns and answer them through modern IT solutions and well-trained employee engagement which will make customers lives more convenient.

To address shareholder concerns we are planning to recruit in-house expertise to have frequent dialogues shareholders. We have also and planed to have quarterly meetings and press conferences in order to maintain a trusted and committed repo with shareholders.

KFL plans to adopt 'Life time employment concept' in order to retain and attract qualified and dedicated employees by avoiding unnecessary competition. Promotions are determined according to the results of such accumulated merit ratings. To maintain the fairness and continuity of the merit rating

system, management keeps detailed records of the personal history of each employee and remunerations will be decided in a fair and transparent way by implementing this concept.

KFL is looking forward to recruit more experienced and dynamic staff and offer lifetime employment to all staff members by giving loan facilities at very low rates such as for housing, vehicle loans and educational loans. Company has a preparation to do frequent employee satisfaction surveys to identify the gaps and to pick their ideas.

We plan to offer well-diversified training programmes for the employees in order to expand their knowledge and to harvest their hidden skills to create and sustain more efficient, effective and innovative human capital for the Company.

Our focus has been on empowering our communities through various initiatives and thus, environmental conservation has taken a back seat, although we have instituted some initiatives as a start to reduce carbon foot print by adopting a proper eco-friendly plan through which KFL will become a more eco-friendly company in future. Further, we are planning to go for the concept called 'paperless working place' by improving an email-related culture among our rural employee base by proving relevant infrastructure facilities.



Stewardship

61

42

46

40

65

6463

Report of the Board Audit Committee

Board of Directors

Management Team


Risk Management

Nomination Committee Report

Remuneration Committee Report

Integrated Risk Management Committee Report

66



40

Mr. P.A. Pemathilaka – DirectorB. Com (Hons.) (University of Ceylon), MBA, FCA

A fellow of The Institute of Chartered Accountants of Sri Lanka with over thirty years of experience in Accounting, Finance and Auditing, having held the positions of Director – Public Enterprises, Director – Public Enterprise Reforms. Additional Director General of Treasury Operations, Director-General of State Accountants of the General Treasury and the Auditor General of State Accountants of the General Treasury and the Auditor General. After retirement from the Post of Auditor General, he performed as a Consultant for the Committee on Public Enterprises in Parliament of Sri Lanka for around two years. At present, he performs as a Member, Tax Appeals Commission and Government Procurement appeal board.

Board of Directors Board of Directors

Mr. S.H. Piyasiri – Chairman/DirectorBA (Hons.), MBA (UK), FCIB (London)

Mr. Piyasiri has over 35 years of experience in Banking/Finance and is the former General Manager/CEO of the National Savings Bank in Sri Lanka. He has served as a Faculty Member of the Department of Economics, Universities of Peradeniya and Colombo and as a visiting faculty member of the Institute of Bankers, Sri Lanka. He held the position of the President of the Chartered Institute of Bankers, London, at the Colombo Centre for two consecutive years.

Dr. K.M.S.B. Rekogama – Deputy Chairman/DirectorFIIESL, MIAESL, I. Eng., GCGI (London), Ph. D. (Honorary)

He is the former Chairman/Managing Director of State Pharmaceutical Manufacturing Corporation, having over 36 years of experience in Engineering, Transportation, Pharmaceuticals and Plantation Industries. He is also the Past President of Institute of Incorporated Engineers of Sri Lanka, Past Vice-President of Institute of Automotive Engineers of Sri Lanka and the Chairman of the Past Presidents Forum of IIESL and also a District Governor of International Association of Lions Club District 306A1. Currently, he is the Chairman/Managing Director of Pear Lanka Engineering Services (Pvt) Ltd.


41

Mr. S.I. Weerasinghe – Chief Executive Officer/Executive DirectorB. Sc (Hons.), MBA (Aus.), ACA, ACMA, MCPM, MINA (Aus.)

He is a Chartered Accountant (ACA) and a Graduate of the University of Sri Jayawardenepura with over 15 years of experience in the field of Management and Accountancy and did his articles at Messrs Ernst & Young. He has held Senior Management positions in several institutions in the field of Finance. He is also a Certified Management Accountant (ACMA) and a member of the Institute of Public Accountants of Australia (MIPA Aus.) and a Fellow Member of the Professional Managers’ Association (FCPM).

Mr. K.K.D. Ranawaka – DirectorLLB (University of Colombo) / Attorney-at-Law

Mr. Kingsley Ranawaka counts over 20 years experience in the field of Law/Administration. In 2005, he was appointed as the Chairman of Sri Lanka Foreign Employment Agency and thereafter was promoted as the Chairman of Sri Lanka Bureau of Foreign Employment (SLBFE). He was the former Chairman at Maga Naguma Road Construction Equipment Company (MNRCE), a fully Government-owned company, which was established under the purview of the Ministry of Ports and Highways.

Mrs. R.S. Goonetilleke – DirectorBA (University of Ceylon), MBA (Sri J.), FCIB (LONDON)

Mrs. Goonetilleke counts over 30 years of experience in Banking and Finance having worked in People’s Bank and Hatton National Bank. After retirement, she joined the Postgraduate Institute of Management (PIM) of Sri Jayawardenepura University as a Senior Banking Consultant and as a Senior Faculty Member. In 2006, she joined the Institute of Bankers, Sri Lanka as the Acting Director-General. She joined the ICFAI Education Lanka, the Sri Lankan Branch of ICFAI University, India in 2008 and since 2009 to date, serving as the Country Head and Dean, Academic of the University Campus.

Board of Directors Board of Directors


42

Management Team Management Team

Mr. Rajendra Dinesh Kumar Assistant General Manager

Mr. W. Roshan SujeewaChief Manager

Mrs. W. Shyaminie Fernando Assistant General Manager

Mr. Ravi Indra Kumara JosephAssistant General Manager - IT

Mr. Aloka Wahalawatta General Manager - Operations


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Mr. Eranda Amal Godage General Manager - Marketing

Mr. Dimuthu PereraChief Manager Mr. Sadeepa Rathnayake

General Manager - Investments

Mr. Pradeep Basnayake Deputy General Manager

Mr. Celmariston Martinez Assistant General Manager


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Mr. Aloka Wahalawatta General Manager - Operations

BBA (Hons.) (Special – Marketing)

Mr. Aloka is a management graduate from the University of Colombo in BBA Special (Hons.) with a Second Upper Class and started his career at AMW before moving into the finance field. He is a specialist in credit and investigations, having worked in the finance industry including The Finance PLC for over 16 years. He joined Kanrich Finance Ltd. in 2009 and currently heads the Company’s Credit and Recoveries, Back office and support functions, HR division, Administration division and Staff welfare and Staff loans.

Mr. Sadeepa Rathnayake General Manager - Investments

MSLIM (SL)

Mr. Sadeepa joined Kanrich Finance Ltd. in 2010 and currently heads the Company’s Microfinance, Leasing/HP, Real Estate, Pawning/Gold Loan, Revolving Business Loan and some of marketing divisions. He started his career at Seylan Merchant Bank Ltd. and has held several senior positions in marketing and has over 15 years experience in the Finance Sector.

Mr. Eranda Amal Godage General Manager - Marketing

Chartered Marketer, MBA (UK), DipM (UK), MCIM (UK), MCMI (UK), MCPM, MSLIM, FIPFM (UK), MGARP, MIM (SL)

Mr. Eranda is a Banker by profession and started his career at Sampath Bank PLC. He counts more than 14 years of experience in Banking and Finance. He is a Chartered Marketer and a Member of the Chartered Institute of Marketing UK and obtained a Master’s of Business Administration from the University of Wales UK. He is a Member of the Chartered Management Institute of UK, Fellow Member of Institute of Professional Financial Managers UK, Member of Certified Professional Managers, Member of the Sri Lankan Institute of Marketing, Member of the Global Association of Risk Professionals. He held several senior positions in the Banking and Finance Sector previously before joining Kanrich Finance Ltd. in 2009. Currently heads the Company’s Marketing and Funding divisions of the Company.

Corporate Management


45

Management Team

Mr. Pradeep Basnayake

Deputy General Manager

Mr. Basnayake is a banker by profession with 16 years of experience. He started his career at The Hongkong and Shanghai Banking Corporation Ltd. before joining Sampath Bank PLC and DFCC Vardhana Bank PLC. He joined Kanrich Finance Ltd. in 2011. He is also a former National Rugby Captain and National Rugby selector.

Mr. Rajendra Dinesh KumarAssistant General Manager

Mr. Dinesh Kumar counts over 14 years experience as a senior manager in the Ceylinco Group of Companies and also handled the Ceylinco Indian Operations. He holds a Diploma in Management and presently serves as Assistant General Manager of Kanrich Finance Ltd.

Mr. Celmariston Martinez

Assistant General Manager

Pg. Dip. in Mkt. (SL), MSLIM, P.Mkt. (SL), AMIM (SL), MCPM (SL).

Mr. Martinez counts over 12 years experience in the banking and finance sectors. He holds a Postgraduate Diploma in Marketing and is a Member of the Sri Lanka Institute of Marketing. Mr. Martinez joined Kanrich Finance Ltd. in 2010. He also has experience at Citizens Development Business Finance PLC.

Mr. Ravi Indra Kumara JosephAssistant General Manager - IT

MBCS (UK), High Dip. (Computer Science)

Mr. Joseph is a Software Engineer by profession with more than 12 years experience in designing, implementing and maintaining software in Commercial Banks, Merchant Banks and Finance Companies. He is a member of British Computer Society and has been involved in many system development projects in the finance industry. He has working experience at OpenArc System Management, Assetline Leasing and Industrial Finance. He joined Kanrich Finance Ltd. in 2010 and has majorly contributed towards developing the Core Banking Software for KFL, implementing Branchless Bank Solution (POS) and implementing SMS Gateway and KFL Mobile App.

Mrs. W. Shyaminie Fernando

Assistant General Manager

BSc (Hons.) Pg. Dip. in Marketing J'Pura

Mrs. Fernando joined Kanrich Finance Ltd. in July 2010 as Manager Business Development. She graduated from the University of Sri Jayewardenepura with a Second Class Upper and completed her Postgraduate Diploma in Marketing also from University of Sri Jayewardenepura. She started her career at the Auditor Generals Department and then joined The Finance PLC in 2000 before joining LB Finance and MBSL Savings Bank.

Mr. W. Roshan SujeewaChief Manager

Mr. Sujeewa joined Kanrich Finance Ltd. in July 2011 as a Product Manager in microfinance operations and has 11 years extensive experience in micro credit sector in prime Grameen which was formerly known as Ceylinco Grameen.

Mr. Dimuthu PereraChief Manager

BSc in Mathematics

Mr. Perera holds a B.Sc. Degree in mathematics from the University of Ruhuna, a Diploma in Management, a Postgraduate Diploma in Management and Postgraduate Diploma in Marketing Management from the Open University of Indira Gandhi – India. He is currently reading for his MBA at the Open University of Indira Gandhi – India. He has more than 10 years experience in the finance industry starting from HSBC and Ceylinco Savings Bank at managerial positions. He joined Kanrich Finance Ltd. in 2012.

Senior Management


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Corporate Governance Report Corporate Governance Report

Over the years, the Company has been able to successfully win and maintain the loyalty and trust of its shareholders, customers, employees and other stakeholders by following a broad set of principles and procedures that ensure integrity, fairness, transparency and accountability at all times. The governance structure followed by Kanrich Finance Ltd. reflects the Company's history, its core values and its corporate social responsibilities, while being in line with best practices of good corporate governance.

Board of DirectorsThe Company's Board of Directors bears the overall responsibility for guiding the Company's governance policies and as such, robust mechanisms have been set in place to achieve accountability across the Board, the Senior Management, the Shareholders and other Stakeholders.

The Company's Board of Directors brings together a vast portfolio of financial expertise and know-how. Spearheaded by the Chairman, the Board comprises a balanced blend of professionals from diverse areas of proficiency which facilitates objective assessment of business strategies and operational performance.

The Chairman and the Board bring in a wealth of knowledge and over 35 years of experience to the Company, Chairman having been the former CEO of the famed National Savings Bank. He is also a Fellow of the prestigious Chartered Institute of Bankers, London placing him in a position to offer unique insights into the business. Having served as the former Auditor General of Sri Lanka, the Chairman of the Audit Committee provides leadership in the areas of governance and financial stewardship.

Kanrich Finance Ltd. is proud to have adopted constantly evolving, modern ethical practices in its business strategy, utilising a performance-driven culture and a dynamic governance structure that enable it to stay ahead even in the most demanding times.


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Corporate Governance Report Corporate Governance Report

SubcommitteesThe Board of Directors is supported by several independent Board Subcommittees that provide unbiased perspective that enhances the functions of the Board in areas pertaining to good governance operational principles. Aligned with industry standards, the Subcommittees are instrumental in effecting dynamic policies and overseeing diverse operational areas while referring to the Board for approval and guidance.

The Company's Audit Committee is charged with the task of reviewing internal controls, legal and ethical compliance, integrity of financial reporting and the Company's risk management framework and meets regularly to ensure continued efficiency in these areas.

The Remuneration Committee meets when the need arises to review the performance of the CEO and management staff and agree on their remuneration by considering performance indicators, company objectives and industry best practices.

Three Management Committees - Asset and Liability Committee, Credit Committee and the Integrated Risk Management Committee – are charged with the responsibility of monitoring the asset and liability position, their maturities, management of risk in all aspects of the business, credit policies and their application and other related tasks. The Credit Committee consists of key personnel of credit operations. The Committee meets monthly and operates with an aim to ensure that existing policies are implemented while discussing and recommending innovative policy changes to the Company's microfinance operation.

The Company also has a Management Committee that meets on a monthly basis, comprising Senior Managers of the Company, chaired by the CEO which deliberates on the implementation of strategic policy initiations of the Board Subcommittees and key aspects of the business that need the attention of this subcommittee.

Corporate Structure and EngagementKFL's corporate structure is based on transparency and complements its responsible governance principles. Every unit within the structure bears responsibility for the assets and liabilities of their branches or clusters, while relevant staff members are constantly updated on mobilised funds and their utilisation.

The well-planned decision-making process provides allowance for Branch Managers to seek staff opinions and the advice of the Senior Management in making key decisions. The entire staff body including the Management is continually updated of the general Company outlook at a monthly meeting, where the management teams from each branch also discuss decisions and performance.

Any decisions or information relevant to customers are relayed to them by the staff, who also keep customers updated on the Company's outlook, its investments and performance. This interaction is further enhanced by utilising social media such as the Company’s Facebook page which provides a convenient and transparent medium of communication.

The Company engages its shareholders and stakeholders through its Annual General Meeting, while consistently providing important updates via its corporate website. The Company also engages with the regulators on a periodic basis where they meet with the Board and the CEO to peruse mandatory monthly reports and comprehensive monthly updates. The Company further extends its engagement to a community level, through public events, CSR projects and corporate sponsorships.

External Governance Framework1. Code of Best Practice on Corporate

Governance issued jointly by the ICASL and the SEC

2. Finance Companies (Corporate Governance) Direction No. 3 of 2008

3. Companies Act No. 07 of 2007

4. Finance Leasing Act No. 56 of 2000

5. Listing Rules of the Colombo Stock Exchange

6. Finance Business Act No. 42 of 2011


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The extent of compliance by the Company with the Code of Best Practice on Corporate governance issued jointly by the ICASL and the SEC, Listing Rules of the Colombo Stock Exchange and Finance Companies (Corporate governance) Direction No. 3 of 2008 is given in the tables that follow.

The Joint Code of Best Practice

Issued byICASL and SEC

Companies (Co-operate Governance) Direction No. 03 of 2008 KFL Extent of Adoption

A. Directors

A.1 The Board should Direct, Lead and Control the Company

A.1 2 (1) and 2 (2) At present, the Board of Directors of the Company comprises of five Non-Executive Directors and one Executive Director. The Board possesses members who have adequate knowledge and skills to direct, lead and control its operations. The Profiles of the Directors are presented on pages 40 to 41 of this Annual Report.

The Board plays an active role in setting the Directions for the Company and the process of implementation of strategies. Senior Managers are given the authority and responsibility to implement strategies. Annual budgets and corporate plans are the key tools in this process. The Board ensures that the Company’s plans are directed towards achievement of set objectives which are regularly monitored and updated through a well-established planning process. Key Performance Indicators are used to assess the performance at each Board meeting.

Board meetings A.1.1 3 (1) Board meetings are held once-every month to review and evaluate the performance of the Company. Special meetings are held based on the requirement to discuss specific matters.

Number of Board meetings held during the period and the individual attendance by each member of the Board there at is presented on page 60 of this Annual Report.

Responsibility of the Board A.1.2 KFL Board of Directors ensures smooth functioning of companies’ strategy and also forming the strategy of the Company. Also ensures the achievement of strategic objectives and the efficient application of our resources for the achievement of these objectives. The Board discharges these responsibilities through continuous meetings that cover regular reviews of financial performance, non-financial performance, critical business issues and the annual strategy review process. Necessary adjustments will be made to the plans and budgets and the strategies will be altered accordingly. The changes by the Board will be based on the Internal Strengths, Weaknesses and the Opportunities and Threats prevailing in the macro-environment. In addition, competitor actions would also be considered in finalising any change.

Compliance with laws and access to independent professional advice

A.1.3 The KFL Board has adopt a policy for Directors to obtain independent professional advice. They have full access to all applicable information and can take independent professional advice, if necessary, at Company’s expense. This procedure ensures the level of independence of the decisions made by Directors and improves the quality of decisions as it seeks professional external advice.

Corporate Governance ReportCorporate Governance Report


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Company Secretary A.1.4 3 (5), 6, 7, 8 The Secretary possesses the required qualifications as per the Companies Act and only the Board has the authority to change the Secretary. All the Directors have access to the advice and service of the Company Secretary. The Secretary ensures that Board procedures are followed and are in compliance with the provisions of the Companies Act No. 07 of 2007, Finance Business Act No. 42 of 2011 and other applicable rules and regulations. The Secretary is responsible for maintaining minutes.

Independent judgment A.1.5 4 (6) All Directors are provided an equal opportunity to communicate their views independently, and

Board will produce their independent judgment to put up with Board proceedings and other subcommittee proceedings.

Training Needs of Directors

A.1.7 The Directors have adequate exposure, proficiency in their relevant areas to fulfil their duties and responsibilities remaining to the Board. Board participated, CBSL events further, more individual Directors who has gained new knowledge will update other Directors accordingly.

As well, Executive Directors continuously deal with corporate management and keep side by side of newest developments.

A.2 Chairman and Chief Executive Officer

Keeping separate the role of Chairperson and Chief Executive

A.2.1 7 (1) The Role of the CEO and Chairman has been distinct and approved by the Board of Directors. The Chairman is a Non-Executive Director while the CEO serves as an Executive Director of the Company. This is to ensure a balance of power and authority such that no one possesses unfettered powers of decisions.

A.3 Chairman’s Role

Chairman’s role in conducting Board proceedings

A.3 7 (2), (4), (6), (7), (8)

The Chairman, who is a Non-Executive Independent Director, provides leadership and facilitates the effective functioning of the Board. The Chairman encourages the effective participation of the Directors towards the strategic decision-making process in order to make collective decisions and ensure that the Directors utilise their maximum potential in favour of the Company. Therefore, the Chairman ensures that Directors are informed adequately and in a timely manner about the issues arising at Board meetings.

Different views of the Directors are evaluated to take strategically viable decisions and to ensure that stakeholder interest is not adversely affected. The Board has complete control over the affairs of the Company, by way of reviewing and analysing performance on a monthly basis.



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A.4 Financial Acumen

Availability of Sufficient Financial Acumen and Knowledge

A.4 4 (6) The Directors hold the required qualifications and experience in the financial service sector as set out in their Profiles given on pages 40 and 41 of this Annual Report and two of our Directors are Chartered Accountants and one of KFL Director is the former Auditor General of Sri Lanka. In addition to the above other members have experience over 30 years in banking and finance industry.

A.5 Board Balance

Presence of Non-Executive Directors

A.5.1 4 (1) & (3) The Board of Directors of the Company comprise of five (5) Non-Executive Directors and one Executive Director, who is the CEO of the Company and their views carry significant weight in the Board decisions.

Independence of the Directors

A.5.2 4 (4) & (8) At present, there are five Directors who are Independent Non-Executive Directors and they are free of any business or other relationship with the Company that could significantly interfere with the exercise of their unfettered and independent judgment.

Criteria for evaluating Independence of Non-Executive Directors

A.5.3 All five Independent Non-Executive Directors remained distant from management and free from any other business relationships that could impair independence in decision-making.

Signed independence declaration by the Non-Executive Directors

A.5.4 Every Non-Executive Director of the Company has made written submission as to their independence as per Schedule J of the Code.

Appointment of an Alternate Director by a Non-Executive Director

A.5.6 N/A

Senior Independent Director (SID)

A.5.7 7.2 No requirement to appoint Senior Independent Director since Chairman

Recording of concerns in Board minutes

A.5.8 Any concerns raised by the Directors during the year, are recorded in minutes of Board meetings with compulsory information by the Company Secretary. However, there were no concerns raised that could not be generally resolved requiring same to be minute.



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A.6 Supply of Information

Information to the Board by Management

A.6.1 7 (6) The Board receives regular reports and presentations on strategies and developments in relation to its business lines and geographical areas and overall plans and performance.

All Directors have full and timely access to all important information as they requested about committees and subcommittees.

Adequate time for effective meetings

A.6.2 The Company Secretary ensured that the required Notice of Meeting, agenda and information documents including Board papers are circulated to all Directors at least 14 days prior to holding of Board meetings. This ensured that the Board members have sufficient time to study and analyses the associated papers and prepare comprehensively for Board meetings.

A.7 Appointments to the Board

Nomination Committee A.7.1 The Nomination Committee under its terms of reference handles all new appointments to the Board in an effective manner.

The Nomination Committee Report for the financial period 2014/15 is given on page 64

Board assessment by the Nomination Committee

A.7.2 KFL Nomination Committee carried out an annual assessment of KFL Board’s composition to determine the levels of competencies which members could acquire to deal with the rapidly changing business environmental requirements.

Disclosure of appointments to shareholders

A.7.3 4 No new appointments made during the period.

A.8 Re-election

Appointment of Non-Executive Directors

A.8.1 No new appointments made during the period.

Election of Directors by shareholders

A.8.2 At the AGM shareholders will appoint nominees given by Nomination Committee.



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A.9 Appraisal of Board Performance

Appraisal of Board performance

A.9.1 A self-assessment was carried out by each Director at the end of the financial year based on a specified evaluation checklist. A summary report of all the assessments made was tabled at the Board meeting, which highlighted areas requiring improvement to ensure the efficiency and effectiveness of the Board.

Annual self-assessment of the Board and its Committees

A.9.2 Please refer A.9.1 code.

Disclosure of method of appraisal

A.9.3 Please refer A.9.1 code.

A. 10 Disclosure of Information on Directors

Director information A.10.1 Brief profile of each Director is provided on pages 40 and 41 under the Section on ‘Board of Directors’. Details of Director participation status at Board meetings and at Subcommittee meetings with information on such committees are given later in this Report.

A.11 Appraisal of the Chief Executive Officer

Targets for CEO A.11.1 Chief Executive Officer is entrusted by the Board to conduct day-to-day operations effectively to attain broad strategic targets/goals after giving necessary consideration to market reality and changes in relevant variables. Corporate objectives and annual forecasted targets and expects to attain these aspirations through the CEO and Corporate Management Team. Performance of the CEO is reviewed on an ongoing basis by the Chairman, evaluating the extent to which organisational objectives have been achieved from an overall perspective.

Appraisal of CEO A.11.2 CEO’s performance is formally appraised.

B. Directors, Remuneration

Remuneration Committee B.1.1 Remuneration Committee allowed to evaluate, appraise, settle on and advocate, to the Board regarding Executive Directors’ remuneration.

Remuneration Committee composition

B.1.2 The Remuneration Committee composition and details of meetings held is given on page 65. The Report of the Remuneration Committee is given on page 65 of this Annual Report.



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Remuneration of Non-Executive Directors

B.1.3 The Board has authority for deciding of Non-Executive Directors’ remuneration packages which is made as a collective decision. The Non-Executive Directors are paid a fee for attending Board or other Committee meetings or carrying out other non-executive duties based on their responsibilities assigned.

Remuneration Committee’s access to CEO and professional advice

B.1.4 Based on the Remuneration Committee composition, the advice of the Chairman of the Company is already available since he chairs the Committee as well.

B.2 The level and make-up of remuneration structure

B.2.1 The Board together with the Remuneration Committee focus to attract retains and motivates high calibre individuals for top executive positions. Since attracting and retaining quality professionals is a vital factor when engaging in long-term business objectives and strategies.

CEO’s Remuneration B.2.2 Remuneration is determined through an assessment of performance made against both annual and long-term objectives.

Comparison of remuneration with other institutions

B.2.3 KFL always benchmark remuneration levels with competitors and remuneration levels will be maintained. However, KFL does not have subsidiary companies or a Parent Company under its structure to which it could draw reference to.

CEO’s performance-related payments

B.2.4 KFL doesn’t have performance-related remuneration for CEO.

Executive share options B.2.5 There was no executive share options scheme offered to any Director during 2013/14 period.

Deciding Executive Director – Remuneration

B.2.6 Not applicable.

Early termination clauses in service contracts of Directors

B.2.7 Not applicable.

Early terminations of Directors

B.2.8 No terminations were effected during this period.

Level of remuneration of Non-Executive Directors

B.2.9 The Non-Executive Directors are paid a fee for their services as mentioned in Code B.1.4. No share options schemes were afforded to Non-Executive Directors during 2014/15.

B.3 Disclosure of Remuneration

Names of members in the Remuneration Committee and remuneration paid to Directors

B.3.1 10 (2) e Page 65 provides composition details of the Remuneration Committee with meetings held.



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C. Relations with Shareholders

C.1 Constructive use of Annual General Meeting (AGM)

C.1 KFL Board is able to maintain effective communication by holding the Annual General Meeting with shareholders. Board always encouraged all KFL shareholders to participate at the AGM and convey their valuable suggestions and concerns towards Company.

Level of proxies at AGMs C.1.1 Proxy Forms are made available in the Annual Report that is released with sufficient prior notice to all shareholders in accordance with Companies Act.

Propose separate resolutions for each separate issue

C.1.2 KFL has separate resolution for all significantly separate matters to provide shareholders an opportunity to deal with each material issue separately.

Availability of Chairmen of all Board Subcommittees at AGMs

C.1.3 Chairman of the Board ensures that Chairmen of all Board Subcommittees are present at the AGM to answer any questions coming under their purview.

Adequate notice of the AGM

C.1.4 Complying with the Companies Act, Annual Report including Financial Statements and the Notice of Meeting are sent to shareholders at least 21 working days prior to the date of the AGM by Company Secretary.

Voting procedures at General Meetings

C.1.5 A summary of procedure relating to voting at General Meetings is generally set out in the Notices of Meeting sent to each shareholder.

C.2 Communication with Shareholders

Channel to reach all shareholders of the Company

C.2.1 Annual Reports, quarterly accounts, press releases, important events and relevant information send to shareholders soft copies, letters and would be posted.

All shareholders are encouraged to attend the Annual General Meeting and extraordinary meetings of shareholders.

Disclosure of the shareholder Communication Policy, Methodology and Implementation

C.2.2 & C.2.3 No policy adopted. Will plan to implement on next financial year.

Disclosure of contact person for shareholders

C.2.4 Main point of contact for the shareholders for their concerns and clarification is the Company’s Secretary who will act as the intermediary between shareholders and the Board.



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Process to make aware of major issues and concerns of shareholders

C.2.5 Chairman, CEO and General Managers are available to handle and inform the Board regarding issues and concerns of the shareholders.

Person to contact in relation to shareholders matters

C.2.6 Shareholders can mainly contact the Company Secretary to raise their matters even though KFL has an open door policy of the Company. Shareholders are at the same time welcome to contact any Executive Director or members of the corporate management to obtain clarifications for their concerns.

Responding process of shareholder matters

C.2.7 Chairman, CEO and General Managers are responsible to convey shareholder enquiries to Board and Secretary will revert back to shareholders.

C.3 Major Transactions

Disclose material facts of major transactions

C.3 There were two major transactions during the period. Please refer page 78.

D. Accountability and Audit

Balanced and understandable assessment of the Company

D.1.1 10.1 (a) and 10 (2) & (b)

In presenting a true and fair set of Financial Statements that provide a sound overview of KFL’s financial performance and position for the financial year ended 31st March 2014, the Company complied with applicable Sri Lanka Accounting Standards (LKAS) and other regulations specified in the Finance Business Act No. 42 of 2011

Directors’ Report D.1.2 Company’s compliance to laws and regulations, confirms the going concern assumption and the effectiveness of Internal Control System that is in place.

Directors’ and Auditors’ responsibility statements

D.1.3 The Directors’ Responsibility for Financial Reporting given on page 74 provides a statement setting out the responsibilities of the Board for the preparation and presentation of the Financial Statements.


D.1.4 10 (2) Please refer the pages 16-30.

Directors’ affirmation of going concern

D.1.5 The Directors’ Responsibility for Financial Reporting given on page 74.



56




Calling of an EGM when net assets fall below 50% of shareholders’ funds

D.1.6 Not Applicable.

Adequacy and accuracy of related third-party transaction disclosures

D.1.7 KFL maintains the records of related party transactions. All Directors submit signed and dated declarations to Company Secretary on an annual basis.

D.2 Internal Controls– Maintaining a sound system of internal controls

Reviewing effectiveness of Internal Control System

D.2.1 2 (1) e Periodic review of adequacy and effectiveness of internal controls of the Company are carried out by Internal Auditors reviewed and followed up by the higher level Audit Committee.

The Board has established an effective system of internal controls to safeguard the assets of the Company. The system of internal controls in place has been designed to counter various risks that could either arise from dealing in financial transactions or from other events and changes in environment and business conditions.

Internal Audit Function D.2.2 Internal Audit Division, comprises well-qualified and experienced officers to conduct independent audits, in areas involving high risk especially at branch level in keeping to the annual audit plan.

Audit Committee to review process and effectiveness of risk management and internal controls and to report to the Board

D.2.3 Risk management framework including use of the risk and controls assessment process that provides business areas and functions with a forward looking view of key risks and an assessment of the effectiveness of controls, and a tracking mechanism for action plans so that they can proactively manage risks within acceptable levels.

The composition of the Risk Management Committee Report is presented on page 63 of this Annual Report.

As per the Terms of Reference of the Committee adopted by the Board of Directors, the following functions are being performed by the Integrated Risk Management Committee:

(I) Assess all risks to the Company on a monthly basis through appropriate risk indicators and management information.

(II) Review the adequacy and effectiveness of all management level committees to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the Committee.



57




(iii) Take prompt corrective action to mitigate the effects of specific risks in case such risks are at levels beyond the prudent limits decided by the Committee on the basis of the Company’s policies and regulatory and supervisory requirements.

(iv) Meet at least quarterly to assess all aspects of risk management including updated business continuity plans and takes prompt corrective action to mitigate such effects.

(v) 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.

(vi) Submit a risk assessment report to the Board seeking the Board’s views, concurrence and/or specific directions.

(vii)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. KFL has recruited a Compliance Officer and he is reporting compliance function and reporting to the Committee.

D.3 Audit Committee – A committee to review financial reporting aspects, internal controls and maintain relationship with Company Auditors

Audit Committee composition

D.3.1 7.10.6 (a) The Audit Committee consists of three members of the Board. Out of the three all members are Independent and Non-Executive Directors who was former Auditor General of Sri Lanka.

The Chairman of the Committee is an Independent Non-Executive Director who possesses necessary qualifications and he is the former Auditor General of Sri Lanka. The other members of the Committee are also Non-Executive Directors.

The composition of the Audit Committee is presented on pages 61 and 62 of this Annual Report.

Reviewing objectivity, effectiveness and independence of External Auditors

D.3.2 The Audit Committee in keeping to its terms of reference monitors the objectivity, effectiveness and independence of the External Auditor of the Company



58




Terms of Reference of the Audit Committee

D.3.3 As set out in the Terms of Reference of the Audit Committee, all members are collectively empowered to carry out the following tasks:

(i) Review the reliability and integrity of financial and operating information and the means used to identify, measure, classify and report such information.

(ii) Review the systems established to ensure compliance with those policies, plans, procedures, laws and regulations which could have a significant impact on operations and reports and determine whether the organisation is in compliance.

(iii) Review the means of safeguarding assets and, as appropriate, verify the existence of such assets.

(iv) Appraise the productivity, efficiency and effective utilisation of resources by the management.

(v) Review operations or programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned.

(vi) Review whether the Company is exposed to operational risk by neglect, omission, human error and or system fault, particularly at vital control points and whether the existing procedures and practices are effective in achieving efficiency in the day-to-day operations for the best advantage of Kanrich Finance Ltd.

Disclosures of the Audit Committee

D.3.4 Please refer Section 8.2 (a) to 8.2 (q) in Part 2 of this Supplement on pages 61 to 62 to obtain further information regarding the composition, objectives and duties of the Audit Committee.

The names of Directors forming the Audit Committee and their participation level at meetings are disclosed on page 60.

D.4 Code of Business Conduct and Ethics

Compliance to requirements on business conduct and ethics

D.4.1 During the last year, a formal document that incorporates aspects on employee conduct was issued to all employees through the HR Division.

Affirmation by Chairman that no individual has violated business conduct and ethical requirements of the Company

D.4.2 There were no violations to requirements of the Company on specified business conduct and ethics.



59





D.5 Corporate Governance Disclosures

Disclosure on Corporate Governance

D.5.1 Corporate Governance Report for 2014/15 provides a comprehensive disclosure on Company’s Corporate Governance Practices against recommended best practices and prevailing regulations.

Section 2: Shareholders

E. Institutional Investors

Constructive dialog between shareholders and Company

E.1.1 KFL has a history of active involvement of shareholders at general meetings.

Shareholders have the liberty to express their views at AGMs, and to convey any matters even outside such meetings. Under the supervision of the Chairman, Company Secretary’ will take minutes discussions and views of all that is present at AGMs.

E.2 Evaluation of Governance Disclosures

E.2.1 As mentioned in Code E.1.1 above, views and other material matters of shareholders are subsequently taken up at Board meetings as necessary.

F. Other Investors

F.1 Individual Shareholders

F.1 Individual shareholders can seek independent advice on investing or divesting decisions.

F.2 Shareholder Voting F.2 All investors are encouraged to participate in general meetings of the Company.Refer code C.1.5.


60


Attendance of Audit Committee Meetings for the Year 2014

Attendance at Audit Committee Meetings – 2014

Name of the Member 27 Jan. 24 Feb. 24 Mar. 21 Apr. 26 May 23 Jun. 22 Jul. 27 Aug. 29 Sep. 27 Oct. 24 Nov. 18 Dec.

1. P.A. Pematilaka

2. R.S. Goonetilleke

3. S.H. Piyasiri

4. K.M.S.B. Rekogama

Attendance of Audit Committee Meetings for the Year 2015

Attendance at Audit Committee Meetings – 2015

Name of the Member 23 Feb. 27 Mar. 27 Apr.

1. P.A. Pematilaka


3. S.H. Piyasiri


Attendance of Board Meetings for the Year 2014

Attendance at Board Meetings

Name of the Director Ex N-Ex In N-In29

Jan.26

Feb.26

Mar.23

Apr.28

May26

Jun.23

Jul.26

Aug.30

Sep.29

Oct.26

Nov.22

Dec.

1. S.H. Piyasiri


3. D.S.I. Weerasinghe


5. K.K.D. Ranawaka

6. P.A. Pematilaka

Ex – Executive N-Ex – Non-Executive In – Independent N-In – Non-Independent

Attendance of Board Meetings for the Year 2015

Attendance at Board MeetingsAttendance at Special

Board Meetings

Name of the Director Ex N-Ex In N-In 28 Jan. 25 Feb. 25 Mar. 29 Apr. 12 Mar.

1. S.H. Piyasiri


3. D.S.I. Weerasinghe


5. K.K.D. Ranawaka

6. P.A. Pematilaka

Ex – Executive N-Ex – Non-Executive In – Independent N-In – Non-Independent


61


Composition of the Committee

The Audit Committee appointed by and responsible to the Board of Directors of Kanrich Finance Ltd. Limited comprises of four Independent Non-Executive Directors, namely, Mr. P.A. Pematilaka, Mr. S.H. Piyasiri, Mr. K.M.S.B. Rekogama and Ms. R.S. Goonetilleke. Each Member possesses wide ranging financial, commercial and management experience. More information on experience of and brief profiles of the members are given in the Directors' Profile of this Annual Report.

The Company Secretary functions as Secretary to the Audit Committee.

Role of the Audit Committee

The main objective of the Audit Committee is to assist the Board of Directors in discharging its responsibilities towards its stakeholders. The Committee is empowered, among other things, to assist the Board of Directors in fulfilling its overall responsibilities for the financial reporting process, review the reliability and integrity of the financial and operating information, review the system of internal control and risk management to ensure that adequate and effective systems of internal control and risk management are in place, review the Company’s process for monitoring compliance with policies, plans, procedures, laws and regulations, see that sound corporate governance practices are being followed within the Company, examine any other matters relating to the financial affairs of the Company, review the independence and performance of the External Auditors and make recommendations to the Board on the appointment of External Auditors.

Meetings

The Audit Committee meets monthly and had eleven meetings during the Financial Year. The Chief Executive Officer, the Head of Finance, the Compliance Officer, the Chief Internal Auditor and other Senior Executives attend the meetings of the Committee by invitation. The Chief Internal Auditor presents a summary of the salient findings of all internal audits and investigations carried out by his department for the period. The responses from the Chief Executive Officer to the internal audit findings were reviewed and where necessary corrective action was recommended and their implementation monitored. During its meetings, the Committee reviewed the adequacy and effectiveness of the internal control systems to its exposure to the business and financial risks and the processes which are in place to safeguard the assets of the Company, to ensure that the financial reporting system can be relied upon in the preparation and presentation of Financial Statements. On the invitation of the Committee, External Auditors of the Company attended three Committee meetings during the year.

Internal Audit

In order to fulfil its responsibility to monitor the effectiveness of internal audit function, the Committee received regular reports from the Chief Internal Auditor, setting out the internal audit functions, view of the control environment and performance against any key indicators. During the year, the Audit Committee reviewed the independence, objectivity and performance of the internal audit function, the findings of the internal audits completed and their evaluation of the Company’s internal control including internal control systems. The Audit Committee also reviewed the adequacy of the frequency and coverage of the internal audit plan and approved the same. It also assessed the Internal Audit Department’s resource requirements including succession planning. The Committee also reviewed the selected audit reports covering various functions of the Company and followed up the implementation of the audit recommendations confirmed by the Committee.

Risk Management and Internal Control

The Committee reviewed the process by which the Company evaluated its control environment, its risk assessment process and the way in which significant risks were managed. It also considered the Internal Audit Reports on the effectiveness of the internal controls, significant deviations that involved employees of the Company and took actions to strengthen the internal controls where necessary.


62


Statutory and Regulatory Compliance

The Committee reviewed the procedures established by the Management for compliance with regulatory requirements of the Central Bank. The Compliance Officer of the Company reported to the Audit Committee on a regular basis indicating the extent to which the Company was in compliance with the regulatory requirements. Due compliance with all requirements is monitored through this process.

External Audit

Prior to the commencement of the annual audit, the Committee discussed with External Auditors, their audit plan, audit approach and matters relating to the scope of the annual audit. It also reviewed the adequacy of disclosure in the published Financial Statements. The Audit Committee also undertook the annual evaluation of the independence and objectivity of the External Auditor and the effectiveness of the audit process.

Conclusion

Based on the review of the reports presented by External and Internal Auditors, the information obtained by the Committee and having examined the adequacy and effectiveness of the internal controls which have been designed to provide a reasonable assurance to Directors that the control environment prevailing in the Company provides a reasonable assurance regarding the reliability of the financial reporting of the Company and safeguarding of the assets of the Company, the Audit Committee is satisfied that the financial position of the Company is regularly monitored and steps are being taken continuously to improve the control and governance environment in which the Company operates.

P.A. PematilakaChairman of the Audit Committee


63

Integrated Risk Management Committee Report

The Integrated Risk Management Committee was established as per the Finance Companies Corporate Governance Direction No. 03 of 2008 issued by the Monitory Board under the Finance Companies Act No. 78 of 1988.

The Committee comprising the following members:

Mr. S.H. Piyasiri Chairman Chairman/Director

Mr. Shiran Weerasinghe Member CEO/Director

Mr. Aloka Wahalawatte Member General Manager – Operations

Mr. Eranda Godage Member General Manager – Marketing

Mr. Sadeepa Ratnayaka Member General Manager – Investments

Mr. Chatura Kumarapperuma Member Manager – Finance

The Committee held 11 meetings for the year under review.

The Committee established a method of overseeing the overall risk management procedures related to Credit, Operation, Marketing, Liquidity and Regulatory by monthly basis.

The Committee initiated several risk indicators based on the management information to mitigate the risk.

Worked closely with key management members to identify the risk elements and reviewed the effectiveness of the all management level committees appointed.

Reviewed and approved risk parameters and limits and taken major decisions with the risk-related matters.

The Committee periodically reviewed the compliance function, the risk associated with the information system reporting requirements and the disaster recovery plan.

Also evaluated the risk associated with the real estate stock and made appropriate recommendations to reduce the stock on gradual basis.

Followed up with the implementation status proposed strategies related to the business activities.

Submitted quarterly return to the Board of Directors on key risk-related matters seeking the Board’s views, concurrence and specific directions.



64

The Committee comprises of three independent Non-Executive Directors and is Chaired by Mr. S.H. Piyasiri, Chairman of the Company.

Members of the Committee:

Mr. S.H. Piyasiri Chairman of the Committee

Mr. P.A. Prematilake Member

Mr. K.K.D. Ranawaka Member

The Nomination Committee operates in pursuant to the guidelines given in the Nomination Committee Charter approved by the Board of Directors. The objective of the Committee is to lead the process of selection of the most suitable candidate or candidates for appointment to the Board and officers performing executive functions and to make recommendation to the Board as regards plans for succession for both Executive and Non-Executive Directors.

Charter of the CommitteeThe mandate of the Committee includes inter alia the following:

• To implement a procedure to select/appoint new Directors, Chief Executive Officer and officers performing executive functions as defined in the Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No. 03 of 2011.

• To consider and recommend the re-election of current Directors, taking into account the performance and contribution made by them towards the overall discharge of the Board’s responsibilities.

• To set the criteria such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of Chief Executive Officer and Officer and Officers Performing Executive Functions.

Nomination Committee Report

• To ensure that Directors, Chief Executive Officer and Officer and Officers Performing Executive Functions are fit and proper persons to hold office as per the criteria set out in the Direction issued by the Central Bank of Sri Lanka and relevant statutes.

• To consider and recommend, from time to time, the requirements of additional/new expertise and the succession arrangements for retiring Directors and Officer and Officers Performing Executive Functions.

• To make recommendations on any other matter/s referred to it by the Board of Directors.

During the year under review, Committee met on the 20th January 2015 to select and make recommendation to the Board for appointing the Risk and Compliance Officer.




65


The Committee comprises of three Independent Non-Executive Directors and is chaired by Mr. S.H. Piyasiri, Chairman of the Company.

Members of the Committee:

Mr. S.H. Piyasiri Chairman of the Committee

Mr. P.A. Prematilake Member

Mr. K.K.D. Ranawaka Member

The Remuneration Committee operates in pursuant to the guidelines given in the Remuneration Committee Charter approved by the Board of Directors. The Charter sets out the role of the committee, objectives, membership and the remuneration framework.

The objectives of the Committee are to assist the Board in fulfilling its corporate governance responsibilities in regards to remuneration matters including:

1. The remuneration framework for Non-Executive Directors.

2. The remuneration and incentive framework for the Chief Executive Officer/Executive Director, any other Executive Directors and Senior Executives.

3. Recommendations and decisions on remuneration and all incentive awards for the Chief Executive Officer/Executive Director, any other Executive Directors and Executive officers.

4. Strategic Human Resources Policies.

During the year under review Committee met on the 26th May 2014, 29th October 2014 and 20th January 2015 to review and recommend to the Board the remuneration to be paid to the senior officers and to recommend the revised remuneration structure that will be offered to the Chief Financial Officer.



66

Risk Management

Risk is an integral element of any organisation. Managing risk has become an essential tool to tackle the inevitable uncertainty associated with business as an integral part of corporate governance, business processes and management decisions of the Company. We understand the importance of aligning risk management objectives of the Company in a way that it strikes an appropriate balance between risk and rewards in order to maximise stakeholder value.

KFL is a fast emerging finance company among other financial institutions in the sector; hence risk management is essential to effective functioning of operations from top to bottom. Risk Management enables management to effectively deal with uncertainty and associate risk and opportunity, enhancing the capacity to create value. The strategy in managing risk resides in establishing the context, identifying risks, analyse, quantify and integrate risks, assessing and prioritising risks and treating risks. As a finance company, we face potential risks mainly the areas of

operation, credit, market, regulatory, reputational and liquidity concerns.

The Company strongly believes that risk management underscores the fact that the survival of KFL depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for change and react to it. Our objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that risks are deliberately taken with full knowledge, clear purpose and understanding to it can be measured and mitigated.

Risk Management Structure

BOD

MicroOperations

Management

HRDepartment IT

Pawning &Gold loans

Management

MISRisk &

ComplianceOfficer

Integrated Risk

ManagementCommittee

SME LoansManagement

InternalAudit

CreditCommittee

Business &Mortgage LoanManagement

External Audit

AuditCommittee

CreditManagement

Management

Risk Management


67

Risk Management

Credit Risk

Management and Mitigation Credit risk is the potential financial loss that could arise as a result of the failure of a borrower or counterparty to honour its contractual obligations. Micro loans, leases, loans and hire purchases are the largest assets of KFL. Thus, credit risk may result in the loss of the capital amount and interest, which will have adverse implications on profits, due to the

suspension of interest and to write-off non-performing facilities. In essence, the proper management of credit risk underpins KFL’s financial stability, growth prospects and profitability and as such the credit risk management in KFL is designed to be a value enhancing activity rather than being an exercise which is confined only to regulatory compliance.

KFL has developed an integrated credit risk strategy which is converted to a policy document and embedded in to credit procedure.

Credit Approving Process

Branch Manager

GeneralManager

Credit

Board of

Directors

Senior Manager/

Chief Manager

CEOAGM/DGM

CreditCommittee

All credit exposure limits are approved within a defined credit authority framework. Credit evaluation and approval is undertaken by experienced credit professionals operating within a clearly delegated authority framework, with only the most senior credit officers entrusted with higher levels of delegated authority. All high value credit propositions above certain threshold levels are approved by the Credit Committee or the Board of Directors. As a policy, Company is not giving facilities for vehicles more than 20 years from the MFY. Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as credit insurance and guarantees. The reliance that can be placed on these mitigations is carefully assessed in light of issues such as legal certainty and enforceability, market valuation correlation and counterparty risk of the Guarantor.

KFL has professional and well-experienced operational teams for each and every product to monitor and develop strategies to mitigate risk. They have appointed strong recovery teams to maintain a healthy NPL ratio among all products.


68

Risk ManagementRisk Management

Monthly NPL%

Feb.

15

May

14

Jun.

14

Jul.

14

Aug.

14

Sep.

14

Oct.

14

Nov.

14

Dec.

14

Jan.

15

Mar.

15

Apr.

14

4.00

3.00

2.50

3.50

1.00

1.50

2.00

0.50

0.00

Further the Company has a well-diversified product portfolio in order to have a good balance and to mitigate risk. The Company is encouraged to accept more than 18K gold for pawning. There is a well-experienced valuation committee to inspect, asses Real Estate in order to mitigate risk.

Liquidity RiskLiquidity risk of the Company, measures by the ability to meet the obligations and the cost par with the funding sources of the Company. The main obligations of KFL is to refund the deposits obtained from the public on maturity and repayments of other borrowings.

The Company maintains a proper liquidity policy and ensures compliance with liquidity levels and ratios required to be maintained which are imposed by the Central Bank of Sri Lanka.

The liquidity requirement of KFL is assessed daily by Treasury Department of the Company. The Asset and Liability

Committee regularly review the internal and external financial trends and make precautions if necessary. The fixed deposits of the Company maturities per month are less than the monthly loan collections. Hence, the liquidity risk has been mitigated comfortably throughout the period.

Withdrawals vs Rental CollectionRs. ‘000

Feb.

15

May

14

Jun.

14

Jul.

14

Aug.

14

Sep.

14

Oct.

14

Nov.

14

Dec.

14

Jan.

15

Mar.

15

Apr.

14

1,800

1,500

600

900

1,200

300

0

FD PN CP/ / Outflow (Rs.)Rental Collection (Rs.)


69

Risk ManagementRisk Management

Mitigation Strategies

• Movements in interest rates are closely monitoring by Asset and Liability Committee (ALCO) and issues directions to lending and borrowings departments on interest rate strategies.

Market Risk Market risk arises because of swings in the financial market as a whole. Market variables uncertainty such as interest rate, inflation rate and commodity prices could directly impact to market risk. These external risk factors cannot diversify in accordance with market risk could be identified as the most critical risk given in Company’s business profile. Managing these risk factors, the Company uses corporate strategies and a variety of quantitative methods to predetermine impacts caused on market risk.

InterestRisk

MarketRisk

CommodityPrice Risk

Inflation Risk

Interest Risk

Interest rate risk stems from the fact that a fall in interest rate will increase the value of any contract that involves a fixed promised to pay over an extended time frame. Conversely, a rise in interest rates will decrease the value of any agreement that involves fixed interest and principle payments.

• Fund management meetings are conducted regularly to implement solutions to mitigate risk under different scenarios.

• Product differentiates with shorter reprising cycles to reduce interest rate sensitivity gaps.

Inflation Rate

Inflation risk is the threat that a general increase in the price level which will undermine the real economic value of corporate agreement that involve a fixed promise to pay over an extended period. Leases, rental agreements, and corporate bonds are all financial instruments of business contracts that can be susceptible to inflation risk.

Commodity Price Risk

Commodity price risk arises on fluctuation in the price of commodities and that could cause uncertainties of future market value, and of the size of future income. The commodity price risk mainly impact on Company gold loan business and financial agreements.

Operational Risk

The operational risk of the Company arises due to failure of process and systems of the Company. The process and the systems have to be designed and reviewed to mitigate such risks of the Company.

The operational risks have been mitigated by implementing proper operational policies and controls and reviewed regularly. Operation manuals are developed for each product and service to streamline the processes of the Company. The comprehensive training sessions for staff members have been designed and implemented to train on compliance with operational policies and controls in the Company.


70

Risk Management

A Disaster Recovery Plan has been implemented to mitigate risk. The IT system and servers are located to other premises as per the aforementioned plan and a proper process for system backup has been implemented simultaneously. The Company uses state-of-art technology with SMS alert system and POS System for operations of the Company.

The Company tied the hands with LankaClear for Sri Lanka Interbank Payment System (SLIPS) which is an online interbank electric fund transfer system. Hence the payments can be handled more accurately and promptly resulting an effective operation in KFL. Other than the Audit Department of the Company, a separate operation team, consist with highly experienced professionals for more than 15 years in the financial industry have been formulated for the monitoring of each product. The main role of the team is to monitor, review and advise on the product process which provide a higher contribution for mitigation of operational risk of the Company.

Compliance RiskCompliance risks are the potential threats to the Company that results from non-conformance with laws, regulations, rules, directions, prescribed practices and ethical standards.

In-line with the Company’s risk management philosophy, the Company implemented a regulatory risk management framework to govern operations.

A separate risk and compliance officer has been appointed in order to carry out the compliance function.

The Company has conducted training programmes among staff to enhance the awareness regarding risk and compliance.

KFL adheres to regulations, rules, directions and guidelines composed by the regulators in order to fulfil all Central Bank requirements.Comprehensive Anti-Monetary Laundering and KYC measurements have been introduced and adopted in favour to mitigate money laundering.The Integrated Risk Management Committee has established a compliance function to assess the Company’s compliance with laws, regulations, rules, directions, regulatory guidelines, internal controls and other prescribed practices.

Risk Management Committees Key Objectives

Integrated Risk Management Committee

Implementing institution-wide Risk Management Strategies.

Management Committee Review and follow up on overall policy matters. Company’s profitability and performance.

Asset and Liability Committee Deciding on all the treasury, investment and liability functions.

Audit Committee Review the adequacy of internal controls implemented in Company’s operations and processes.

Credit Committee Approving high value credit facilities and monitoring high value overdue accounts.

KFL is in the process of consolidating its functions, structure, policies, systems, etc. to the extent we can take risk more consciously, anticipate adverse changes and hedge accordingly. KFL relies on statutory guidelines/directions as sources for forward-looking approach in building process and systems attuned to risk management practices.


Financial Reports

74

72

80

7978

75

76

77

Directors’ Responsibility for Financial Reporting

The Annual Report of the Board of Directors on the

Affairs of the Company

Independent Auditors’ Report

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in EquityCash Flow Statement

Notes to the Financial Statements

The Annual Report of the Board of Directors on the Affairs of the Company

Annual Report of the Board of Directors

The Board of Directors of Kanrich Finance Ltd. has pleasure in presenting their Report on the affairs of the Company together with the Summary of the Financial Statements for the year ended 31st March 2015. The Financial Statements have been prepared in accordance with Sri Lanka Accounting Standards.

Legal StatusIncorporated as a limited liability company on 27th October 1971 under Chapter 145 of the Company Ordinance No. 51 of 1938 and a licensed finance company with the Central Bank of Sri Lanka under the Finance Business Act No.42 of 2011 and re-registered under the Companies Act No.07 of 2007 and changed its name as Kanrich Finance Ltd. on 6th October, 2010.

Principal ActivitiesThe Company accepts deposits from the public and engages in Leasing, Hire Purchase, Loans, Microfinance Loans and Real Estate.

Financial Statements The Summary of the Financial Statements of the Company is attached herewith.

Independent Auditors’ ReportIndependent Auditors’ Report on the Financial Statements is attached.

TurnoverThe Turnover of the Company was Rs. 2,854,119,806/- as compared with a turnover of Rs. 1,441,162,747/- during the previous financial year.

Accounting Polices The accounting policies adopted in the preparation of the Financial Statements are given in Notes of the Financial Statements. There were no significant changes in the accounting Policies adopted, in the year of 2014/15

Stated CapitalThe stated capital of the Company as per the Audited Accounts as at 31st March 2015 was Rs. 672, 993,044/-.

Interest RegisterThe Directors of the Company have made the General Disclosures provided for in Section 192 (2) of Companies Act No. 07 of 2007 and maintains an Interest Register.

Directors’ shareholding of ordinary shares in the Company are given below.

Names of the DirectorsNo. of Shares as at

31.03.2015No. of Shares as at

31.03.2014

S.H. Piyasiri 05 05

72



73

The Annual Report of the Board of Directors on the Affairs of the Company

Annual Report of the Board of Directors

Directorate The names of the Directors of the Company who served during the year are given below.

Mr. S.H. PiyasiriDr. K.M.S. B. RekogamaMr. D.S.I. Weerasinghe Mrs. R.S. GoonetillekeMr. K.K.D. RanawakaMr. P.A. Pematilaka Executive DirectorMr. D.S.I. Weerasinghe

Non-Executive/Independent DirectorsMr. S.H. Piyasiri Mr. K.M.S.B. RekogamaMrs. R.S. Goonetilleke Mr. P.A. Pematilaka Mr. K.K.D. Ranawaka

The Remuneration and Other Benefits of the Directors Directors’ remuneration and other emoluments in respect of the Company for the year ended 31st March 2015 was Rs.14,850,000/- as compared with the remuneration of Rs.16,050,000/- during previous financial year.

Corporate GovernanceThe Board has taken necessary measures to ensure proper systems and procedures are in place within the Company by adopting sound corporate governance practice.

AuditorsThe Financial Statements for the year have been audited by Messrs. B.V. Fernando & Co., Chartered Accountants. Messrs. KPMG in Sri Lanka for the year ending 31st March 2016 is deemed to have been appointing as Auditors in terms of the Section 158 of the Companies Act No. 7 of 2007.

The Auditors, Messrs. B.V. Fernando & Co. were paid Rs. 675,000/- as audit fees by the Company.

As far as the Directors are aware, the Auditors do not have any relationships (other than that of an Auditor)-with the Company other than those disclosed above. The Auditors also do not have any interests in the Company.

Signed on behalf of the Board Kanrich Finance Ltd.

S.H. PiyasiriDirector

Shiran WeerasingheDirector

Chart Business Systems (Pvt) Ltd.

Secretaries28th May 2015


74

Directors’ Responsibility for Financial Reporting

The following statement sets out the responsibilities of the Board of Directors in relation to the preparation and presentation of the Financial Statements of the Company. These responsibilities differ from those of the Auditors, which are set out in their Report appearing on page 72 of this Annual Report.

The Companies Act No. 07 of 2007 and the Finance Companies Act No. 78 of 1988, requires that the Directors are required to prepare Financial Statements for each financial year, giving a true and fair view of the state of affairs of the Company as at the end of the financial year and the profit or loss of the Company for the financial year.

The Board of Directors is responsible for ensuring that the Company maintains adequate accounting records, which are sufficient enough to prepare Financial Statements that disclose with reasonable accuracy the financial position of the Company. Further the Directors have the responsibility for the general supervision, control and administration of the affairs and business of the Company.

The overall responsibility for the Company’s internal control systems lies with the Board of Directors. Whilst recognising the fact that there is no single system of internal control that could provide absolute assurance against material misstatements and fraud, the Directors confirm that the prevalent internal control systems are so designed that, there is reasonable assurance that the assets are safeguarded and transactions properly authorised and recorded so that material misstatement and irregularities are either prevented or detected within a reasonable period of

time. The Finance Committee under the guidance of the Management to monitor the effectiveness of the system of internal controls and recommends modifications where necessary.

The Directors are responsible to ensure that the Financial Statements presented in the Annual Report give a true and fair view of the state of affairs of the Company as at 31st March 2015 and the profit/loss for the year then ended.

The Directors confirm that the Financial Statements have been prepared and presented in accordance with Sri Lanka Accounting Standards and that they provide the information as required by the Companies Act No. 07 of 2007.

The Directors confirm that suitable accounting policies have been used and applied consistently and that all applicable accounting standards have been followed in the preparation of the Financial Statements. Furthermore, reasonable and prudent judgments and estimates have been made in the preparation of these Financial Statements.

Directors confirm that to the best of their knowledge, all taxes, statutory dues and levies payable by the Company as at the Balance Sheet date have been paid for or where relevant provided for.

By Order of the Board,

SecretariesChart Business Systems (Private) Ltd.27th May 2015



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TO THE SHARE HOLDERS OF KANRICH FINANCE LIMITED

Report on the Financial Statements

We have audited the accompanying financial statements of Kanrich Finance Limited, which comprise the statement of financial position as at 31st March 2015 and the statement of profit and loss and other comprehensive income, statement of changes in equity and, cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory information exhibited.

Board’s Responsibility for the Financial Statements

The Board of Directors (‘Board’) is responsible for the preparation of these Financial Statements that presents fairly a framework in accordance with Sri Lanka Accounting Standards and for such internal control as Board determines is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility,

Our responsibility is to express an opinion on these Financial Statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Financial Statements. The procedures selected depends on the auditors’ judgment, including the assessment of the risks of material misstatement of the Financial Statements, whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity’s preparation of the Financial Statements that presents fairly framework in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Board, as well as evaluating the overall presentation of the Financial Statements.

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

Opinion

In our opinion, the Financial Statements give a hive and fair view of the financial position of the Company as at 31st March 2015 and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Report on Other Legal and Regulatory Requirements

As required by section 163 (2) of the Companies Act No. 0 7 2007, we state the following:

a) The basis of opinion and scope and limitations of the audit are as stated above.

b) In our opinion:

– 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,

– The Financial Statements of the Company, comply with the requirements of section 151 of the companies Act.

CHARTERED ACCOUNTANTS. Colombo, 28th May 2015 Bv/pmb/su

B V Fernando B.Com. (Cey), F.C.A., I B D Jayasinghe F.C.A., P.D. Gunaratne F.C.A. B.Sc., (B.Admn)

N Nagasinghe B.Sc., F.C.A., Y M Ariyarathne A.C.A., B.A. (Hons) Econ.

No. 70/B/8/SP, Y.M.B.A. Old Building, Borella,Colombo 08, Sri Lanka.Tel: 011-4614017, 0112-685901, 0777-356025Fax: 011-4614017E mail: [email protected]@gmail.com

CHARTERED ACCOUNTANTS.


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Year ended 31st March Notes

2015 Rs.

2014 Rs.

Income 6 2,854,119,806 1,441,162,747

Interest Income 2,514,991,620 1,296,154,234

Interest Expenses (828,728,373) (687,025,444)

Net Interest Income 1,686,263,247 609,128,790

Fee and Commission Income 331,082,833 143,093,481

Net Fee and Commission Income 7 331,082,833 143,093,481

Other Operating Income (Net) 8 8,045,353 1,915,032

Total Operating Income 2,025,391,433 754,137,303

Impairment (Charges)/Reversal for Loans and other Losses 9 (235,472,710) (61,935,016)

Net Operating Income 1,789,918,723 692,202,286

Operating Expenses

Personnel Costs 10 (415,493,382) (260,347,547)

Depreciation of Property & Equipment (24,836,714) (14,518,725)

Other Operating Expenses 11 (657,912,951) (376,476,563)

Profit before Value Added Tax on Financial Services 691,675,676 40,859,451

Value Added Tax on Financial Services (81,366,703) (27,578,268)

Profit before Taxation 610,308,973 13,281,183

Provision for Income Taxation 12 (123,149,691) 1,290,132

Profit for the Year 487,159,282 14,571,315

Other Comprehensive Income for the Year, Net of Taxes – –

Total Comprehensive Income for the Year 487,159,282 14,571,315

Earnings Per Share (Rs.) 13 6.59 0.20

Accounting Policies and Notes from pages 80 to 128 form an integral part of these Financial Statements.

Statement of Comprehensive Income Statement of Financial Position


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As at 31st March Notes

2015 Rs.

2014 Rs.

Assets

Cash and Bank Balances 15 815,995,451 57,991,081

Placement with Banks and Financial Institutions 16 125,364,949 69,108,989

Financial Investments – Held-to-maturity 17 489,623,891 168,860,575

Loans and Advances 18 9,499,962,076 3,846,056,002

Lease Rentals Receivable and Stock Out on Hire 19 57,784,784 36,747,678

Financial Investments – Available-for-Sale 20 772,980 772,980

Other Financial Assets 21 111,431,552 173,429,557

Real Estate Stock 22 278,123,629 550,755,106

Other Non-Financial Assets 23 58,401,454 42,279,008

Intangible Assets 24 32,456,378 34,701,199

Property, Plant and Equipment 25 87,155,490 69,551,790

Total Assets 11,557,072,634 5,050,253,966

Liabilities

Due to Banks and Financial Institutions 26 1,405,686,794 165,460,097

Due to Customers 27 1,596,676,207 1,010,353,032

Debt Instruments Issued and Other Borrowed Funds 28 7,161,753,454 3,400,092,945

Other Financial Liabilities 29 170,887,507 94,835,343

Current Tax Liabilities 113,991,252 –

Deferred Tax Liability 30 9,158,439 –

Other Liabilities 31 27,051,665 25,068,093

Retirement Benefit Liability 32 14,363,216 6,664,150

Total Liabilities 10,499,568,534 4,702,473,660

Shareholders' Funds

Stated Capital 33 672,993,044 472,993,044

Retained Earnings 34 337,993,817 (135,873,140)

Reserves 35 46,517,240 10,660,401

Total Shareholders' Funds 1,057,504,101 347,780,305

Total Liabilities and Shareholders' Funds 11,557,072,634 5,050,253,966

Commitments and Contingencies 1,000,000 318,214

Statement of Financial Position

These Financial Statements are in compliance with the requirements of the Companies Act No. 07 of 2007.

Chathura KumarapperumaChief Financial Officer

The Board of Directors is responsible for the preparation & presentation of these Financial Statements.

Signed for and on behalf of the Board by,

S H Piyasiri Shiran WeerasingheChairman Director/Chief Executive Officer


27th May 2015Colombo


78

Statement of Changes in Equity

Year ended 31st March

Stated Capital

Rs.

Reserve Fund

Rs.

General Reserve

Rs.

Retained Earnings

Rs.

Micro Insurance

Reserve FundRs.

Investment Fund

ReserveRs.

Total

Rs.

Balance as at 1st April 2013 472,993,044 619,080 280,000 (151,736,687) 720,581 – 322,876,018

Transfers during the Year – – – – – 9,420,033 9,420,033

Loans Written-off (Net) (Written off loans) – – – – (379,293) – (379,293)

Net Profit for the Year – – – 14,571,315 – – 14,571,315

Prior Year Adjustment – – – 1,292,232 – – 1,292,232

Balance as at 31st March 2014 472,993,044 619,080 280,000 (135,873,140) 341,288 9,420,033 347,780,305

Issue of Shares 200,000,000 – – – – – 200,000,000

Transfers during the Year – 728,566 – (31,244,015) 21,165,098 30,515,449 21,165,098

Written off Loans (Net) – – – – (16,552,274) – (16,552,274)

Prior Year Adjustment – – – 17,951,689 – – 17,951,689

Net profit for the year – – – 487,159,282 – – 487,159,282

Balances as at 31st March 2015 672,993,044 1,347,646 280,000 337,993,817 4,954,112 39,935,482 1,057,504,101



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Year ended 31st March Notes

2015 Rs.

2014 Rs.

Cash Flows from/(Used in) Operating Activities

Profit before Income Tax Expense 691,675,676 40,859,451

Adjustments for

Depreciation of Property, Plant and Equipment 24 & 25.3 24,836,714 14,518,725

Impairment Provision 9 235,472,710 12,168,395

Interest Cost on Finance Lease 3,780,107 4,797,073

Loss/(Profit) on Disposal of Property, Plant and Equipment 922,083 581,455

Provision/(Reversal) for Defined Benefit Plans 32 7,699,066 2,000,000

Dividend Received (18,800) (9,400)

Operating Profit before Working Capital Changes 964,367,557 74,915,699

(Increase)/Decrease in Loans and Advances (5,822,280,103) (1,639,896,583)

(Increase)/Decrease in Lease Rentals Receivable and Stock Out on Hire (25,307,005) 7,615,761

(Increase)/Decrease in Other Financial Assets 61,998,005 551,210

(Increase)/Decrease in Other Non-Financial Assets (16,122,446) (6,932,954)

Increase/(Decrease) in Amounts Due to Customers 586,323,175 141,969,577

Increase/(Decrease) Debt Instruments Issued and Other Borrowed Funds 3,761,660,509 1,782,465,859

Increase/(Decrease) in Other Financial Liabilities 78,035,736 46,678,600

Cash Generated from Operations (411,324,572) 407,367,169

Retirement Benefit Liabilities Paid – (125,000)

Taxes Paid (71,211,691) (28,313,247)

Net Cash from/(Used in) Operating Activities (482,536,263) 378,928,922

Cash Flows from/(Used in) Investing Activities

Acquisition of Property, Plant and Equipment (21,335,628) (24,325,942)

Acquisition of Intangible Assets (4,170,711) (1,894,556)

Proceeds from Sales of Property, Plant and Equipment 5,245,000 3,395,000

Sale/(Purchase) of Placement with Other Banks and Financial Institutions (56,255,960) (56,708,005)

Sale/(Purchase) of Financial Investments- Available-for-Sale – (768,280)

Purchase/(Sale) of Real Estate Stocks 226,182,174 138,077,926

Sale/(Purchase) of Financial Investments – Held-to-Maturity (320,763,316) (96,134,734)

Dividend Received 18,800 9,400

Net Cash Flows from/(Used in) Investing Activities (171,079,640) (38,349,191)

Cash Flows from/(Used in) Financing Activities

Payment under Finance Lease Liabilities 26.2 (9,194,065) (8,320,719)

Net Cash Flow from Securitised Borrowings and Other Bank Facilities 672,880,890 (8,236,424)

Proceeds from Issue of Shares 200,000,000 –

Net Cash Flows from/(Used in) Financing Activities 863,686,826 (16,557,143)

Net Increase in Cash and Cash Equivalents 210,070,922 324,022,588

Cash and Cash Equivalents at the Beginning of the Year (88,087,826) (412,110,414)

Cash and Cash Equivalents at the End of the Year 121,983,096 (88,087,826)


Cash Flow Statement


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Notes to the Financial Statements Notes to the Financial Statements

1. Reporting Entity

1.1 Corporate Information

Kanrich Finance Ltd. (‘The Company’) is a public limited liability company incorporated on 27th October 1971 and domiciled in Sri Lanka.

It is a licensed Finance company regulated under the Finance Business Act No. 42 of 2011. The Company was re-registered under Companies Act No. 07 of 2007. The registered office of the Company and the principal place of business is situated at No.69, Ward Place, Colombo 07.

The staff strength of the Company as at 31st March 2015 was 1,208 (885 as at 31st March 2014).

1.2 Principal Activities and Nature of Operations

The Company provides a comprehensive range of financial services encompassing acceptance of deposits, granting lease facilities, hire purchase, mortgage loans and other credit facilities, real estate development and other related services.

There were no significant changes in the nature of the principal activities of the Company during the financial year under review.

1.3 Parent Enterprise and Ultimate Parent Enterprises

The Company’s Parent And Ultimate Parent Company is Mutual Holdings Ltd.

2. Basis of Preparation

2.1 Statement of Compliance

The Financial Statements of the Company have been prepared and presented in accordance with Sri Lanka Accounting Standards comprising SLFRS and LKAS (hereafter ‘SLFRS’), as issued by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 07 of 2007 and Finance Business Act No. 42 of 2011 and amendments thereto.

The Company did not adopt any inappropriate accounting treatments which are not in compliance with the requirements of the SLFRSs and regulations governing the preparation and presentation of the Financial Statements.

The formats used in the preparation of the Financial Statements and the disclosures made therein also comply with the specified format prescribed by the Central Bank of Sri Lanka for the preparation, presentation and publication of annual audited Financial Statements of licensed finance companies.

2.2 Responsibility of Financial Statements

The Board of Directors is responsible for the preparation and fair presentation of the Financial Statements of the Company as per the provision of the Companies Act No. 07 of 2007 and the Sri Lanka Accounting Standards.

The Board of Directors acknowledges this responsibility in the Statement of Financial Position on page 77.

These Financial Statements include the following components:

• Statement of Comprehensive Income providing the information on the financial performance of the Company for the year under review.

• Statement of Financial Position providing the information on the Financial Position of the Company as at year.

• A Statement of Changes in Equity depicting all changes in shareholders’ equity during the year under review.

• Statement of Cash Flow providing the information on the users on the ability of the Company to generate cash and cash equivalents and the needs to utilisation of those cash flows.

• Notes to the Financial Statements comprising Accounting Policies used and other Notes.

2.3 Date of Authorisation for Issue

The Financial Statements of Kanrich Finance Ltd. for the year ended 31st March, 2015 (including comparatives) were approved and authorised for issue by the Board of Directors on 27th May 2015.

2.4 Basis of Measurement

The Financial Statements have been prepared on a historical cost basis, except for the following material items in the Statement of Financial Position.


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Items Note No.

Available-for-Sale Financial Investments 20

Loans and Advances 18

Lease Rentals Receivable and Stock out on hire 19

Defined Benefit Obligation 32

2.5 Functional and Presentation Currency

The Financial Statements are presented in Sri Lankan Rupees which is the Company’s functional and presentation currency except when otherwise indicated.

2.6 Presentation of Financial Statements

The assets and liabilities of the Company presents in its Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. No adjustments have been made for inflationary factors affecting the Financial Statements. Maturity analysis is presented in Note 36 to the Financial Statements.

Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position only when there is a legally enforceable right to offset the recognised amount and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the Statement of Comprehensive Income unless required to be Permitted by an Accounting Standard or interpretation and as specifically disclosed in the Accounting Policies of the Company.

2.7 Materiality and Aggregation

Each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately unless they are immaterial as permitted by Sri Lanka Accounting Standards LKAS 1 ‘Presentation of Financial Statements’.

2.8 Offsetting

Assets and liabilities and income and expenses are not set-off unless permitted by the Sri Lanka Accounting Standards.

2.9 Significant Accounting Judgments, Estimates and Assumptions

The preparation of Company’s Financial Statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the accompanied disclosures and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

The most significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have most significant effect on the amounts recognised in the Financial Statements of the Company are as follows:

2.9.1 Going Concern

The Company’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, 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, the Financial Statements continue to be prepared on the going concern basis.

2.9.2 Fair Value of Financial Instruments

When the fair value of financial assets and financial liabilities recorded in the Statement of Financial Position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The valuation of financial instruments is described in more details in Note 45 to the Financial Statements.


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2.9.3 Impairment Losses on Loans and Advances

The Company review their individually significant loans and advances at each Reporting date to assess whether an impairment loss should be recorded in the Statement of Comprehensive Income. In particular, management’s judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the impairment allowance made.

Loans and advances that have been assessed individually and found to be not impaired and all individually insignificant loans and advances are then assessed collectively, by categorising them in to groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence, but the effects of which are not yet evident.

The collective assessment takes in to account data from the loan portfolio (such as levels of arrears, credit utilisation, loan-to-collateral ratios, etc.), and judgments on the effect of concentrations of risks and economic data (including levels of unemployment, inflation, interest rates, exchange rates).

The impairment loss on loans and advances is disclosed in more details in Notes 18.1 and 19.1 to the Financial Statements.

2.9.4 Impairment of Available-for-Sale Investments

The Company reviews their equity securities classified as available-for-sale investment at each Reporting

date to access whether they are impaired. This requires similar judgments as applied on the individual assessment of loans and advances.

The Company records impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Company generally treats significant as 20% or more prolonged as greater than six months. In addition the Company evaluates, among other factors, historical share price movements, duration and extent up to which the fair value of an investment is less than its cost.

2.9.5 Impairment of Non-Financial Assets

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions, conducted at arm observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

2.9.6 Deferred Tax Assets

Deferred income tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available against which such tax losses can be utilised. Significant judgment is required to determine the amount of deferred tax asset that can be recognised, based upon the likely timing and level of future taxable profits, together with the future tax planning strategies.

2.9.7 Defined Benefit Obligations

The cost of defined benefit plans are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation and long-term nature, a defined benefit obligation is subject to significant uncertainty.

2.9.8 Useful Lifetime of the Property, Plant and Equipment

Useful economic lives of Property, Plant and Equipment are estimated as disclosed in Note 3.3.7 to the Financial Statements.

3. Significant Accounting Policies

Recognition of Assets and Liabilities

Accounting policies set out below have been applied consistently to all periods presented in the Financial Statements of the Company unless otherwise indicated. Further,


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comparative year’s information and phrases have been rearranged, reclassified whenever necessary, to comply with the current year’s presentation.

3.1 Financial Instruments – Initial Recognition, Classification and Subsequent Measurement

3.1.1 Date of Recognition

All financial assets and liabilities except ‘regular way trades’ are initially recognised on the trade date, i.e., the date that the Company becomes a party to the contractual provisions of the instrument. ‘Regular way trades’, means 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. Those trades are initially recognised on the settlement date.

3.1.2 Classification and Initial Measurement of Financial Instruments

The classification of financial instruments at initial recognition depends on their purpose and characteristics and the management’s intention in acquiring them. Further details on classification of financial assets and financial liabilities are given under 3.1.3 and 3.1.4. respectively.

All financial instruments are measured initially at their fair value plus transaction costs that are directly attributable to acquisition are issue of such financial instruments except in the case of financial assets and financial liabilities at fair value through profit or loss as per the

Sri Lanka Accounting Standards LKAS 39 - (Financial Instrument Recognition and measurement). Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Statement of Comprehensive Income.

3.1.2.1 ‘Day 1’ Profit or Loss

When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Company immediately recognises the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in ‘Interest Income and Personnel Expenses’. In cases where fair value is determined using data which is not observable, or when the instrument is recognised, The ‘Day 1’ loss arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) over the remaining service period of the employees or tenure of the loan whichever is shorter.

3.1.3 Classification and Subsequent Measurement of Financial Assets

At the inception a financial assets is classified into one of the following categories:

a) At fair value through profit or loss

i. Financial assets held-for-trading

ii. Financial assets designated at fair value through profit or loss

b) Financial assets available-for-sale

c) Held-to-maturity financial investments

d) Loans and receivables .

The subsequent measurement of financial assets depends on their classification.

3.1.3.1 Financial Assets at Fair Value Thorough Profit or Loss

Financial assets at fair value through profit or loss include financial assets held-for-trading and financial assets designated upon initial recognition at fair value through profit or loss which are discussed below:

The Company has not designated any financial assets upon initial recognition as at fair value through profit or loss.

3.1.3.2 Financial Assets Held-for-Trading

Financial assets are classified as held-for-trading are if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together of short-term profit or position taking.

Financial assets held-for-trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in ‘Net trading income’. Interest and Dividend Income is recorded in ‘Net trading income’ according to the terms of the contract, or when the right to receive the payment has been established.

The Company evaluates its held-for-trading assets portfolio, to determine whether the intention to sell them in the near future is still appropriate. When the Company is unable to trade these financial assets due to inactive markets and management intention to sell them in the foreseeable future significantly changes, the Company may select to reclassify these financial assets.


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Financial assets held-for-trading include instruments such as Government Securities and Equity Instruments that have been acquired principally for the purpose of selling or repurchasing in the near term.

The Company has not classified any financial assets held-for-trading to the Financial Statements.

3.1.3.3 Financial Assets Designated at Fair Value through Profit or Loss (FVtPL)

Financial assets designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair vale. Changes in fair value are recorded in ‘Net gain or loss on financial instrument designated at fair value through profit or loss’. Interest earned is accrued in ‘Interest Income’, using the Effective Interest rate (EIR) method, while dividend income is recorded in ‘other operating income’ when the right to payment has been established.

The Company has not designated any financial asset upon initial recognition as designated at fair value through profit or loss or Company has not used fair value hedge or credit derivative instruments.

3.1.3.4 Available-for-Sale Financial Assets

Available-for-sale investments include non-quoted equity securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. The Company has not designated any loans or receivable as available-for-sale.

After initial measurement available-for-sale financial investments are subsequently measured at fair value. Unrealised gains and losses are recognised directly in Equity through ‘other comprehensive income/expense’ in the ‘available-for-sale reserve’. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the Income Statement in ‘other operating income’. Where the Company holds more than one investment in the same security, they are deemed to be disposed of on a weighted average basis. Interest earned whilst holding ‘available-for-sale financial investments’ is reported as ‘interest income’ using the Effective Interest Rate (EIR). Dividends earned whilst holdings ‘available-for-sale Financial Statements’ are recognised in the Statement of Comprehensive Income as ‘Other Operating Income’ when the right of payment has been established. The losses arising from impairment of such investments are recognised in the Statement of Comprehensive Income in ‘Impairment charges/(reversal) for loans and other losses’ and reclassified from the ‘ available-for-sale reserve’.

Details of ‘financial investments –available-for-sale’ are given in Note 20 to the Financial Statements.

3.1.3.5 Held-to-Maturity Financial Assets

Held-to-Maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which have the intention and ability to hold-to-maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the EIR, less impairment.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in ‘interest income’ in the Statement of Comprehensive Income. The losses arising from impairment of such investments are recognised in the Statement of Comprehensive Income in ‘impairment charges for loans and other losses’.

Details of ‘financial assets held to maturity’ are given in Note 17 to the Financial Statements.

3.1.3.6 Loans and Receivables and Lease and Stock Out on Hire

Loans and receivables and lease and stock out on hire include financial assets with fixed or determinable payments that are not quoted in an active market, other than:-

• Those that the Company intends to sell immediately or in the near term and those that the Company, upon initial recognition, designates as at fair value through profit or loss;

• Those that the Company, upon initial recognition, designates as available-for-sale;

• Those for which the Company may not recover substantially all of its initial investment, other than because of credit deterioration.

After initial measurement, loans and receivable and lease and stock out on hire are subsequently measured at amortised cost using the Effective Interest Rate (EIR), less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest income’ in the Statement of Comprehensive Income.



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The losses arising from impairment are recognised in the Income Statement in ‘Impairment (Charges) / Reversal for loans and other losses’ in the Statement of Comprehensive Income.

Details of ‘loans and receivables and leases and stock out on hire’ are given in Notes 18 and 19 to the Financial Statement.

3.1.3.7 Cash and Cash Equivalents

Cash and cash equivalent include cash and bank balances and money at call and short notice.

Cash and cash equivalents are carried at amortised cost in the Statement of Financial Position.

Details of Cash and cash equivalents are given in Note No. 15 to the Financial Statements.

For the purpose of Cash Flow Statement, Cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdraft. Investment with short maturities i.e. three months or less from the date of acquisition also treated as cash equivalents.

3.1.4 Classification and Subsequent Measurement of Financial Liabilities

At inception a financial liability is classified into one of the following categories:

• At fair value through profit or loss

- Held-for-trading; or

- Designated at fair value through profit or loss;

• At amortised cost.

The subsequent measurement of financial liabilities depends on their classification.

3.1.4.1 Financial Liabilities at Amortised Cost

Financial instruments issued by the Company that are not designated at fair value through profit or loss, are classified as liabilities under ‘due to bank,’ ‘due to other customers’ and ‘debt issued and other borrowed fund’ as appropriate, where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares at amortised cost using the EIR method.

After initial recognition such financial liabilities are substantially measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in ‘interest expenses’ in the Statement of Comprehensive Income. Gains and losses are recognised in the Statements of Comprehensive Income when the liabilities are derecognised as well as through the EIR amortisation process.

The details of the Company’s financial liabilities at amortised cost are shown in Notes No. 26, 27,28 and Note 29 to the Financial Statements.

3.1.5 Reclassification of Financial Instruments

Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortised cost.

For a financial asset reclassified out of the ’available-for-sale’ category, any previous gain or loss on that asset

that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to the Statement of Comprehensive Income.The Company may reclassify a non–derivative trading asset out of the ‘held-for-trading’ category and into the ‘loans and receivables’ category if it meets the definition of loans and receivables and the Company has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified and if the Company subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Reclassification is at the election of management and is determined on an instrument by instrument basis. The Company does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition.

The Company does not reclassify any financial asset during the year.



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3.1.6 Derecognition of Financial Instrument

(i) Financial Assets

A 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 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 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.

(ii) Financial Liabilities

A financial liability is de recognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de recognition 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.

3.1.7 Determination of Fair Value

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.

Fair Value Measurement Hierarchy

Level 1

The fair value for financial instruments traded in active markets at the Reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

Level 2

For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison with similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models.

Level 3

Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models.

Also, profit or loss calculated when such financial instruments are first recorded (‘Day 1’ profit or loss) is deferred and recognised only when the inputs become observable or on de recognition of the instrument. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 44 to the Financial Statements.

3.1.8 Impairment of Financial Assets

The Company assesses at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an ‘incurred loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include: indications that the borrower or a group of borrowers is experiencing



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significant financial difficulty; the probability that they will enter bankruptcy or other financial reorganisation; default or delinquency in interest or principal payments; and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

3.1.8.1 Financial Assets Carried at Amortised Cost

For financial assets carried at amortised cost (such as loans and advances to customers as well as held-to-maturity investments), the Company first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

The interest income is recorded as part of ‘Interest and Similar Income’. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write–off is later recovered, the recovery is credited to the Other Operating Income’.

The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Company’s internal credit grading system that considers credit risk characteristics such as asset type and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based

and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows reflect and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

3.1.8.2 Available-for-Sale Financial Investments

For available-for-sale financial investments, the Company assesses at each Reporting date whether there is objective evidence that an investment is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would also include a ‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. The Company treats ‘significant’ generally as 20% and ‘prolonged’ generally as greater than six months. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in equity through Other Comprehensive Income is removed from equity and recognised in the Statement of Comprehensive Income. Increases in the fair value after impairment are recognised in Other Comprehensive Income.



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(i) Renegotiated Loans

Where possible, the Company seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original EIR.

(ii) Collateral Valuation

The Company seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and based on the Company’s quarterly reporting schedule, however, some collateral, for example, cash or securities relating to margining requirements, is valued daily.

To the extent possible, the Company uses active market data for valuing financial assets, held as collateral. Other financial assets which do not have a readily determinable market value are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third-parties such as valuers, audited Financial Statements, and other independent sources.

(iii) Offsetting Financial Instruments

Financial 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 the Statement of Financial Position.

3.2 Finance Leases and Hire Purchase Agreements

The determination of whether an arrangement is a lease, or it contains a lease , is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

3.2.1 Finance Leases

Assets leased to customers, which transfer substantially all risk and rewards associated with the ownership other than legal title are classified as finance lease in accordance with the LKAS 17 - ‘Leases‘.

Amount receivable under finance leases net of unearned interest and provision for impairment is shown as finance lease receivables in the Statement of Financial Position.

3.2.2 Hire Purchase Agreements

Advances granted under agreements that transfer substantially all risks and rewards associated with ownership other than legal title, are classified as stock out on hire receivables.

Amount receivable under hire purchases net of unearned interest and provision for impairment is shown as stock out on hire receivable in the Statement of Financial Position.

3.3 Property, Plant and Equipment

Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to be used during more than one period. The Company applies the requirements of Sri Lanka Accounting Standard – LKAS 16 - ‘Property, Plant and Equipment’ in accounting for these assets.

3.3.1 Basis for Recognition

Property, Plant and Equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the Company and the cost of the asset can be reliably measured.

3.3.2 Measurement

An item of Property, Plant and Equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and cost incurred subsequently to add to, replace part of, or service it. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised



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as part of computer equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.

3.3.3 Cost Model

The Company applies cost model to all Property, Plant and Equipment, and records at cost of purchase or construction together with any incidental expenses there on less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing part of the equipment when that cost is incurred, if the recognition criteria are met.

3.3.4 Subsequent Cost

The subsequent cost of replacing a component of an item of Property, Plant and Equipment is recognised in the carrying amount of an item, if it is probable that the future economic benefits embodied within that part will flow to the Company and it can be reliably measured. The costs of the day-to-day servicing of Property, Plant and Equipment are changed to the statement of Comprehensive Income as incurred. Costs incurred in using or redeploying an item is not included under carrying amount of an item.

3.3.5 Restoration Cost

Expenditure incurred on replacement, repairs or maintenance of Property, Plant and Equipment in order to restore or maintain the future economic benefits expected from the originally assessed standard of performance is recognised as an expense when incurred.

3.3.6 Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognising of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset), is recognised in ‘Other Income/Expenses’ in profit or loss in the year the asset is derecognised.

When replacement costs are recognised in the carrying amount of an item of Property, Plant and Equipment, the remaining carrying amount of the replaced part is derecognised as required by Sri Lanka Accounting Standard – LKAS 16 - on ‘Property, Plant and Equipment’.

3.3.7 Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of Property and Equipment since this method most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Freehold land is not depreciated. The estimated useful lives are as follows:

Asset Category Period

Furniture and Fittings 4 years

Office Equipment 5 years

Motor Vehicles 8 years

Computer Equipment 4 years

The depreciation rates are determined separately for each significant part of an item of Property, Plant and Equipment and commence to depreciate when it is available for

use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is derecognised. Depreciation methods, useful lives and residual values are reassessed at each Reporting date and adjusted if appropriate.

3.4 Intangible Assets

An intangible asset is an identifiable monetary asset without physical substance held for use in production or supply of goods or services, for rental to others or for administrative purposes.

3.4.1 Basis of Recognition

An intangible asset is recognised if it is probable that the future economic benefits that are attributable to the asset will flow to the entity and the cost of the assets can be measured reliably. An intangible asset is initially measured at cost.



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3.4.2 Computer Software

Cost of all computer software licensed for use by the Company, which are not integrally related to associated hardware, which can be clearly identified, reliably measured and its probable that they will lead to future economic benefits, are included in the Statement of Financial Position under the category intangible assets and carried at cost less accumulated amortisation and any accumulated impairment losses.

3.4.3 Subsequent Expenditure

Expenditure incurred on software is capitalised only when it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and this expenditure can be measured and attributed to the asset reliably. All other expensed as incurred.

3.4.4 Derecognised of Intangible Assets

The carrying amount of an item of intangible asset is derecognised on disposal or when no future economic benefits are expected from its use. The gain or loss arising from derecognition of an item of intangible asset is included in the Income Statement when the item is derecognised.

3.4.5 Amortisation of Intangible Asset

Intangible assets, except for goodwill, are amortised on a straight-line basis in the Income Statement from the date when the asset is available for use, over the best estimate of its useful economic life based on a pattern in which the assets economics benefits are consumed by the Company. Amortisation methods,

useful lives and residual values are reviewed at each Reporting date and adjusted if appropriate. The Company assume that there is no residual value for its intangible assets.

Asset Category Period

Computer Software 10 years

3.4.6 Impairment of non–financial assets

The carrying amounts of the Company’s non-financial assets, other than deferred tax assets are reviewed at each Reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses of continuing operations are recognised in profit or loss under those expense categories consistent with the function of the impaired asset, except for property previously revalued where the gain or

loss on revaluation was taken to equity. In this case, the impairment is also recognised in equity up to the extent of any previously recognised revaluation gains.

For assets excluding goodwill, an assessment is made at each Reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation/amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss.

3.4.7 Deposits Due to Customers

These include fixed deposits only. Subsequent to initial recognition deposits are measured at their amortised cost using the effective interest method. Interest paid/payable on these deposits is recognised in profit or loss.



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3.4.8 Debt Issued and Other Borrowed Funds

Financial instruments issued by the Company that are not designated at fair value through profit or loss, are classified as liabilities under ‘Debt Issued and Other Borrowed Funds’, where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of owned equity shares.

After initial measurement, debt issued and other borrowings are subsequently measured at amortised cost using the EIR. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR.

3.4.9 Other Liabilities

Other liabilities include fees, expenses and amount payable to suppliers’. These liabilities are recorded at amounts expected to be payable at the Reporting date.

3.4.10 Provisions

When the Company has a present obligation (legal or constructive) as a result of a past event, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the Company can reliably estimate the amount of the obligation, we recognise it as a provision in accordance with LKAS 37 - ‘Provisions, Contingent Liabilities and Contingent Asset’.

3.5 Employee Benefits

3.5.1 Defined Benefit Plan

A defined benefit plan is a post employment benefit plan other than a defined contribution plan. The Company measures the present value of the promised retirement benefits for gratuity, which is a defined benefit plan with the advice of an independent professional Actuary using the Projected Unit Credit (PUC) method as required by Sri Lanka Accounting Standard LKAS 19 - on ‘Employees Benefits’. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflow using interest rates that apply to the currency in which the benefits will be paid.

The Company policy is to perform actuarial valuation once in every three years and the last valuation was done as of 31st March 2014.

Provision has been made for retirement gratuities from the first year of service for all employees in conformity with the LKAS 19 - ‘Employees Benefits’.

However, under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of 5 years of continued service.

3.5.2 Defined Contribution Plans

Employees are eligible for Employees’ Provident Fund contributions and Employees’ Trust Fund contributions in line with the respective statutes and regulations. The Company contributes 12% and 3% of gross emoluments of employees to the Employees’ Provident Fund and Employees’ Trust Fund respectively.

3.6 Events after the Reporting Period

Events after the Reporting period are those events, favourable and unfavourable, that occur between the Reporting date and the date when the Financial Statements are authorised for issue.

In this regard, all material and important events that occurred after the Reporting period have been considered and appropriate disclosures are made in the Note 49 to the Financial Statements where necessary.

3.7 Commitments and Contingencies

All discernible risks are taken into account in determining the liabilities of the Company. 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 readily measured as defined in the Sri Lanka Accounting Standard - LKAS 37 - on ‘Provisions, Contingent Liabilities and Contingent Assets’.

Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless its occurrence is remote.

All other capital commitments and contingencies, for which the Company is liable, are disclosed in Notes 37 to the Financial Statements.

3.8 Earnings per Share (EPS)

Basic EPS 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 period.



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Details of earnings per share are given in the Note 13 to the Financial Statements.

3.9 Segment Reporting

An 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 incur expenses, that relate to transactions with any of the Company’s other components, whose operating results are reviewed regularly by the Company management committee (being the chief operating decision-maker) to make decisions about resources allocated to each segment and assess its performance and for which discrete financial information is available.

No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Company’s total revenue in 2014 or 2015.

Detailed information on the results of each reportable segment as required by the Sri Lanka Accounting Standard – SLFRS 8 on Operating Segments, is provided in the Note 43 to the Financial Statements.

3.10 Effect of Accounting Standard Issued but not effective as at Reporting Date

The following SLFRSs have been issued by the Institute of Chartered Accountants of Sri Lanka that have an effective date in the future and have not been applied in preparing these Financial Statements. Those SLFRS will have an effect on the accounting policies currently adopted by the Company and may have an impact on the future Financial Statements.

i) SLFRS 9 - Financial Instruments

SLFRS 9 reflects the replacement of LKAS 39 and applies to classification and measurement, impairment and hedge accounting of financial assets and liabilities.

SLFRS 9 will change the below:

- New impairment requirements for all financial assets that are not measured at fair value through profit or loss

- Amendments to the previously finalised classification and measurement requirements for financial assets

Under SLFRS 9, the impairment model is a more ‘forward-looking’ model in that a credit event no longer has to occur before credit losses are recognised. For financial assets measured at amortised cost or fair value through other comprehensive income (FVTOCI), an entity will now always recognise (at a minimum) 12 months of expected losses in profit or loss. Lifetime expected losses will be recognised on these assets when there is a significant increase in credit risk after initial recognition.

In other changes, SLFRS 9 also introduces additional application guidance to clarify the requirements for contractual cash flows of a financial asset to be regarded as giving rise to payments that are Solely Payments of Principal and Interest (SPPI).

A third measurement category has also been added for debt instruments – FVTOCI, which applies to debt instruments that meet the SPPI contractual cash flow characteristics test and where the entity is holding the debt instrument to both collect the contractual cash flows and to sell the financial assets.

This standard will be effective for the financial period beginning on or after 01st January 2018.

The first time application of SLFRS 9 has a wide and potentially very significant impact on the accounting for financial instruments. The new impairment requirements are likely to bring significant changes for impairment provisions for loans and advances, lease rentals receivables, hire purchases and other financial assets not measured at fair value through profit or loss.

The entity has not yet made a detailed assessment of the impact of this standard.

ii) SLFRS 15 - Revenue from Contracts with Customers

An entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This means that revenue will be recognised when control of goods or services is transferred, rather than on transfer of risks and rewards as it is currently the case under LKAS 18 - ‘Revenue’.

To accomplish this, SLFRS 15 requires the application of a five-step model:

1. Identify the contract

2. Identify the performance obligations

3. Determine the transaction price

4. Allocate the transaction price to each performance obligation

5. Recognise revenue when each performance obligation is satisfied

This standard will be effective for the financial period beginning on or after 1st January 2017.



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The entity has not yet made a detailed assessment of the impact of this standard.

iii) The following new Accounting Standards and amendments to existing standards are not expected to have an impact on the Financial Statements,

- Agriculture : Bearer Plants (Amendments to LKAS 16 on ‘Property, Plant and Equipment’ and LKAS 41 on ‘Agriculture’) – effective date – 01st January 2016.

- Regulatory Deferral Assets – SLFRS 14 – effective date 01st January 2016

4. Significant Accounting Policies – Recognition of Income and Expenses

4.1 Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and such revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

4.2 Interest & Similar Income and Expense

For all financial instruments measured at amortised cost, interest bearing financial assets classified as available-for-sale and interest income or expense is recorded using the EIR. EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability.

The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Company revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as ’Interest and similar income’ for financial assets and ’Interest and Similar Expense’ for financial liabilities.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

4.3 Fee and Commission Income

The Company earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

4.3.1 Fee Income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

4.3.2 Fee Income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the purchase or sale of business is recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

4.4 Dividend income

Dividend income is recognised when the right to receive the payment is established

4.5 Net Trading Income

Results arising from trading activities include interest income or expense and dividends for financial assets.

4.6 Net Trading Income from Government Securities and Securities Purchased under Resale Agreements

Discounts/premium on treasury bills and treasury bonds are amortised over the period to reflect a constant periodic rate of return. The coupon interest on treasury bonds is recognised on an accrual basis. The interest income on securities purchased under resale agreements is recognised in the Statement of Comprehensive Income on an accrual basis over the period of the agreement.



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4.7 Gain or Losses on Disposal of Property, Plant and Equipment, Investments in Government Securities

Gains or losses resulting from the disposal of property, plant and equipment, investments in Government securities, dealing securities and investment securities are accounted for on cash basis in the Statement of Comprehensive Income, in the period in which the sale occurs.

4.8 Recovery of Bad and Doubtful Debts Written Off

Recovery of amounts written off as bad and doubtful debts are recognised on a cash basis.

4.9 Other Income

Other income is recognised on an accrual basis.

4.10 Borrowing Cost

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

4.11 Significant Accounting Policies - Tax Expense

4.11.1 Income Tax Expenses

As per the Sri Lanka Accounting Standard - LKAS 12 on ‘Income Taxes’, tax expense (tax income) is the aggregate amount included in

determination of profit or loss for the period in respect of current and deferred taxes. Income tax expense is recognised in the Statement of Comprehensive Income except to the extent it relates to items recognised directly in equity or in Other Comprehensive Income (OCI), in which case it is recognised in equity or in OCI.

4.11.2 Current Taxes

Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current as well as prior years. The tax rates and tax laws used to compute the amounts, are those that are enacted or substantially enacted by the Reporting date. Accordingly, provision for taxation is made on the basis of the accounting profit for the year as adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto.

4.11.3 Deferred Taxation

Deferred tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except;

Where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

In respect of taxable temporary differences associated with investments in subsidiaries,

associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax assets and unused tax losses can be utilised: except

• Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.



95

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the Reporting date.

The deferred tax relating to items recognised directly in equity are also recognised in equity, and not in the Statement of Comprehensive Income.

4.11.4 Value Added Tax on Financial Services

The base for the computation of Value Added Tax on Financial Services is the accounting profit before emoluments paid to employees and income tax, which is adjusted for the depreciation computed on prescribed rates. The amount of Value Added Tax charged in determining the profit or loss for the period is given in the Statement of Comprehensive Income on page 76.

4.11.5 Nations Building Tax on Financial Services

The base for the Computation of Nation Building Tax on Financial Services is the accounting profit before emoluments paid to employees and income tax, which is adjusted for the depreciation computed on prescribed rates. The amount of Nation Building Tax Charged in determining the profit or loss for the period is given in the Statement of Comprehensive Income on Page 76.

4.12 Crop Insurance Levy (CIL)

As per the provisions of Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from 1st April 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

5. Statement of Cash FlowThe Statement of Cash Flow has been prepared by using the ‘Indirect Method’, in accordance with Sri Lanka Accounting Standards – LKAS 7 on ‘Statement of Cash Flows’ whereby gross cash receipts and gross cash payments of operating activities, finance activities and investing activities have been recognised.



96

Year ended 31st March 2015 Rs.

2014 Rs.

6. IncomeInterest Income 2,514,991,620 1,296,154,234

Net Fee and Commission Income 331,082,833 143,093,481

Other Operating Income 8,045,353 1,915,032

2,854,119,806 1,441,162,747

6.1 Interest IncomeLoans and Advances 2,449,349,773 1,263,824,690

Lease Rentals Receivable and Stock Out on Hire 6,227,440 9,684,296

Financial Investments – Held-to-Maturity 57,509,489 17,803,093

Interest Income Accrued on Impaired Financial Assets 1,904,918 4,842,155

Total Interest Income 2,514,991,620 1,296,154,234

Notional Tax Credit for Withholding Tax on Government Securities on Secondary Market Transactions

The Inland Revenue Act No.10 of 2007, provided that a company which derives interest income from the secondary market transactions in Government Securities (on or after 1st April 2002 ) would be entitled to a notional tax credit (being one-ninth of the net interest income) provided such interest income forms part of the statutory income of the Company for that year of assessment.

Accordingly, the net interest income earned from the secondary market transactions in Government Securities for the year, has been grossed up in the Financial Statement and the resulting notional tax credit amounts to Rs. 3,058,662/- (2014 – Rs. 1,287,547/-).


2014 Rs.

7. Fee and Commission IncomeCredit-Related Fees and Commissions 144,289 21,126

Service Charges 163,386,081 54,981,275

Others 167,552,463 88,091,080

Total Fee and Commission Income 331,082,833 143,093,481

Net Fee and Commission Income 331,082,833 143,093,481



97



2014 Rs.

8. Other Operating IncomeIncome from Available-for-Sale Financial Investments – 422,185

Profit/(Loss) on Disposal of Property and Equipment (922,083) (581,455)

Dividend 18,800 9,400

Others 8,948,636 2,064,902

Total Other Operating Income 8,045,353 1,915,032

9. Impairment (Charges)/Reversal for Loans and Other LossesLoans and Advances 184,753,509 57,893,923

Lease Rentals Receivable and Stock Out on Hire 4,269,899 4,041,094

Impairment of Real Estate 46,449,302 –

235,472,710 61,935,016

10. Personnel CostsSalaries and Bonus 329,343,322 213,902,528

Employer’s Contribution to EPF 33,463,552 22,909,272

Employer’s Contribution to ETF 8,333,968 5,727,318

Gratuity Charge for the Year 7,699,066 2,000,000

Other Allowances and Staff-Related Expenses 36,653,475 15,808,429

415,493,382 260,347,547

11. Other Operating ExpensesDirectors’ Emoluments 14,850,000 16,050,000

Auditors, Fees 675,000 650,000

Professional and Legal Expenses 16,597,399 2,995,903

Office Administration and Establishment Expenses 221,724,627 148,486,973

Advertising and Business Promotion Expenses 10,622,896 24,775,949

Marketing and Distribution 311,349,690 124,219,891

Other Expenses 82,093,339 59,297,847

657,912,951 376,476,563

12. Income Tax ExpensesIncome Tax Expenses on Profit for the Year 105,000,000 –

Under/(Over) Provision of Current Taxes in Respect of Previous Years 8,991,252 –

Deferred Taxation Charge/(Reversal) (Note 30) 9,158,439 –

123,149,691 –


98


2014 Rs.

12.1 Reconciliation of Accounting Profit to Income Tax ExpensesProfit Before Tax 610,308,973 13,281,183

Add: Tax Effect of Non-Deductible Expenses 150,011,718 128,322,784

Less: Tax Effect of Allowable Credits (68,754,926) 92,422,005

Tax Effect of Deductible Expense (316,565,765) (234,025,972)

Assessable Income 375,000,000 –

Less: Qualifying Payments – –

Taxable Income 375,000,000 –

Income Tax Expense @ 28% 105,000,000 –

Effective Tax Rate (Excluding Deferred Tax) – –

The Company is liable for income tax at 28% on the taxable income for the current year (2014 – 28%).

The Company has taken into account the full benefit of capital allowances arising in terms of Section 23 of the Inland Revenue Act No. 10 of 2006 and amendments there to in determining the taxation on profits for the year.

The Company’s properties have not been revalued in the financial year 2014/15.

13. Earnings Per Ordinary ShareBasic earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders by weighted average number of ordinary shares outstanding during the year, as per LKAS 33 – ‘Earnings Per Share’.


2014 Rs.

Amounts Used as the Numerators:

Profit/(Loss) Attributable to Ordinary Shareholders for Basic Earnings Per Share 487,159,282 14,571,315

Number of Ordinary Shares Used as Denominators for Basic Earnings Per Share

Weighted Average Number of Ordinary Shares 73,950,778 72,700,778

Basic Earnings per Ordinary Share (Rs.) 6.59 0.20



99

14. Analysis of Financial Instruments by Measurement Basis

14.1 As at 31st March 2014

HTM at Amortised Cost

Rs.

L&R at Amortised Cost

Rs.

AFS at Cost

Rs.

Total

Rs.

Assets

Cash and Bank Balances – 815,995,451 – 815,995,451

Placement with Banks and Financial Institutions – 125,364,949 – 125,364,949

Financial Investments – Held-to-Maturity 489,623,891 – – 489,623,891

Loans and Advances – 9,499,962,076 – 9,499,962,076

Lease Rentals Receivable and Stock Out on Hire – 57,784,784 – 57,784,784

Financial Investments – Available-for-Sale – – 772,980 772,980

Other Financial Assets – 111,431,552 – 111,431,552

Total Financial Assets 489,623,891 10,610,538,812 772,980 11,100,935,684

Amortised CostRs.

TotalRs.

Liabilities

Due to Banks – – 1,405,686,794 1,405,686,794

Due to Customers – – 1,596,676,207 1,596,676,207

Debt Instruments Issued and Other Borrowed Funds – – 7,161,753,454 7,161,753,454

Other Financial Liabilities – – 170,887,507 170,887,507

Total Financial Liabilities – – 10,335,003,962 10,335,003,962

HFT - Held-for-Trading HTM - Held-to-Maturity L & R - Loans and Receivables AFS - Available-for-Sale


2014 Rs.

15. Cash and Bank BalancesCash in Hand 178,697,895 36,390,723

Balances with Banks 166,189,485 5,752,059

Money at Call and Short Notice 471,108,071 15,848,299

815,995,451 57,991,081



100


2014 Rs.

16. Placement with Banks and Financial InstitutionsInvestment in Fixed Deposits 125,364,949 69,108,989

125,364,949 69,108,989

17. Financial Investments – Held-to-MaturityGovernment of Sri Lanka Treasury Bills 471,928,012 159,380,203

Government of Sri Lanka Treasury Bonds 17,695,879 9,480,372

489,623,891 168,860,575

18. Loans and AdvancesReal Estate Loans 203,987,254 188,095,816

Term Loans 9,497,900,778 3,675,132,632

9,701,888,032 3,863,228,448

Less: Allowance for Impairment Losses (Note 18.1) (201,925,956) (17,172,446)

Net Loans and Advances 9,499,962,076 3,846,056,002

18.1 Allowance for Impairment LossesAs at 1st April 17,172,446 17,311,882

Charge/(Reversal) for the Year 184,753,510 (139,436)

As at 31st March 201,925,956 17,172,446

Individual Impairment 184,753,510 (139,436)

Collective Impairment – –

Total 184,753,510 (4,371,877)

19. Lease Rentals Receivable and Stock Out on HireGross Rentals Receivable

- Lease Rentals 74,340,135 21,307,333

- Amounts Receivable from Hirers 36,667,440 52,479,024

111,007,575 73,786,357

Less: Unearned Income (23,314,867) (13,275,608)

Net Rentals Receivable 87,692,708 60,510,749

Less: Allowance for Impairment Losses (Note 19.1) (24,868,566) (20,598,668)

Less: Rentals Received in Advance (1,291,342) –

Less: Finance Charges in Advance (3,748,015) (3,164,403)

Total Net Rentals Receivable (Notes 19.2 & 19.3) 57,784,784 36,747,678



101


2014 Rs.

19.1 Allowance for Impairment LossesAs at 1st April 20,598,668 18,041,815

Charge/(Reversal) for the Year 4,269,898 2,556,853

As at 31st March 24,868,566 20,598,668

Individual Impairment 4,269,898 2,556,853

4,269,898 2,556,853

Within One Year

Rs.

1 - 5 Years

Rs.

Over 5 Years

Rs.

Total

Rs.

19.2 As at 31st March 2015Gross Rentals Receivable

- Lease Rentals 10,789,642 51,937,613 11,612,880 74,340,135

- Amounts Receivable from Hirers 11,600,284 25,067,157 – 36,667,440

22,389,925 77,004,770 11,612,880 111,007,575

Less: Unearned Income (488,779) (19,463,208) (3,362,880) (23,314,867)

Net Rentals Receivables 21,901,146 57,541,562 8,250,000 87,692,708

Less: Allowance for Impairment Losses (24,868,566)

Less: Rental Received in Advance (1,291,342)

Less: Finance Charges in Advance (3,748,015)

Total Net Rentals Receivable 57,784,784

Within One Year

Rs.

1 - 5 Years

Rs.

Over 5 Years

Rs.

Total

Rs.

19.3 As at 31st March 2014Gross Rentals Receivable

- Lease Rentals 37,195,331 37,144,804 – 74,340,135

- Amounts Receivable from Hirers 11,244,558 25,422,883 – 36,667,440

48,439,889 62,567,687 – 111,007,575

Less: Unearned Income (26,259,434) (24,237,393) – (50,496,826)

Net Rentals Receivables 50,940,499 18,013,793 – 60,510,749

Less: Allowance for Impairment Losses (20,598,668)

Less: Finance Charges in Suspense (3,164,403)

Total Net Rentals Receivable 36,747,678



102

20. Financial Investments – Available-for-Sale

2015 2014

No. of Shares

Cost

Rs.

No. of Shares

Cost

Rs.

Unquoted Equities

Credit Information Bureau 47 4,700 47 4,700

City Finance Corporation Ltd. 76,828 768,280 76,828 768,280

Total 772,980 772,980

2015 Rs.

2014 Rs.

21. Other Financial Assets Refundable Deposits 18,329,000 23,695,729

Sundry Debtors 93,102,552 149,733,828

111,431,552 173,429,557

22. Real Estate StockReal Estate Stocks 324,572,931 550,755,106

Less: Allowance for Impairment (46,449,302) –

278,123,629 550,755,106

23. Other Non-Financial AssetsPrepayments 12,362,114 9,408,614

Prepaid Expenses 6,688,332 2,594,216

Receivable from Inland Revenue Department 39,351,008 30,276,178

58,401,454 42,279,008

24. Intangible AssetsCost

Cost as at 1st April 35,668,973 33,774,417

Additions and Improvements 4,170,711 1,894,556

Cost as at 31st March 39,839,684 35,668,973

Amortisation and Impairment

Amortisation as at 1st April 967,774 967,774

Charge for the Year 6,415,532 –

Accumulated Amortisation as at 31st March 7,383,306 967,774

Net Book Value as at 31st March 32,456,378 34,701,199



103

25 Property, Plant and Equipment

25.1 Gross Carrying Amounts

Balance As at 01.04.2014

Rs.

Additions

Rs.

Reclassified/ Transferred

Rs.

Disposals

Rs.

Balance as at31.03.2015

Rs.

Cost

Freehold Assets

Furniture & Fittings 35,980,706 7,272,578 (99,470) – 43,352,754

Equipment 16,030,309 4,291,310 99,470 – 20,222,149

Motor Vehicles & Accessories 13,729,763 – – – 13,729,763

Computer Hardware 21,785,550 9,132,240 – – 30,917,790

Leasehold Improvements 8,568,201 639,500 – – 9,207,701

96,094,529 21,335,628 – – 117,430,157

Assets on Finance Lease

Motor Vehicles 25,764,028 20,856,337 – (8,200,000) 38,420,365

Total Value of Depreciable Assets 121,858,557 42,191,965 – (8,200,000) 155,850,522


Rs.

Incurred During the Year

Rs.

Reclassified/ Transferred

Rs.

Disposals

Rs.


Rs.

25.2 Capital Work-in-ProgressCapital work-in-progress – – – – –


Rs.

Charge for the Period

Rs.

Transfers

Rs.

Disposals

Rs.


Rs.

25.3 Depreciation Depreciation

Freehold Assets

Furniture & Fittings 18,347,558 7,086,689 – – 25,434,247

Equipment 6,881,178 3,155,688 – – 10,036,866

Motor Vehicles & Accessories 12,565,631 148,681 – – 12,714,312

Computer Hardware 10,594,399 5,531,409 – – 16,125,808

37,279,756 15,922,467 – – 64,311,233

Assets on Finance Lease

Motor Vehicles 3,918,001 2,498,715 – (2,032,917) 4,383,799

41,197,757 18,421,182 – (2,032,917) 68,695,032



104


2014 Rs.

25.4 Net Book ValuesAt Cost

Furniture & Fittings 17,918,507 17,633,148

Equipment 10,185,283 9,149,131

Motor Vehicles & Accessories 1,015,451 1,164,132

Computer Hardware 14,791,982 11,191,151

Leasehold Improvements 9,207,701 8,568,201

On Finance Leases

Motor Vehicles 34,036,566 21,846,027

Capital Work-in-Progress – –

Total Carrying Amount of Property, Plant and Equipment 87,155,490 69,551,790

25.5 During the financial year, the Company acquired Property, Plant and Equipment to the aggregate value of Rs. 42,191,965/- (2014 – Rs. 24,325,943/-). Cash payments amounting to Rs. 21,335,628/- ( 2014 - Rs. 20,925,943/- ) was paid during the year for purchases of Property, Plant and Equipment.

25.6 The initial cost of fully–depreciated Property, Plant and Equipment which are still use as at Reporting date Rs. 38,847,720/- (2014 – Rs. 29,596,389/-).


2014 Rs.

26. Due to Banks and Financial InstitutionsBank Overdrafts 694,012,355 146,078,908

Securitised Borrowings, Syndicated Loans and Other Bank Facilities (Notes 26.1 (a), 26.1 (b)) 681,117,314 –

Finance Lease (Notes 26.2 , 26.3) 30,557,125 19,381,189

Total 1,405,686,794 165,460,097



105

Repayments

As at01.04.2014

Rs.

Loans Obtained

Rs.

InterestRecognised

Rs.Capital

Rs.Interest

Rs.

As at31.03.2015

Rs. Period Security

26.1 (a) Securitised Borrowings and Term Loans

Securitised Borrowings

First Capital Markets Ltd. Securitisation No. - 02

– 249,500,817 11,100,891 152,299,109 11,100,891 97,201,708 12 months Mortgage over Micro Loan

Rentals Receivables



Rentals Receivables



Rentals Receivables

– 987,877,086 18,028,015 358,071,985 18,028,015 629,805,101

Term Loans

Softlogic Finance PLC 75,000,000 3,531,473 23,687,787 3,531,473 51,312,213 12 months Corporate Guarantee of Mutual

Holdings Ltd.

– 75,000,000 3,531,473 23,687,787 3,531,473 51,312,213

– 1,062,877,086 21,559,488 381,759,772 21,559,488 681,117,314

Repayments

As at01.04.2013

Rs.

Loans Obtained

Rs.

InterestRecognised

Rs.Capital

Rs.Interest

Rs.

As at31.03.2014

Rs. Period Security

26.1 (b) Securitised Borrowings and Term Loans


8,236,424 – – 8,236,424 – – 24 months Mortgageover Lease,

Hire PurchaseReceivables

8,236,424 – – 8,236,424 – –

8,236,424 – – 8,236,424 – –



106

As at 01.04.2014

Rs.

New Leases Obtained

Rs.

Leases Settlements

Rs.

Repayments

Rs.

As at 31.03.2015

Rs.

26.2 Finance LeaseFinance Leases 19,381,190 20,370,000 5,867,500 3,326,565 30,557,125

19,381,190 20,370,000 5,867,500 3,326,565 30,557,125

Gross Liability 26,864,614 40,166,430

Finance Charges Allocated for Future Periods (7,483,424) (9,609,305)

Net Finance Lease Liability 19,381,189 30,557,125

2015 Rs.

2014 Rs.

26.3 Finance LeaseGross Liability 40,166,430 26,864,614

Less: Finance Charges Allocated for Future Periods (9,609,305) (7,483,424)

Net Liability 30,557,125 19,381,189

Repayable within One Year

Gross Liability 10,107,229 8,023,816


Net Liability 6,398,744 4,692,851

Repayable after One Year before Five Years

Gross Liability 30,059,201 18,840,797


Net Liability 24,158,381 14,688,339

27. Due to CustomersFixed Deposits 1,596,676,207 1,010,353,032

1,596,676,207 1,010,353,032

28. Debt Instruments Issued and Other Borrowed FundsOther Borrowings 7,161,753,454 3,400,092,945

7,161,753,454 3,400,092,945



107

2015 Rs.

2014 Rs.

29. Other Financial LiabilitiesAccrued Interest 157,338,886 89,960,531

Accrued Expenses 13,548,621 4,874,812

170,887,507 94,835,343

2015 2014

Temporary Difference

Rs.

Tax Effect

Rs.

Temporary Difference

Rs.

TaxEffect

Rs.

30. Deferred Tax Liability

Balance at the Beginning of the Year – – – –

Deferred Tax Effect on PPE 47,071,925 13,180,139 – –

Deferred Tax Effect on Actuarial Gain (14,363,216) (4,021,700) – –

Balance at the End of the Year 32,708,709 9,158,439 – –


2014 Rs.

31. Other LiabilitiesStatutory Payables 7,504,655 8,934,065

Others 19,547,010 16,134,028

27,051,665 25,068,093

32. Retirement Benefit ObligationsRetirement Benefit Obligations – GratuityBalance at the Beginning of the Year 6,664,150 4,789,150

Expenses Recognised During the Year 7,699,066 2,000,000

Payments Made During the Year – (125,000)

Balance at the End of the Year 14,363,216 6,664,150



108

33. Stated Capital

2015 2014

No. of Shares Rs. No. of Shares Rs.

33.1 Issued and Fully-Paid Ordinary Shares

At the Beginning of the Year 72,700,778 472,993,044 72,700,778 472,993,044

Issued During the Year 5,000,000 100,000,000 – –

At the End of the Year 77,700,778 572,993,044 72,700,778 472,993,044

33.2 12% Non-Cumulative Non-Redeemable Preference SharesAt the Beginning of the Year – – – –

Issued During the Year 5,000,000 100,000,000 – –

At the End of the Year 5,000,000 100,000,000 – –

Total 82,700,778 672,993,044 72,700,778 472,993,044

33.3 Rights of Shareholders

The holders of ordinary shares confer their right to receive dividends as declared from time to time and are entitled to one vote per share at the meeting.

All shares rank equally with regard to the Company’s residual assets.

2015 Rs.

2014 Rs.

34. Retained EarningsAs at 1st April (135,873,140) (151,736,687)

Prior Year Adjustment – 1,292,232

Notional Tax Adjustment 17,951,689 –

Transfers to Reserve Fund (31,244,015) –


As at 31st March 337,993,817 (135,873,140)

Retained earnings represents the undistributed earnings held by the Company to be used in the Company’s operations. This could be used to absorb future possible losses or dividends payable.



109

Reserve Fund

Rs.

General Reserve

Rs.

Micro InsuranceReserve Fund

Rs.

Investment Fund Reserve

Rs.

Total

Rs.

35. ReservesAs at 1st April 2013 619,080 280,000 720,581 – 1,619,661

Transfers to/(from) During the Year – – – 9,420,033 9,420,033

Loans Written-off (Net) – – (379,293) – (379,293)

As at 31st March 2014 619,080 280,000 341,288 9,420,033 10,660,401

Transfers to/(from) During the Year 728,566 – 21,165,098 30,515,449 52,409,113

Loans Written-off (Net) – – (16,552,274) – (16,552,274)

As at 31st March 2015 1,347,646 280,000 4,954,112 39,935,482 46,517,240

35.1 Reserve fund is a capital reserve which contains profits transferred as required by Section 3 (b) (ii) of Central Bank Direction No. 1 of 2003.


2014 Rs.

35.2 Investment Fund ReserveAs at 1 April 2014 9,420,033 –

Transfers to/(from) During the Year 30,515,449 9,420,033

As at 31st March 2015 39,935,482 9,420,033

As per Budget Proposal 2011, finance companies were required to establish and operate and Investment Fund Accounts (IFA) commencing from January 2011. According to the guidelines issued by the Central Bank of Sri Lanka, finance companies are required to transfer 8% of the profits calculate for the payment of Value Added Tax (VAT) on financial services and 5% of the profit before tax calculated for payment of income tax.


2014 Rs.

35.2.1 Utilisation of Investment Fund Account (IFA)

Balance Available for Utilisation (60,339) –

During the Year Transfers to IFA from Retained Earnings 30,515,449 9,420,033

During the Year Investments in Government Securities (8,215,508) (9,480,372)

Balance Available for Utilisation as at 31st March 22,239,602 (60,339)



110

Cumulative Utilisation of Investment Fund

35.2.2 Investments in Government Securities

Face Value

Rs.

Year of Maturity

Rs.

Cost of Investment

Rs.

Outstanding2015

Rs.

Treasury Bonds Over 7 Years

Entrust Securities Ltd. 1,650,000 2021 1,520,966 2,045,235




Total Investments in Government Securities 17,319,812 17,695,879 21,479,630

36. Maturity Analysis of Financial Assets and Financial LiabilitiesAn analysis of financial assets and financial liabilities based on the remaining period at the Balance Sheet date to the respective contractual maturity dates is as follows:

2015 2014

Within 12 Months

Rs.

After 12 Months

Rs.

Total

Rs.

Within 12 Months

Rs.

After 12 Months

Rs.

Total

Rs.

Assets

Cash and Bank Balances 815,995,451 – 815,995,451 57,991,081 – 57,991,081

Placement with Banks and Financial Institutions 119,191,571 6,173,378 125,364,949 69,108,989 – 69,108,989

Financial Investments – Held-to-Maturity 471,928,012 17,695,879 489,623,891 168,860,575 – 168,860,575

Loans and Advances 8,787,978,875 711,983,201 9,499,962,076 2,911,379,766 934,676,236 3,846,056,002

Lease Rentals Receivable and Stock Out on Hire 23,039,423 34,745,361 57,784,784 16,143,280 20,604,398 36,747,678

Financial Investments – Available-for-Sale – 772,980 772,980 – 772,980 772,980

Other Financial Assets 93,102,552 18,329,000 111,431,552 54,628,744 118,800,813 173,429,557

Total Assets 10,311,235,885 789,699,799 11,100,935,684 3,278,112,435 1,074,854,427 4,352,966,862

Liabilities

Due to Banks 1,375,040,371 30,646,423 1,405,686,794 146,078,908 19,381,189 165,460,097

Due to Customers 1,236,774,818 359,901,389 1,596,676,207 916,744,316 93,608,716 1,010,353,032

Debt Instruments Issued and Other Borrowed Funds 7,055,137,800 106,615,654 7,161,753,454 3,284,819,012 115,273,933 3,400,092,945

Other Financial Liabilities 163,455,651 7,431,856 170,887,507 94,835,343 – 94,835,343

Total Liabilities 9,830,408,640 504,595,322 10,335,003,962 4,442,477,579 228,263,838 4,670,741,417

Net 480,827,244 285,104,477 765,931,721 (1,164,365,144) 846,590,589 (317,774,555)



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37. Commitments and Contingencies

37.1 Capital Commitments

There are no significant capital commitments which have been approved or contracted for by the Company as at 31st March 2015.

37.2 Contingencies

37.2.1 Contingent Liabilities


2014 Rs.

Guarantees Issued to Other Institutions 1,000,000 318,214

Total Contingent Liabilities 1,000,000 318,214

Total Commitments – –

Total Commitments and Contingencies 1,000,000 318,214

37.2.2 Litigations Against the Company

No legal claims against the Company as at 31st March 2015.

37.2.3 Contingent Assets

There are no contingent assets as at the date of Statement of Financial Position.

38. Trust ActivitiesThe Company is not engaged in any trust activities which may have an impact on its financial results, financial position or liquidity of the Company.

39. Related Party DisclosureThe Company carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with related parties. Except for the transactions that Key Management Personnel (KMPs) have availed under schemes uniformly applicable to all staff at concessionary rates, transactions with the related parties listed below have been at commercial rates.

39.1 Parent and Ultimate Controlling Party

In the opinion of Directors, the Company’s Immediate and Ultimate Parent undertaking and controlling party is Mutual Holdings Ltd.

39.2 Transactions with Key Management Personnel (KMPs)

Related party includes KMPs defined as those persons having authority and responsibility for planning, directing and controlling the activities for the Company. Such KMPs include the Board of Directors of the Company (include Executive and Non-Executive Directors), Executives who directly report to Board subcommittees and other key Executives who meet the criteria described above.



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39.2.1 Key Management Personnel Compensation

2015 Rs.

2014 Rs.

Directors’ Remuneration 14,850,000 16,050,000

Short-Term Employment Benefits 5,400,000 3,600,000

20,250,000 19,650,000

In addition to the above, the Company has also paid non-cash benefits such as vehicles and fuel to Key Management Personnel in line with the approved benefit plan of the Company.

39.2.2 Transactions, Arrangements and Agreements Involving KMPs and their Close Family Members (CFMs)

CFMs of a KMPs are those family members who may be expected to influence, or be influenced by, that KMP in their dealing with the entity. They may include KMPs domestic partner and children, children of the KMPs domestic partner and dependants of the KMP or the KMPs domestic partner.

2015 Rs.

2014 Rs.

Nature of Transaction – –

39.2.3 Transaction, Arrangements and Agreements Involving with Entities which are Controlled and/or Jointly Controlled by the KMPs and their CFMs or Shareholders

2015 Rs.

2014 Rs.

Nature of Transaction – –

39.2.4 Transactions with Group Entities

The Group entities include the Parent, Fellow Subsidiaries and Associate Companies of the Parent.

39.2.4.1 Transactions with Parent Company

2015 Rs.

2014 Rs.

Current Account Balances – 7,994,220

Interest Receivable – Joint Venture Agreement – 28,772,402

– 36,766,622



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40. Assets PledgedThe following assets have been pledged as securities against the long-term and short-term borrowings that have been disclosed under the Note 26 to the Financial Statements.

Name of the Institute Nature of the Facility

Facility Amount

Rs.

Outstanding as at 31.03.2015

Rs. Securities/Mortgages

First Capital Markets Ltd. Securitisation Loan – No. 2

249,500,817 97,201,708 Mortgage over Micro Loan Rentals receivables

Securitisation Loan – No. 3


Securitisation Loan – No. 4


Softlogic Finance PLC Term Loan 75,000,000 51,312,213 Corporate Gurantee of Mutual Holdings Ltd.

National Development Bank PLC Leasing Facility 6,350,000 3,545,097 Mortgage over Vehicle No. WP JN - 7538

Leasing Facility 7,500,000 4,358,382 Mortgage over Vehicle No. WP KF - 9696

Leasing Facility 6,700,000 6,631,710 Mortgage over Vehicle No. WP KL - 2101

Leasing Facility 7,000,000 6,928,652 Mortgage over Vehicle No. WP KM - 9538

Leasing Facility 6,670,000 6,600,744 Mortgage over Vehicle No. CP KJ - 9005

Pan Asia Bank PLC Leasing Facility 3,400,000 2,581,837 Mortgage over Vehicle No. WP KG - 7019

41. Events After the Reporting DateSubsequent to the Reporting date, no circumstances have arisen which would require adjustments to or disclosure in the Financial Statements.

42. CapitalThe Company maintains an activity managed capital basis to cover risks inherent in the business and meet the capital adequacy requirements of Central Bank of Sri Lanka . The adequacy of the the Company’s capital is monitored based on the measures, rules and ratios adopted by Central Bank of Sri Lanka.

42.1 Capital Management

The primary objective of Company’s capital management policy are to ensure that the Company complies with externally imposed capital requirements and healthy capital ratios in order to support its business and to maximise shareholders’ value.



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43. Financial Reporting by Segments as per the Provisions of Sri Lanka Financial Reporting Standard (SLFRS) 08The operating business are organised and managed separately, according to the nature of the products and services provided with each segment representing a strategic business unit that offers different products and serves different markets.

The following table presents the income, profit and assets and liability information on the Company’s business segments for the year ended 31st March 2015 and comparative figures for the year ended 31st March 2014:

43.1 Business Segments

Loans and Advances Finance Lease and Stock Out on Hire Investments Others Total

For the year ended 31st March 2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

Interest Income 2,449,349,773 1,263,824,690 6,227,440 9,684,296 57,509,489 17,803,093 1,904,918 4,842,155 2,514,991,620 1,296,154,234

Interest Expenses 807,098,376 669,889,197 2,052,037 5,133,153 18,950,260 9,436,514 627,700 2,566,580 828,728,373 687,025,444

Net Interest Income/(Expenses) 1,642,251,397 593,935,493 4,175,403 4,551,143 38,559,229 8,366,579 1,277,218 2,275,575 1,686,263,247 609,128,790

Net Fee and Commission Income 466,703,035 143,078,355 112,267 15,126 – – – – 466,815,302 143,093,481

Other Operating Income 8,909,323 – – – – – (863,970) 1,915,032 8,045,352 1,915,032

Total Operating Income 2,117,863,755 737,013,848 4,287,670 4,566,270 38,559,229 8,366,579 413,248 4,190,606 2,161,123,901 754,137,303

Impairment (Charges)/Reversal for Loans and Other Losses 184,753,509 57,893,923 4,269,899 4,041,094 – – 182,181,771 – 371,205,179 61,935,016

Net Operating Income 1,933,110,246 679,119,925 17,771 525,176 38,559,229 8,366,579 (181,768,523) 4,190,606 1,789,918,722 692,202,286

Personnel and Other Operating Expenses 1,073,406,333 636,824,110

Property, Plant and Equipment 24,836,714 14,518,725

– – – – – – – – 1,098,243,047 651,342,835

Operating Profit Before Taxation 1,933,110,246 679,119,925 17,771 525,176 38,559,229 8,366,579 (181,768,523) 4,190,606 691,675,676 40,859,451

Taxes (204,516,394) (26,288,136)


Segment Assets 9,499,962,076 3,846,056,002 57,784,784 36,747,678 614,988,840 237,969,564 1,384,336,934 929,480,722 11,557,072,634 5,050,253,966

Segment Liabilities 8,630,689,279 3,581,201,494 52,497,317 34,217,089 558,715,661 221,582,046 1,257,666,277 865,473,032 10,499,568,534 4,702,473,660

Net Assets 869,272,797 264,854,508 5,287,468 2,530,589 56,273,179 16,387,518 126,670,657 64,007,690 1,057,504,101 347,780,305



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43. Financial Reporting by Segments as per the Provisions of Sri Lanka Financial Reporting Standard (SLFRS) 08The operating business are organised and managed separately, according to the nature of the products and services provided with each segment representing a strategic business unit that offers different products and serves different markets.

The following table presents the income, profit and assets and liability information on the Company’s business segments for the year ended 31st March 2015 and comparative figures for the year ended 31st March 2014:

43.1 Business Segments

Loans and Advances Finance Lease and Stock Out on Hire Investments Others Total

For the year ended 31st March 2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

2015 Rs.

2014Rs.

Interest Income 2,449,349,773 1,263,824,690 6,227,440 9,684,296 57,509,489 17,803,093 1,904,918 4,842,155 2,514,991,620 1,296,154,234

Interest Expenses 807,098,376 669,889,197 2,052,037 5,133,153 18,950,260 9,436,514 627,700 2,566,580 828,728,373 687,025,444

Net Interest Income/(Expenses) 1,642,251,397 593,935,493 4,175,403 4,551,143 38,559,229 8,366,579 1,277,218 2,275,575 1,686,263,247 609,128,790

Net Fee and Commission Income 466,703,035 143,078,355 112,267 15,126 – – – – 466,815,302 143,093,481

Other Operating Income 8,909,323 – – – – – (863,970) 1,915,032 8,045,352 1,915,032

Total Operating Income 2,117,863,755 737,013,848 4,287,670 4,566,270 38,559,229 8,366,579 413,248 4,190,606 2,161,123,901 754,137,303

Impairment (Charges)/Reversal for Loans and Other Losses 184,753,509 57,893,923 4,269,899 4,041,094 – – 182,181,771 – 371,205,179 61,935,016

Net Operating Income 1,933,110,246 679,119,925 17,771 525,176 38,559,229 8,366,579 (181,768,523) 4,190,606 1,789,918,722 692,202,286

Personnel and Other Operating Expenses 1,073,406,333 636,824,110

Property, Plant and Equipment 24,836,714 14,518,725

– – – – – – – – 1,098,243,047 651,342,835

Operating Profit Before Taxation 1,933,110,246 679,119,925 17,771 525,176 38,559,229 8,366,579 (181,768,523) 4,190,606 691,675,676 40,859,451

Taxes (204,516,394) (26,288,136)


Segment Assets 9,499,962,076 3,846,056,002 57,784,784 36,747,678 614,988,840 237,969,564 1,384,336,934 929,480,722 11,557,072,634 5,050,253,966

Segment Liabilities 8,630,689,279 3,581,201,494 52,497,317 34,217,089 558,715,661 221,582,046 1,257,666,277 865,473,032 10,499,568,534 4,702,473,660

Net Assets 869,272,797 264,854,508 5,287,468 2,530,589 56,273,179 16,387,518 126,670,657 64,007,690 1,057,504,101 347,780,305



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44. Current and Non-Current Analysis of Assets and LiabilitiesThe table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled:

As at 31st March 2015 2014

Assets

Within 12 Months

Rs.

After 12 Months

Rs.

Total

Rs.

Within 12 Months

Rs.

After 12 Months

Rs.

Total

Rs.

Financial Assets

Cash and Bank Balances 815,995,451 – 815,995,451 57,991,081 – 57,991,081

Placement with Banks and Financial Institutions 119,191,571 6,173,378 125,364,949 69,108,989 – 69,108,989

Financial Investments – Held-to-Maturity 471,928,012 17,695,879 489,623,891 168,860,575 – 168,860,575

Loans and Advances 8,787,978,875 711,983,201 9,499,962,076 2,911,379,766 934,676,236 3,846,056,002

Lease Rentals Receivable & Stock Out on Hire 23,039,423 34,745,361 57,784,784 16,143,280 20,604,398 36,747,678

Financial Investments – Available-for-Sale – 772,980 772,980 – 772,980 772,980

Other Financial Assets 93,102,552 18,329,000 111,431,552 54,628,744 118,800,813 173,429,557

Total Financial Assets 10,311,235,885 789,699,799 11,100,935,684 3,278,112,435 1,074,854,427 4,352,966,862

Non-Financial Assets

Real Estate Stock 202,465,092 75,658,537 278,123,629 269,646,743 281,108,363 550,755,106

Other Non-Financial Assets 19,050,446 39,351,008 58,401,454 12,002,830 30,276,178 42,279,008

Intangible Assets – 32,456,378 32,456,378 – 34,701,199 34,701,199

Property, Plant and Equipment – 87,155,490 87,155,490 – 69,551,790 69,551,790

Total Non-Financial Assets 221,515,538 234,621,413 456,136,951 281,649,573 415,637,531 697,287,104

Total Assets 10,532,751,422 1,024,321,212 11,557,072,634 3,559,762,008 1,490,491,958 5,050,253,966

Liabilities

Financial Liabilities

Due to Banks and Financial Institutions 1,375,040,371 30,646,423 1,405,686,794 146,078,908 19,381,189 165,460,097

Due to Customers 1,234,993,292 360,994,974 1,595,988,266 916,744,316 93,608,716 1,010,353,032

Debt Instruments Issued and Other Borrowed Funds 7,055,137,800 107,225,969 7,162,363,769 3,284,819,012 115,273,933 3,400,092,945

Other Financial Liabilities 163,455,651 7,509,482 170,965,133 94,835,343 – 94,835,343

Total Financial Liabilities 9,828,627,114 506,376,848 10,335,003,962 4,442,477,579 228,263,838 4,670,741,417

Non-Financial Liabilities

Current Tax Liabilities 113,991,252 – 113,991,252 – – –

Deferred Tax Liabilities 9,158,439 – 9,158,439 – – –

Other Liabilities 27,051,665 – 27,051,665 25,068,093 – 25,068,093

Retirement Benefit Liability – 14,363,216 14,363,216 – 6,664,150 6,664,150

Total Non-Financial Liabilities 150,201,356 14,363,216 164,564,572 25,068,093 6,664,150 31,732,243

Total Liabilities 9,978,828,470 520,740,064 10,499,568,534 4,467,545,672 234,927,988 4,702,473,660

Net Assets/Liabilities 553,922,953 503,581,148 1,057,504,101 (907,783,665) 1,255,563,970 347,780,305



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45. Fair Value of Financial InstrumentsThe following is a description of how fair values are determined for financial instruments that are recorded at fair value using valuation techniques. These incorporate the participant would make when valuing the instruments.

45.1 Determination of Fair Value and Fair Value Hierarchy

Set out below is the comparison, by class, of the carrying amounts of fair values of the Company’s financial instruments that are not carried at fair value in the Financial Statements. This table does not include the fair values of non-financial assets and non-financial liabilities.

2015 2014

Carrying Amount

Rs.

Fair Value

Rs.

Carrying Amount

Rs.

Fair Value

Rs.

Financial Assets

Cash and Bank Balances 815,995,451 815,995,451 57,991,081 57,991,081

Placement with Banks & Financial Institutions 125,364,949 125,364,949 69,108,989 69,108,989

Financial Investments – Held-to-maturity 489,623,891 489,623,891 168,860,575 168,860,575

Loans and Advances 9,499,962,076 9,499,962,076 3,846,056,002 3,846,056,002

Lease Rentals Receivable & Stock Out on Hire 57,784,784 57,784,784 36,747,678 36,747,678

Financial Investments – Available-for-Sale 772,980 772,980 772,980 772,980

Other Financial Assets 111,431,552 111,431,552 173,429,557 173,429,557

Total Financial Assets 11,100,935,684 11,100,935,684 4,352,966,862 4,352,966,862


Due to Banks 1,405,686,794 1,405,686,794 165,460,097 546,987,584

Due to Customers 1,596,676,207 1,596,676,207 1,010,353,032 868,515,907

Debt Instruments Issued and Other Borrowed Funds 7,161,753,454 7,161,753,454 3,400,092,945 1,617,494,634

Other Financial Liabilities 170,887,507 170,887,507 94,835,343 61,404,800

Total Financial Liabilities 10,335,003,962 10,335,003,962 4,670,741,417 3,094,402,925

Fair Value of Financial Assets and Liabilities Not Carried at Fair Value

The following describes the methodologies and assumptions used to determine the fair values for those financial instruments which are not already recorded at fair value in the Financial Statements.

Assets for which Fair Value Approximates Carrying Value

For financial assets and financial liabilities that have a short-term maturity (original maturities less than a year), it is assumed that the carrying amounts approximate their fair values. This assumption is also applied to fixed deposits, certificate of deposits and savings deposits without a specific maturity. Long-term deposits accepted from customers for which periodical interest is paid and loans and advances granted to customers with a variable rate are also considered to be carried at fair value in the books.



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Fixed Rate Financial Instruments

Carrying amounts are considered as fair values for short-term credit facilities. There is a significant difference between carrying value and fair value of Reverse Repurchase Agreements and Repurchase Agreements with original tenors above one year. In fair valuing held-to-maturity securities, rates published by the CBSL for similar trading securities were used. Loans and advances with fixed interest rates were fair valued using market rates at which fresh loans were granted during the fourth quarter of the reporting year. Conversely, fixed deposits with original tenors above one year and interest paid at maturity were discounted using current market rates offered to customers during the fourth quarter of the reporting year.

46. Financial Risk Management Risk management and related reporting issues that are associated with financial institutions valuations of complex transactions and their impact to capital requirements and profitability of financial institutions, has received unstinted attention in the recent decade.

‘Importance of robust risk management and control processors revolving around the measurement of fair value accounting of financial instruments reliably of a wide range is considered pivotal for the financial services sector for sound management of related assets and liabilities’.

46.1 KFL Being a Finance Company is Exposed to Number of Risks Arising from Dealing in Financial Transactions Involving Mainly Financial Assets and Liabilities. Key Risks Associated with KFL Business Revolve Around:

• Credit risk

• Liquidity risk

• Market risk

• Operational risk

This note discloses information about KFL’s exposure to each of the above identified risks and management process for risk identification, risk measurement and monitoring of associated risk. KFL’s risk management process is streamlined in effect to ensure there is appropriate balance between risk and rewards. By, instilling various controls and strategies, management continuously strives in mitigating risk or to avoid risks altogether and aims at maximising profitability in the process.

46.2 Risk Management Framework

46.2.1 Board Role in Risk Management

Overall responsibility for the establishment and oversight of KFL’s risk management framework lies with the Company’s Board of Directors. The Board discharges its governance responsibility through served key Board Subcommittees Namely; the Board Integrated Risk Management Committee (IRMC), Assets and Liabilities Management Committee (ALCO) and the Audit Committee. Other sub Board committees namely the Credit Committee, Remuneration Committee and Nomination Committee have been entrusted to oversee specified areas for better governance to either directly or indirectly assist IRMC in maintaining a sound risk governance function.

Based on IRMC’s terms of reference, a formal risk management policy was established last period to identify and analyse key risks specific to KFL business and set forth a mechanism to counter potential threats. The established risk management policy, controls and systems in place are reviewed on a continuous basis to ensure they are adequate in the light of market sophistication and changes occurring to products and services offered. At KFL, risks are measured using appropriate techniques based on type of risk involved and uses several measures to obtain correct measurement at any given time. Management resorts to sensitivity analysis and stress testing to ascertain impacts from risks based on possible and worst case scenarios and forecast scenarios based on specific assumptions, the results of which are reported to the Board through the IRMC.



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Risk management policies of the Company are aligned to the overall businesses strategy. Based on accepted industry norms on risk tolerance levels and risk appetite level of KFL, management has set forth predetermined specific risk limits approved by the IRMC. Any negative deviations and exceeding of limits are captured through a sound process of risk measurement and appropriately reported to IRMC for their guidance and instructions.

46.2.2 Corporate Managements Role in Risk Management

Based on the approved ‘Risk Policy’, corporate management that represent all key functions of mi’s business operation has been entrusted to instill required controls covering their scope of work to either avoid risk or mitigate risk as much as possible. The key divisions coming under the Risk Policy framework include;

1. Credit and Marketing Division including Branches2. Deposits Division3. Recoveries Division4. Finance Division5. Other Support Divisions

46.2.3 Board Sub Committees and Their Functions in Supporting Risk Management in 2014/15 Financial Year

Committee Risk Aspects Reviewed in 2014/15

Audit Committee

Please Refer ‘Risk Report‘ Published in the Annual Report 2014/15Credit Committee

Assets and Liabilities Committee

Management Committee

46.3 Credit Risk

Credit risk is the risk of financial loss to the Company if a borrower or counterparty to a financial instrument fails to meet its specified contractual obligations. Related risk arises mainly from the Company’s loans and advances portfolio and from other comparable financial instruments including investments in debt securities.

Management takes into account all elements of credit risk exposures both at micro and macro level. This includes analysing individual obligor default risk, industry specific risk and geographical risk as part of Kanrich’s comprehensive credit risk management process.

46.3.1 Credit Risk Management Process

The credit and marketing division is responsible to strictly adhere to credit policies, procedures and practices, which is established on sound control framework that aims to mitigate potential risk. From the moment of customer inquiry to final disbursement and then to the process of collection, that is handled by the recoveries division there is predetermined controls set to manage risk.

In mitigating credit risk, the Company resorts to obtaining collaterals which are valued by recognised external parties together with an internal valuation as suitable. In 2014, management enhanced its collateral valuation process accuracy by establishing a separate ‘Internal Valuation Unit’ to support the credit disbursement process. The credit division is expected to take collateral against proposed lending merely as a precaution, as a secondary source of payment in the event of a borrower default.



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At macro level, the IRMC through the Risk Manager carries out monthly, quarterly and annual risk assessment related to credit risk and proposes suitable recommendations to counter any identified risk. Recently established Board’s Credit Committee is entrusted to review high value credit over a specified Board approved value.

Credit Operation Manual

KFL’s credit operation manual revised with strengthened credit practices in 2014 plays an integral role in managing daily credit operations. The manual specifies collateral requirements, minimum documentation requirements, while specifying the required credit assessment process to be adopted together with applicable credit authority limits. The specified process covers aspects relating to customer selection, early alert reporting, due diligence, adherence to statutory requirements and portfolio monitoring. The manual is reviewed periodically and necessary changes made after assessing changes in credit risk profile and business conditions. Management ensures that the credit manual is aligned at all times with KFL’s overall business strategy and changing business needs.

Loan Origination

Loan origination process of KFL encompasses initial screening and credit appraisal. This process focuses on appraising a customer’s creditworthiness referring to financial documents submitted, CRIB and by carrying out site visits. As an integral part of the risk mitigation process, KFL reviews type and the quality of collaterals given to the Company in the loan origination process.

Credit Authorisation Structure

Credit authorisation limits have been specified for various levels of credit staff based on officer’s grade. Credit facilities to be extended exceeding these threshold values require approval from either the head of credit, Credit Committee or the Board of Directors depending on the value in concern.

Credit Appraisal Process

Reviewing and assessing credit risk is done by credit officers and then reviewed by relevant Manager/Senior Manager/ Deputy General Manager. They assess extent of credit exposure within their designated limits prior to granting the facility to the customer in concern and assesses the adequacy of the collaterals given against proposed credit as a ratio as a key risk mitigating factor. Renewal of facilities is also subject to the same risk appraisal process.

Credit Administration and Distribution

KFL’s loan portfolio is centrally administrated through the head office which ensures key credit functions covering from disbursement of credit, settlement recovery, processing renewal notices to customer educating and advising.

Branches role on the other hand is to bring in credit business and involve themselves in initial credit documentation collection and review, credit appraisal and recommending credit or approving them as appropriate and also assist in collection of instalments subsequent to disbursement.

Credit Measurement and Monitoring

The IRMC measures and tracks the quality of the credit portfolio periodically, using tools such as scenario analysis, impact studies and identifying early warning signs. The Committee also prepares a credit risk dashboard with the support of Manager – Risk and Compliance to review the credit portfolio in concern. The oversight of the credit risk function vest with the IRMC of the Company. Identified concerns or adverse trends are addressed by the Committee in co-ordination with the relevant officers of the corporate management.

Periodic review of credit risk is carried out by the IRMC comparing actual credit exposures against set internal limits, including those for selected industries, geographical areas and product types.



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Recovery Process

Recovery of periodic dues associated to KFL’s loan book including the problematic loan portfolio is managed by the recoveries division. The division manages the overall aspects of non-performing loan facilities, restructuring of credit facilities, reviewing the value of collaterals, legal documentation and liaising with the customer for recovery collection. Recoveries division functions are impeccably aligned with credit administration and credit risk management process to ensure a sound and effective credit disbursement and recovery system is maintained in line with organisational objectives on asset quality.

Regular Audit of Divisions

From an oversight perspective, based on a predefined annual audit programmes that covers credit review requirements, continuous internal audits are carried out by KFL’s internal audit division.

Definitions Related to Credit

Impairment

This occurs when recoverable amount of an asset is less than its carrying amount. Please refer Note from 2.9.3 to 2.9.5 into the Financial Statements for details on impairment methodology adopted and related policies.

Past Due

KFL considers that any amount uncollected one day or more beyond their contractual due date are ‘past due’.

46.3.2 Credit Quality by Class of Financial Assets

KFL ascertains the credit quality of financial asset using a company specific credit quality categorisation method based on collateral buffer and loss rate indicators. The table below discloses the credit quality of KFL’s financial assets by its class as at the end of the financial year based on the credit risk categorisation mechanism adopted by the Company:

46.3.2.1 Credit Quality by Class of Financial Assets

Neither Past Due Nor Impaired

Financial Assets

High Grade

Rs. ‘000

Standard Grade

Rs. ‘000

LowGrade

Rs. ‘000

Past Due Not Impaired Rs. ‘000

Individually Impaired Rs. ‘000

Total

Rs. ‘000

Cash and Short-Term Funds 815,995 – – – – 815,995

Placement with Other Banks 120,657 – – 4,707 – 125,365

Financial Investments – Held-to-Maturity

489,624 – – – – 489,624

Loans and Advances 5,853,000 2,868,536 – 379,590 398,837 9,499,962

Lease Rentals Receivable and Stock Out on Hire – 19,613 – 11,397 26,775 57,785

Financial Investments – Available-for-Sale – – 773 – – 773

Other Financial Assets – 111,432 – – – 111,432

Total 7,279,277 2,999,580 773 395,694 425,612 11,100,936



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Commentary More than 66% of KFL’s financial assets are of ‘high grade’ which are neither past due nor impaired mainly comprising of the lendings and financial investments – available-for-sale. There is constant review of individual impaired past due not impaired and low grade accounts by KFL’s recovery division to sustain overall asset quality, taking appropriate recovery measures on a timely manner.

46.3.2.2. Age Analysis Past Due (Facilities in Arrears of 1 day and above) But not Impaired by Class of Financial Assets

Past Due Not Impaired

Less Than 30 DaysRs. ‘000

31 to 60 Days

Rs. ‘000

61 to 90 Days

Rs. ‘000

91 to 120 Days

Rs. ‘000

120 to 180 Days

Rs. ‘000

Total

Rs. ‘000

Loans and Advances – 194,162 76,646 53,825 59,664 384,297

Lease Rentals Receivable and Stock Out on Hire – 5,219 1,254 2,876 2,048 11,397

Total – 199,381 77,899 56,701 61,712 395,694

46.3.2.3 Types of Collateral Taken to Minimise Credit Exposure

Type of Lending Collateral Generally Obtained

Lease Agricultural land and vehicles, commercial property, computer hardware and equipment, dual purpose vehicles, land vehicles, motor bicycles, motor cars, motor coaches, motor lorries, motor tricycles, non-agricultural land vehicles, other equipment, other machinery, prime movers, tractor three-wheels and tractor four wheels.

Hire Purchase Same as above.

Personal Loans/Term Loans Same as above except residential property.

Microfinance Promissory Notes.

The Company resorts to repossession of assets kept as security when the borrowers default goes beyond the specified credit period. The sales proceeds resulting from the subsequent sale of such assets are then used to minimise credit risk exposure.

46.3.3 Analysis of Risk Concentration

KFL monitors credit concentration risk by referring to the degree of credit exposure by KFL to various sectors and by geographic location.



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46.3.3.1 Sector-wise Analysis

The following table shows the maximum credit exposure of KFL’s loans and advances to various sectors as at the end of the financial year:

As at 31st March

2015Rs. ‘000 %

2014Rs. ‘000 %

Agriculture 2,651,965 27 772,646 20

Commercial 757,093 8 386,323 10

Consumption 449,253 5 115,897 3

Finance – 0 – 0

Housing and Property 203,987 2 154,529 4

Industrial 1,459 0 – 0

Others 5,708,667 58 2,317,937 60

Services 11,926 0 115,897 3

Tourism – 0 – 0

Total 9,784,351 100 3,863,228 100

46.3.3.2 Province-wise Analysis

This table below discloses KFL’s credit exposure to various provinces based on the lending carried out by KFL’s branch network that is scattered across the country:

As at 31st March

Concentration by Province2015

Rs. ‘000 %2014

Rs. ‘000 %

Western 3,235,189,119 33 1,352,129,957 35

Central 1,184,066,331 12 502,219,698 13

Eastern 417,893,892 4 115,896,853 3

North-Central 726,479,255 7 231,793,707 6

North-Western 2,070,957,356 21 888,542,543 23

Northern 126,903,889 1 77,264,569 2

Sabaragamuwa 1,116,414,566 11 386,322,845 10

Southern 709,365,517 7 231,793,707 6

Uva 197,080,661 2 77,264,569 2

Total 9,784,350,586 100 3,863,228,448 100



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46.4 Liquidity Risk

Liquidity risk arises when the Company encounters difficulties in meeting its financial liabilities by settlements made either in cash or through another financial asset.

KFL is a financially sound institution that has been strong in liquidity throughout its history. To strengthen liquidity management we have formed a Board approved Assets and Liability Management Committee (ALCO) to oversee liquidity risk aspects associated with KFL businesses. IRMC as part of their risk management process reviews independently, the effectiveness of the liquidity risk management process and recommend suitable actions when necessary. The key sources of funding for the Company is its capital base, core deposits mobilised from customers, borrowings obtained from money market instruments and bank funding lines. KFL has implemented strict policies on managing of its assets, keeping liquidity as a vital focus, monitoring the liquidity position on a daily basis through the finance division under the leadership of the Finance Manager.

The Company has developed adequate control mechanisms to manage liquidity both in short and longer horizon by estimating future cash flows. In devising the three-year strategic plan, long-term cash flow position was projected so that appropriate strategic measures could be devised to manage future liquidity requirements.

During the year, in managing short and medium-term funding needs, the Treasury Division resorted to following borrowing options to mobilise funds in addition to encouraging deposits mobilisation as its primary source of funding:

1. Utilising available borrowing lines from KFL’s traditional borrowing partners.2. Seeking fresh funding lines from banks and other financial sources.3. Alternative borrowing such as commercial paper and short-term borrowing derived from individuals and corporate

institutions.4. Seeking negotiation to secure foreign funding lines that is ongoing.

46.4.1 Exposure to Liquidity Risk

Ratio2015

%2014

%

Net Loans/Customer Deposits 109 88

Net Loans/Total Assets 83 77

Statutory Liquid Asset Ratio (LAR):

Average for the Year 20 22

Minimum for the Year 10 10

Maximum for the Year 29 47

Commentary

KFL was able to maintain statutory liquidity ratio well above the minimum requirement as the balance sheet date. KFL’s net loans to deposits ratio is at … and Management plans to bring this ratio below 120% as per forecast within the next financial year with the planned growth in deposits.



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46.4.2 Analysis of Assets and Liabilities by Remaining Contractual Maturities

The following tables show the maturity gap analysis of KFL’s financial assets and financial liabilities based on their remaining period to maturity undiscounted as at 31st March 2015.

On Demand

Rs.

Up to 3 Months

Rs.

3-12 Months

Rs.

1-3 Years

Rs.

3-5 Years

Rs.

More than 5 Years

Rs.

Total

Rs.

Financial Assets

Cash and Bank Balances 815,995,451 – – – – – 815,995,451

Placement with Banks and Financial Institutions

75,583,149 43,608,422 – 6,173,378 125,364,948


175,888,763 296,039,249 – – 17,695,879 489,623,891

Loans and Advances 3,579,582,294 5,208,396,583 703,246,939 8,736,260 9,499,962,076

Lease Rentals Receivable and Stock Out on Hire 13,300,704 9,738,718 17,136,729 17,608,633 57,784,784

Financial Investments – Available-for-Sale – – – – – 772,980 772,980

Other Financial Assets 93,102,551 18,329,000 111,431,551

Total Financial Assets 815,995,451 3,844,354,910 5,650,885,523 738,712,668 32,518,271 18,468,859 11,100,935,682


Due to Banks and Financial Institutions 694,012,355 317,353,347 370,162,712 24,158,381 1,405,686,794

Due to Customers – 693,255,133 543,519,686 212,704,751 147,196,638 – 1,596,676,207

Debt Instruments Issued and Other Borrowed Funds – 3,515,098,675 3,533,551,083 64,644,361 27,794,797 20,664,538 7,161,753,454

Other Financial Liabilities – – 170,887,505 – – – 170,887,505

Total Financial Liabilities 694,012,355 4,525,707,154 4,618,120,986 301,507,493 174,991,434 20,664,538 10,335,003,961

Net Financial Assets/ Liabilities 121,983,096 (681,352,245) 1,032,764,537 437,205,175 (142,473,163) (2,195,679) 765,931,722

Commentary

To bridge the less than one year maturity gap of Rs. 0.68 billion, KFL continues to focus on obtaining deposits that of longer term and plans to seek borrowings that are either medium-term or longer. It is a common factor that the LFC sector operates on a negative gap in the shorter run based on the nature of doing business.


126

46.5 Market Risks

Market risk would arise when the fair value or future cash flows of financial instruments of the Company fluctuate due to changes in market variables such as interest rates, exchange rate and equity prices. KFL’s market risk exposure primary revolves around interest rate risk. KFL is not exposed exchange rate risk materially at present.

46.5.1 Interest Rate Risk

Interest rate risk arises due to fluctuations in the interest rate resulting in adverse impact to future cash flows or the fair values of financial instruments of the Company.

KFL’s approach in managing interest rate risk is to continuously monitor positions on a daily basis to levels that are viable and prudent. In analysing impacts of interest rate movements on profitability, Management resorted to the techniques of sensitivity analysis carried out on KFL’s financial assets and liabilities taking into account various interest rate scenarios.

46.5.1.1 Interest Rate Sensitivity Analysis

Given below is a sensitivity analysis carried out as at 31st March 2015, that demonstrates possible impact to KFL’s Statement of Comprehensive Income due to a given change in interest rates, keeping all other variables constant.

Market Rates up by 1% effect to the Interest Income/(Expenses)

Rs.

Market Rates drop by 1% effect to the Interest Income/(Expenses)

Rs.

Effect on Rate Sensitive Assets 101,354,438 (101,354,438)

Effect on Rate Sensitive Liabilities (94,701,041) 94,701,041

Sensitivity/Effect to Statement of Comprehensive Income 6,653,397 (6,653,397)

46.5.1.2 Financial Assets and Financial Liabilities Exposed to Interest Rate Risk

Disclosed below are the Company’s financial assets and financial liabilities exposed to interest rate risk as at 31st March 2015. The financial assets and financial liabilities so disclosed are at their carrying amounts and categorised by the earlier of contractual repricing or maturity dates.

Up to 3 Months

Rs.

3-12 Months

Rs.

1-3 Years

Rs.

3-5 Years

Rs.

More than 5 Years

Rs.

Non-Interest-Bearing

Rs.

Total as at 31.03.2015

Rs.

Financial Assets

Cash and Bank Balances – – – – – 815,995,451 815,995,451

Placement with Banks & Financial Institutions

75,583,149 43,608,422 – 6,173,378 – – 125,364,948


175,888,763 296,039,249 – – 17,695,879 – 489,623,891

Loans and Advances 3,579,582,294 5,208,396,583 703,246,939 8,736,260 – – 9,499,962,076

Lease Rentals Receivable & Stock Out on Hire 13,300,704 9,738,718 17,136,729 17,608,633 – – 57,784,784

Financial Investments – Available-for-Sale – – – – – 772,980 772,980

Other Financial Assets – – – – – 111,431,552 111,431,552

Total Financial Assets 3,844,354,910 5,557,782,972 720,383,668 32,518,271 17,695,879 928,199,983 11,100,935,684



127


Up to 3 Months

Rs.

3-12 Months

Rs.

1-3 Years

Rs.

3-5 Years

Rs.

More than 5 Years

Rs.

Non-Interest-Bearing

Rs.

Total as at 31.03.2015

Rs.

Due to Banks and Financial Institutions 317,353,347 370,162,712 24,158,381 – – 694,012,355 1,405,686,794

Due to Customers 693,255,133 543,519,686 212,704,751 147,196,638 – 1,596,676,207

Debt Instruments Issued and Other Borrowed Funds 3,515,098,675 3,533,551,083 64,644,361 27,794,797 20,664,538 7,161,753,454

Other Financial Liabilities – – – – – 170,887,505 170,887,505

Total Financial Liabilities 4,525,707,154 4,447,233,480 301,507,493 174,991,434 20,664,538 864,899,860

10,335,003,961

Interest Sensitivity Gap (681,352,245) 1,110,549,491 418,876,175 (142,473,163) (2,968,659) 63,300,123 765,931,724

Commentary

KFL possesses interest rate sensitive assets of Rs. 10.2 billion and rate sensitive liabilities of Rs. 9.5 billion. Currently, the impact from an interest rate fluctuation of 1% + or (1%) is negligible.

46.5.2 Equity Risk

KFL does not exposed to equity risk due non-availability of equity investment in share market.

46.6 Operational Risk

Operational risk is the risk of direct or indirect loss arising from an array of causes associated with KFL business when dealing in operations that relate to processes, procedures, 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 standard of corporate behaviour.

KFL’s objective is to manage operational risks by maintaining an appropriate balance by the avoidance of financial losses and damage to KFL’s reputation whilst ensuring overall cost effectiveness of selecting right policies and procedures, avoiding control procedures which restrict initiative and creativity.

Corporate management is primary responsible for the development and implementation of controls to address operational risks. Board Subcommittee including Audit Committee, IRMC, ALCO from a broader perspective provide advice, ascertaining risk levels and at the same time reviews all the control procedures introduced by divisional heads of the Company. The audit function is entrusted to review and report operational non-compliance to the Audit Committee on an ongoing basis.


128


KFL has implemented following key procedures in order to mitigate the operational risk exposure to the Company:

1. Segregation of the duties including the independent authorisation of transactions.2. Execution of reconciliation and monitoring of transactions.3. Establishment and documentation of comprehensive internal controls and procedures.4. Complying with required regulatory enactments and other regulations.5. Periodic assessment of the adequacy and effectiveness of controls and procedures.6. Reporting of operational losses with remedial actions.7. Updating of the status against expectations laid down in the Business Contingency Plan.8. Providing in-house and external professional development training.9. Application of risk mitigating techniques such as insurance cover to avert losses wherever effective.10. Introduction of ethical and business standards to employees through issue of the ‘Human Resource Handbook’.11. Upholding a strong oversight function through Audit and Compliance Officers.

46.7 Capital Management

Capital management is considered integral to KFL operation in meeting any unforeseen risks. Hence, management monitors KFL’s capital adequacy position closely through the finance division and reports to the Board monthly. Capital adequacy is a measure of the Company’s ability to tolerate associated risks in doing its finance business. The main objective of maintaining adequate capital in terms of regulatory capital adequacy ratios is to safeguard the depositors, whilst sustaining customer confidence. The capital adequacy measurement being a widely accepted concept, specifies the limit upto which KFL can expand in terms of its risk-weighted assets. In pursuit of business expansion and diversification, KFL engages itself in activities dealing in financial instruments that regularly change the risk and capital profile of the Company. Thus regulatory capital requirements ensure Company does not move into undue expansion beyond specified limits and signals the Company to be cautious and not to take undue risk through growth of its assets especially in areas risky than others.

In this context, KFL’s capital strength serves as a cushion in absorbing any unexpected losses that may arise and is a good indicator of KFL’s levels of safety towards stakeholders more importantly its depositors. KFL’s policy on capital is to retain a strong capital base at all times so as to ensure investor, creditor and market confidence and to back the sustainable growth of the Company.

KFL reviews its capital adequacy ratios (CAR) on a monthly basis to ensure compliance to prudential requirements on capital. The Company’s Core Capital Ratio (CCR) and Total Risk-Weighted Capital Ratio (TRWCR) were maintained well above the minimum regulatory requirements of 5% and 10% respectively, throughout 2014/15 financial period.

The computation of the CAR ratios is in two parts and involves firstly, a working to arrive at the Tier 1 capital and the capital base for the two ratios CCR and TRWCR respectively. A separate computation is carried out to derive at the total Risk-Weighted Assets as at a given date.

The capital base comprises of two elements, namely Tier 1 and Tier 2 capital.

Tier 1 capital comprises the stated capital, statutory reserve fund, retained profits, general and other reserves excluding the revaluation reserve.

Tier 2 capital consists of the revaluation reserve of which, only 50% could be taken for the computation. Other Tier 2 components include the general provision, approved subordinated term debts and other hybrid capital instruments. The Tier 2 capital is not allowed to exceed 100% of the Tier 1 capital for the Total Risk-Weighed Capital Ratio. In deriving at the Total Risk-Weighted Assets, each asset category in the balance sheet is arranged in the order of their risk and available security and thereafter pre-defined risk weights are assigned to each such category to compute the total risk-weighted value.


129

Five Year Summary 130

Shareholder Information 131

Our Locations 132

Milestones 133

Notice of Meeting 134

Form of Proxy Enclose

Corporate Information Inner Back Cover

Annexes


130

Change%

2014/15 Rs. ’000

2013/14 Rs. ’000

2012/13 Rs. ’000

2011/12Rs. ’000

2010/11 Rs. ’000

Financial Performance

Interest Income 94 2,514,992 1,296,154 523,438 175,196 96,176

Net Interest Income 177 1,686,263 609,129 257,243 91,837 21,729

Other Operating Income 134 339,128 145,009 34,996 29,649 12,626

Total Income 98 2,854,120 1,441,163 558,434 204,844 108,801

Staff Cost 60 415,493 260,348 123,970 67,583 18,137

Other Operational Expenses and Depreciation 75 682,750 390,995 142,079 45,039 33,236

Profit/(Loss) before Taxes 1593 691,676 40,859 16,547 13,160 (17,020)

Profit/(Loss ) after Taxes 3243 487,159 14,571 13,116 13,160 (17,020)

Financial Position

Total Lending Portfolio 146 9,557,747 3,882,804 2,252,940 690,507 214,848

FD and Interest-Bearing Borrowings 122 10,164,116 4,575,906 3,032,998 1,432,958 754,194

Total Assets 129 11,557,073 5,050,254 3,434,290 1,741,547 1,072,302

Shareholders’ Fund 204 1,057,504 347,780 322,876 244,079 209,035

Stated Capital 42 672,993 472,993 472,993 391,425 369,541

Property, Plant and Equipment 25 87,155 69,552 63,701 23,190 29,058

Five Year Summary Shareholder Information


131

20 Major Shareholders of the Company

NameNo. of Shares as at

31st March 2015% on

Total Capital

Mutual Holdings Ltd. 59,885,934 77.07

Alfred Joe Constantine Senathipathy 4,800,000 6.18

Tamari Dammika Sellahewa 2,000,001 2.57

Korale Hewage Soorasena 1,000,000 1.29

Central Investments & Finance PLC 833,333 1.07

Neluka Devani Jayatunga Perera 833,333 1.07

Kariyawasam Sembakutti Somasiri Karunasena 826,724 1.06

Yoshida Tetsuro 700,000 0.90

Malala Hetti Bandaralage Lalith Herath 500,000 0.64

Sarath Kumara Munathanthirige 500,000 0.64

D.M. Meegaswatte 351,071 0.45

Mythree Parackrama Bandara Meegaswatte 281,191 0.36

Jayathilake Mudiyanselage Gunathilake 269,000 0.35

Liyanka Ranasinghe 250,000 0.32

Jayantha Bodhipala Edirisinghe 250,000 0.32

C.S.K. Meegaswatte 242,687 0.31

Jayathilaka Hitihamillage Abeyaratna 200,000 0.26

Mahawidanage Premadasa Wijeweera Ginawardana 200,000 0.26

S.K. Wijerathne 154,629 0.20

Chandana Pushpaka Gardiye Punchihewa. 153,500 0.20

Share Distribution

As at 31st March 2015 As at 31st March 2014

NameNo. of

ShareholdersNo. of

Shares %No. of

ShareholdersNo. of

Shares% of

Share holdings

1 - 1,000 102 51,417 0.07 97 46,417 0.06

1,001 - 5,000 74 224,506 0.29 47 130,806 0.18

5,001 - 10,000 20 178,898 0.23 12 108,498 0.15

10,001 - 50,000 41 1,295,479 1.67 10 278,229 0.38

50,001 - 100,000 15 1,215,012 1.56 2 150,512 0.21

100,001 - 500,000 16 3,856,141 4.96 7 1,862,491 2.56

500,001 - 1,000,000 5 4,193,390 5.40 4 3,493,390 4.81

Over 1,000,001 3 66,685,935 85.82 4 66,630,435 91.65

276 77,700,778 100.00 183 72,700,778 100.00

Shareholder Information


132

Our Locations

Wennappuwa

Gampaha

Divulapitiya

Chilaw

Puttalam

Ruwanwella

RatnapuraBalangoda

Ambalantota

Embilipitiya

Batticaloa

Trincomalee

Nikaweratiya

Kekirawa

KandyMawanella

HanguranketaGampola

Hatton

MataleKurunegala

Monaragala

Badulla

Polonnaruwa

Vavuniya

Nittambuwa

Kaduwela

Homagama

Thambuttegama

Kaluthara

Galle

Matara

Medawachchiya

Maho

Welimada

Matugama

Anuradhapura

Ambalangoda

WattalaKiribathgoda

Colombo 07Nugegoda

Moratuwa

Horana


133

2015 2015February March

Asset base of the Company reached Rs. 10 billion.

Slip Joint – Joined Sri Lanka Inter Bank Payment System (SLIPS) as a secondary participant.

1971 2002 2008

Mutual Investments and Finance Ltd. was incorporated under the Companies Ordinance No. 51 of 1938.

October September October

Mutual Investments and Finance Ltd. was bought over by Janashakthi Finance Investment Ltd. and the name was established as Janashakthi.

Janashakthi name was re-branded as Next Finance.

2010 2010 2011October November March

Next Finance was bought over by Mutual Holdings (Pvt) Ltd. and re-registered as Kanrich Finance Ltd.

Kanrich Finance Ltd. opened its first branch in Ratnapura.

Launch of ‘Micro Finance’.

2014 2014 2014March October December

Asset base of the Company reached Rs. 5 billion.

Welanda Warama was launched. Core capital of the Company reached Rs. 1 billion.

Milestones


134

Kanrich Finance Ltd. – PB 694NOTICE IS HEREBY GIVEN that the Annual General Meeting of the Shareholders of Kanrich Finance Ltd., will be held at the Kanrich Finance Ltd., No. 69, Ward Place, Colombo 07 on 23rd June 2015 at 3.00 p.m. for the following purposes:

Agenda

1. To consider and receive the Annual Report of the Board and the Audited Financial Statements for the year ended 31st March 2015, together with the Report of the Auditors thereon.

2. To re-elect Mr. P.A. Pematilake, who retires by rotation at the Annual General Meeting, a Director.

3. To authorise the Directors to determine contributions to charities.

4. To authorise the Directors to appoint the Auditors, as Messrs KPMG in Sri Lanka, Chartered Accountants for the year ending 31st March 2016 and determine the remuneration in line with Section 158 of the Companies Act No. 07 of 2007.

5. To consider any other business of which due notice has been given.

By Order of the Board

Kanrich Finance Ltd.Chart Business Systems (Pvt) Ltd.

Sgd.SecretariesNo. 141/3, Vauxhall Street, Colombo 0228th May 2015

Note:

• A shareholder is entitled to appoint a proxy to attend and vote on his/her behalf and a proxy need not to be a shareholder of the Company.

A Form of Proxy is attached for this purpose. The instrument appointing a proxy must be deposited at Chart Business Systems (Pvt) Ltd. - the

Secretaries of the Company, No. 141/3, Vauxhall Street, Colombo 02 not less than forty-eight (48) hours before the time fixed for the meeting.

• Shareholders are requested to indicate any changes in their address.

• The summarised Financial Statements of the Company for the 2014/15 is attached herewith the Notice.

Notice of Meeting Form of Proxy


Kanrich Finance Ltd. – PB 694

I/We………………………………………………………………………………………………………………………............................................................................

of……………………………………………………………………………………………………………………………...........................................................................

being a *shareholder/shareholders of Kanrich Finance Ltd. hereby appoint

(i)………………………………………………………………………………………………………………………….............................................................................

of………………………………………………………………………………………………….………………………... or failing him.

(ii) Mr. S.H. Piyasiri, Chairman of the Board of Kanrich Finance Ltd. or failing him any one of the other Directors of the Company as *my/our proxy to attend and vote as indicated hereunder for *me/us and on *my/our behalf at the Annual General Meeting of the Company to be held on 23rd June 2015 and at every poll which may be taken in consequence of the aforesaid meeting and at any adjournment thereof. For Against

1. To consider and receive the Annual Report of the Board and the Audited Financial Statements for the year ended 31st March 2015, together with the Report of the Auditors thereon.

2. To re-elect Mr. P.A. Pematilake, who retires by rotation at the Annual General Meeting, a Director.

3. To authorise the Directors to determine contributions to charities.

4. To authorise the Directors to appoint the Auditors, Messrs KPMG in Sri Lanka, Chartered Accountants for the Year endings 31st March 2016 and determine the remuneration in line with Section 158 of the Companies Act No. 07 of 2007.

(**) The proxy may vote as he thinks fit on any other resolution brought before the Meeting.

................................................... Signature of ShareholderDate: ………........……………… 2015

Note: (a) * Please delete the inappropriate words.

(b) Instructions as to completion are noted on the reverse hereof

Form of Proxy


Form of Proxy

Instructions as to Completion

1. To be valid, this Form of Proxy must be deposited at Chart Business Systems (Pvt) Ltd. – the Secretaries of the Company, No. 141/3, Vauxhall Street, Colombo 02 not less than forty-eight (48) hours before the time fixed for the meeting.

2. In perfecting the Form of Proxy, please ensure that all details are legible.

3. If you wish to appoint a person other than the Chairman of the Company (or failing him, one of the Directors) as your proxy, please insert the relevant details at 1 overleaf and initial against this entry.

4. Please indicate with an X in the space provided how your proxy is to vote on each resolution. If no indication is given, the proxy in his discretion will vote as he thinks fit. Please also delete (**) if you do not wish your proxy to vote as he thinks fit on any other resolution brought before the Meeting.

5. In the case of a Company/Corporation, the proxy must be under its Common Seal which should be affixed and attested in the manner prescribed by its Articles of Association.

6. Where the Form of Proxy is signed under a Power of Attorney (POA) which has not been registered with the Company, the original POA together with a photocopy of same or a copy certified by a Notary Public must be lodged with the Company along with the Form of Proxy.

Corporate Information

Name of the CompanyKanrich Finance Ltd.

Legal FormIncorporated as a Limited Liability Company under Chapter 145 of the Company Ordinance No. 51 of 1938.

Re-registered under the Companies Act No. 07 of 2007 and licensed by the Monetary Board of Central Bank under the Finance Business Act No. 42 of 2011.

Date of Incorporation27th October 1971

Company Number PB 694 Registered OfficeNo. 69, Ward Place, Colombo 07Tel: 011 4381381/011 2685656Fax: 011 4717784Email: [email protected]: www.kanrich.lk

Principle Lines of BusinessThe Company accepts deposits from the public and engaged in Leasing, Hire Purchase, Loans, Microfinance Loans, Gold Loans, SME Loans and Real Estate.

Board of DirectorsMr. S.H. Piyasiri Dr. K.M.S.B. RekogamaMr. D.S.I. Weerasinghe Mrs. R.S. Goonetilleke Mr. K.K.D. RanawakaMr. P.A. Pematilaka

Senior Management Mr. Aloka Wahalawatta – GMMr. Sadeepa Rathnayake – GMMr. Eranda Godage – GMMr. Pradeep Basnayake – DGMMr. Rajendra Dinesh Kumar – AGMMr. Ravi Joseph – AGMMs. Shyminie Fernando – AGMMr. Celmariston Martinez – AGM

AuditorsMessrs B.V. Fernando & Co, Chartered Accountants

Bankers Commercial Bank PLC Pan Asia Banking Corporation PLCPeople’s BankSampath Bank PLCNation Development Bank PLCDFCC Bank PLCUnion Bank PLCSeylan Bank PLCBank of Ceylon

Tax AdvisorsAmarasekara & Co.Chartered Accountants

SecretariesMessrs Chart Business Systems (Pvt) Ltd.141/3, Vauxhall Street, Colombo 02

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Kanrich Finance Ltd.

No. 69, Ward Place, Colombo 7, Sri LankaHotline: +94 114 381 381 Tel: +94 112 685 656 E-mail: [email protected]

A VALUABLEPROPOSITION

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A VALUABLE PROPOSITION - Kanrich